As I mentioned last week, millions of people don't enroll in 401(k) plans because it seems like a hassle. It doesn't matter that getting started would probably take less time than throwing a load of whites into the washing machine.

Curiously, this aversion to paperwork doesn't seem like much of a problem for departing workers, who are eager to get their hands on the money. But for former employees who appreciate the need to preserve their retirement cash, the paperwork hurdle once again turns into a sheer precipice.

In most cases, the best place for 401(k) cash for former employees is in an Individual Retirement Account. To establish one, you need to contact a financial institution, such as a mutual fund company or a brokerage firm, to obtain the documents necessary to complete the transfer.

Since most well-intentioned workers never get around to it, you may be wondering what's the harm of just keeping the money in the 401(k).

One of the many drawbacks to maintaining the status quo is that it can hurt loved ones, who ultimately inherit what's left in these workplace accounts.

What's the problem? Traditionally, only a husband or wife who inherits a 401(k) could take that money and roll it into his or her own IRA, where it could remain sheltered from taxes. Everyone else, including children and grandchildren, as well as same-sex partners, have always been prohibited from doing this.

For these beneficiaries, the lauded tax protection of a 401(k) becomes as permanent as wet toilet paper. That's because companies distribute the cash in lump sums to beneficiaries. Once these checks are issued, the tax protection vanishes and income taxes on the full amount is owed. Ouch.

Beginning in 2007, however, people who inherit a 401(k), 403(b) or a 457 plan won't get the shaft. Thanks to the Pension Protection Act of 2006, anybody who inherits one of these accounts will be able to move that money into an IRA. Although Congress has made it easier to keep the tax benefits of a 401(k) alive for beneficiaries who aren't spouses, the process still isn't idiot-proof. If you inherit a workplace plan, you need to be careful about the handoff.

When a 401(k) is rolled into an inherited IRA, for instance, it's important to title the account correctly. For instance, let's suppose that John Smith inherits a 401(k) from Mary Smith, his mother. If he decides to preserve this money in an IRA, the new account should be written this way: Mary Smith IRA (deceased Sept. 1, 2007) f/b/o (for the benefit of) John Smith.

Getting the title right on an IRA account might seem silly to everyone but a stenographer. The IRS, however, isn't going to be amused when it tells you that you owe tax on a botched IRA transfer. Suppose, for instance, that a son deposited his mom's $100,000 401(k) into his own IRA instead of a new, inherited IRA that's correctly titled. That mistake would cost him dearly. If he was in the 35 percent tax bracket and paid 8 percent in state taxes, he'd owe a total of $43,000 in taxes for that error. And, of course, the cash that's left couldn't remain in the tax cocoon. Continued...