Sanding past 220 (and even 150 or 180 on some woods) begins to burnish the wood. This reduces its ability to absorb anything. This is bad if you are trying to color the wood, since dyes and stains require adequate penetration. Topcoats, however - even oil (at least that's my contrarian view) - do not require deep penetration to do their protection job. In this case, it has been my experience that sanding to 320 or 400 actually helps the first couple topcoats go on more evenly than if only sanded coarser. There are anecdotes of people who sand up to 1000 before putting on a topcoat. You have to pick what feels right to you.
For strict oil or oil/varnish (i.e., in-the-wood) finishes, sanding to finer grits really helps in getting a silky soft feel in the end product. However, I will say that I have noticed on a piece of quilted maple I'm working on now that when sanded to 400 and then oiled, the figure did not seem to accentuate as well as I thought it should. When I sanded back to 150, and started applying the oil, I got better results.
For film-forming wipe-on or straight varnishes or even shellac, sanding to 400 helps those first few coats go on smoother and even. In the end, it allows me to put on less finish and still achieve an even sheen - which looks best (to me).
In the end, perhaps on this project you shld go with conventional wisdom and sand to 220. Again, you won't go wrong, and it'll provide a baseline should you decide in the future to deviate up or down in grit prep.
If it were me, and this were my first, here's the sched I'd follow (it's more or less similar to what was recommended in a recent article in FWW):
sand all parts before assembly: 100, 150, 220
Wipe or brush on a good coat of Waterlox or equivalent (after an hour or two, wipe off any pooling). Let dry overnight.
Sand all parts gently again with 220 until smooth. Wipe off debris
Wipe on two more thin coats of Waterlox (let dry over night in between)
Sand all parts gently again with 400 until smooth. Wipe of debris.
Wipe on two more thin coats of Waterlox (let dry over night in between)
Sand all parts with 600 until smooth. Wipe off debris.
Wipe on one more thin coat of Waterlox.
Done this way, you can get a professional looking/feeling finish with minimal fuss.
To each his own.