The recovery plan enacted last December contains a new rule about the eligibility of non-spousal heirs to receive 401K benefits. Previously, children, siblings and other family members were subject to rules that forced them to cash out, and pay taxes on, an inherited 401K plan within 1-5 years – a rule than never applied to spouses. The new rules are good news for children or other beneficiaries who stand to receive income from a parent or other relative. They will no longer be forced to cash out and pay taxes within a specific period of time.
Now, non-spousal beneficiaries may keep the plan going, pacing their withdrawals over time and avoiding the taxes that come with cashing out the entire amount.