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What is a Conduit IRA?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 August 2016
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    2003-2016
    Conjecture Corporation
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Conduit IRAs are individual retirement accounts that are used to temporarily house funds that are distributed from a qualified retirement plan. Sometimes referred to as a Rollover IRA, this is a helpful device for storing the funds accumulated in a retirement plan of a former employer while a new and permanent arrangement is put in place for those funds. A Conduit IRA should never be viewed as a permanent solution, however, and there are limits on the amount of time funds may reside in IRAs of this type.

One of the easiest ways to understand how a Conduit IRA functions is to think in terms of a long time employee who has paid into a 401(K) plan as part of his or her overall retirement plans. Rather than remaining with the employer until reaching retirement age, the individual chooses to secure employment with another firm. In many cases, full benefits are deferred until the new employee completes his or her probation period. This often means that the new hire will not be eligible to participate in the retirement plan of the new employer until at least the probation period is completed.

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Rather than pulling money from the 401(K) and possible incurring taxes on the balance, the individual chooses to transfer the funds into a Conduit IRA. Here, the money remains intact, is not generally subject to taxes, and is effectively parked or stored until the employee becomes eligible to participate in the new employer’s qualified retirement plan. At that point, the balance of funds within the IRA are transferred into the new plan, and it ceases to exist.

It is important to note that not all retirement plans are eligible for funds transfer to a Conduit IRA. Also, it is a good idea to make sure the new employer’s retirement plan will allow the funds from a Conduit IRA to be transferred into the program, as not all types of retirement plans support this type of activity. Above all, remember that it is not a good idea to add funds from sources that are not tax-deferred to a Conduit IRA during this interim period, as doing so could impact the ability of a funds transfer to take place, and make the balance subject to taxes.

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Can a qualifying conduit IRA converted to a Roth IRA be rolled over to a 401(k) Plan which allows for Roth deferrals - or does it have to be re characterized as a traditional IRA first with a rollover to the 401(k) plan to be treated as a traditional rollover?

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