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Conduit IRAs

A conduit IRA is an account established at a financial institution through which a transfer may be made from one qualified plan to another. It is an individual retirement arrangement (IRA) that serves as a holding account. Qualified retirement plan money is rolled over tax-free between employer plans with a temporary layover in the conduit IRA. However, there is no time limit for the money deposited to a Conduit IRA. Please note, not every employer's qualified plan is required to accept rollover transfers. Your plan administrator must provide for the acceptance of the amounts.

Prior to EGTRRA (tax act of 2001) a conduit IRA could not have assets other than those previously distributed from an individual's account in an employer's qualified plan. So, conduit IRA assets could not be commingled with the assets of a traditional IRA or Roth IRA. If commingling did occur, a rollover to a new qualified plan would not occur without incurring tax. A conduit IRA was the only way to make a transfer between qualified plans. However, due to new legislative changes kicking in in 2002, conduit IRAs will likely outlive their usefulness.

Beginning in 2002 and thereafter, an eligible rollover distribution from an IRA may be rolled over into a qualified employer 401k/profit sharing plan, a 403(b) annuity, or 457 government plan. This applies whether or not the distributing IRA qualifies as a conduit IRA, even if money was commingled. As a result, conduit IRAs may still be in existence, but their usefulness is in decline, and not necessary for future qualified plan transfers once an employee terminates as a participant in a qualified plan.

Please also note that unless a direct rollover is made from one qualified plan to another, it is subject to a mandatory 20 percent withholding. If direct receipt of the qualified money occurs, the taxpayer must make up the 20% of the funds missing from the conduit IRA as they are transferred to the new plan within 60 days, or pay taxes and penalties associated with making an early withdrawal. You should contact your plan administrator or pension specialist for assistance through the direct rollover process.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Thursday, August 28, 2008 08:26 AM