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What are Conduit IRA Plans?

Money Manager | Monday, July 5th, 2010

Conduit IRA Plans

Conduit IRA plans are sometimes referred to as a Rollover IRA. These plans are designed to temporarily house fund distributions from other qualified retirement plans. They can be used as a temporary solution when a person leaves a company as a means of storing the money accumulated in that company’s retirement plan. The money is never intended to stay permanently in a Conduit IRA plan, and there are certain limits on how long money can stay in this kind of plan. They are generally only used until the individual can make a more permanent arrangement for their retirement funds.

How can a Conduit IRA plan be utilized?

When a person has paid into a company’s retirement plan, the expectation is that the employee will remain in the plan until the funds are dispersed at retirement age. Of course, many times an employee will leave a company due to a job change or other circumstances before they actually reach retirement age. In these situations, the person might not be able to participate in the new employer’s retirement plan until after a designated period time has passed, as there are often probationary periods in place before benefits are provided. During this time, the money that was in the previous employer’s retirement plan has to be rolled over into another qualifying plan. If the money is simply withdrawn from the previous plan, taxes would need to be paid. A Conduit IRA plan can help fill the gap between the time when the employee leaves their previous employer and when they can place the funds in the new employer’s plan. Once the money can be transferred to another qualifying plan, the Conduit IRA simply ceases to exist. Using one of these plans essentially allows a person to temporary “park” their funds between jobs, without having to pay taxes. When used properly under circumstances that allow the use of a Conduit IRA, they can be a good solution which will allow an individual to retain the tax exempt status of their retirement plan funds. There isn’t a limit on the contributions that can be transferred into a Conduit IRA plan, but the funds must be kept separate from any other money or contributions.

Does a Conduit IRA plan have any limitations?

A Conduit IRA plan cannot be used in every circumstance, because not all retirement plans accept them. There are retirement plans that do not allow the transfer of funds into a Conduit IRA. There are also employer retirement plans that do not allow money to be transferred into their plan directly from a Conduit IRA. Therefore, one should investigate these plans before using them to make sure they will operate as desired. It is also extremely important to keep the money placed in a Conduit IRA separate from any other funds. If you make any contributions to the Conduit IRA in excess of the amount of money rolled over into it from the previous plan, the money will not be tax deferred. This could make the balance taxable, and could limit your ability to roll the funds over into another qualifying plan when the time comes.

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