You want the beneficiary of your 401(k) plan to actually benefit from your estate, correct? Well, up until recently, beneficiaries who were not married to the plan owner, ie, children, siblings, partners, were required to cash out 401(k) inheritances within 1 to 5 years of the account owner's death and pay the income tax on the entire account. Recently, a new law was enacted by Congress allowing anyone who inherits a 401(k) plan to benefit from the same rules that govern spouses, specifically the ability to minimize taxes by withdrawing the money over their expected lifetime. The heir has to transfer the inheritance into an IRA by a specific date in order to spread out the income tax payments.
Sounds great, yes? The problem is that the law simply provides the option but does not force plans to adhere. It is up to employers to amend their 401(k) plans and since such an amendment requires the revision of paperwork and the training of staff, costing the company money, most companies aren't bothering to change their plans. Therefore, it's important to protect your beneficiary from future tax problems by moving your 401(k) into an IRA when leaving a job or retiring in order to get the funds out from under an employer's antiquated rules.