Tax-free 401(k) inheritance will not be limited to spouses only anymore. Due to a provision in the pension law signed last week by President Bush, anyone will be eligible to inherit the money without immediately paying taxes on the windfall, the Los Angeles Times reports. The rule could save heirs thousand of dollars each year in taxes.
Federal law has always permitted a spouse who inherits a 401(k) account to put the money into his or her own retirement account without penalty. However, anyone else usually was required to withdraw all funds from the account and pay taxes on the income within a matter of months. In some instances, it forced some survivors to jump to a higher tax bracket, further increasing their tax burden.