There are good inheritances, and there are inheritances that are, well, not so good. A pearl necklace: good. A 15-foot python that eats live mice: not so good.

A 401(k) plan falls into both categories. If you're a surviving spouse, a 401(k) plan is an excellent asset to inherit. 

You can roll it into your own individual retirement account, where it can continue to grow, tax-deferred, until you need the money for retirement.

In the past, though, inheriting a 401(k) from someone who wasn't your spouse was a lesson in diminishing returns. By law, “non-spouses” couldn't roll over an inherited 401(k) into their own IRAs.

Most company 401(k) plans require beneficiaries to withdraw all the money in a lump sum, usually within one to five years after the plan owner dies. Unable to roll the money into an IRA, heirs had no choice but to pay federal and state taxes on the entire balance, says Natalie Choate, an attorney and author of Life and Death Planning for Retirement Benefits. By then, the inheritance had often shrunk by a third or more. 

Fortunately, the pension-reform law signed by President Bush last month included a provision that will make a 401(k) a much nicer asset to inherit — for everyone. 

Starting in 2007, children, unmarried partners and other non-spouses will be allowed to transfer an inherited 401(k) to an individual retirement account. They'll be required to take annual withdrawals, but that amount will be based on their life expectancy. 

For example, a 30-year-old who inherits a 401(k) from her father will have more than 50 years to withdraw all the money from her IRA. During that period, the investments will continue to compound and grow.

“The bottom line is, beneficiaries end up with more money in their pockets,” says Barry Picker, a certified public accountant and financial planner in Brooklyn, N.Y. The change will also apply to inheritances of 403(b) retirement plans, which are typically used by teachers, and 457 retirement savings accounts for government workers.

The Human Rights Campaign, a gay rights group, has lobbied for the change for years. The Sept. 11 terrorist attacks also provided momentum for the change, says Ed Slott, an accountant and IRA expert in Rockville Centre, N.Y. 

Children and other survivors were forced to pay big tax bills on 401(k) plans inherited from victims of the attacks.

Non-spouses will still need to handle an inherited 401(k) with care. Make one misstep, and you could find yourself stuck with a heavy tax bill. To stretch out withdrawals over your lifetime, you must: 

•Wait until after Dec. 31 to transfer the money from an inherited 401(k) to an IRA. The law doesn't take effect until 2007. If you inherit a 401(k) this year, ask the company not to distribute the money until after Jan. 1.

•Set up an inherited IRA. Unlike spouses, who can roll over an inherited 401(k) into their existing IRAs, non-spouses must set up a separate account known as an inherited IRA. Make sure the financial institution that handles the transaction understands how to properly title an inherited IRA. If you transfer the money to an existing IRA, you'll have to pay taxes on the entire 401(k), Slott says.

•Arrange for a direct transfer of the money. Ask the 401(k) plan administrator to send the money directly to the inherited IRA. If the plan administrator sends the check to you, you'll have to pay taxes on the money, even if you turn around and deposit the money in an IRA, Picker says. 

Financial advisers have long advised workers to roll their 401(k)s into IRAs when they leave their jobs, in part because of the unfavorable tax treatment of 401(k)s inherited by someone other than a spouse. By contrast, anyone — spouse or non-spouse — can stretch out withdrawals from an inherited IRA.

While the pension bill makes inheriting a 401(k) less costly for non-spouses, a rollover still benefits most job-changers, Picker says.

If you've worked for several different companies, rolling over your former employers' 401(k) plans into an IRA makes it easier to keep track of your savings, he says. In addition, an IRA offers more investment choices. When your money is in a 401(k), you're limited to the funds offered by that plan.

There are a few cases when investors are better off leaving their funds in their 401(k). If you plan to retire between ages 55 and 59½, for example, you can take withdrawals directly from your 401(k) without paying a 10% early withdrawal penalty. You lose that benefit if you roll the money into an IRA.