Conduit IRAs are temporary retirement accounts used to hold funds from a former employer’s retirement plan while a new plan is established. They should not be viewed as a permanent solution and have limits on how long funds can stay. It’s important to ensure eligibility and avoid adding non-tax-deferred funds.
Conduit IRAs are individual retirement accounts used to temporarily house funds that are distributed from a qualified retirement plan. Sometimes referred to as a Rollover IRA, this is a useful device for storing funds accumulated in a former employer’s retirement plan while a new, permanent arrangement for those funds is established. However, a Conduit IRA should never be viewed as a permanent solution, and there are limits to the amount of time funds can reside in IRAs of this type.
One of the easiest ways to understand how a Conduit IRA works is to think in terms of a long-time employee who has paid into a 401(K) plan as part of their overall retirement plans. Rather than remain with the employer until retirement age, the individual chooses to obtain employment with another company. In many cases, full benefits are deferred until the new employee completes their probationary period. This often means that the new employee will not be eligible to participate in the new employer’s retirement plan until at least the trial period is complete.
Rather than withdraw money from the 401(K) and possible taxes on the balance, the individual chooses to roll the funds into a Conduit IRA. Here, the money remains intact, is generally not taxed, and is effectively parked or stored until the employee is eligible to participate in the new employer’s qualified retirement plan. At that time, the balance of funds within the IRA is transferred to the new plan and ceases to exist.
It is important to note that not all retirement plans are eligible to roll over funds to a Conduit IRA. Also, it’s a good idea to make sure the new employer’s retirement plan allows funds from a Conduct IRA to roll over to the program, since 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 non-tax-deferred sources to a Conduit IRA during this interim period, as doing so could affect the ability to transfer funds and make the balance taxable.
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