Conduit IRAs

As its name suggests, a conduit IRA is essentially a medium through which a transfer may be made from one qualified plan to another. More simply, it is an individual retirement arrangement acting as a holding account. If properly structured, money is rolled over tax-free between plans with a temporary layover in the conduit IRA. However, the new qualified plan is not required to accept transfers and must provide for the acceptance of the amounts.

Tip Remember that unless a direct rollover is made, it is subject to a mandatory 20 percent withholding. As a result, the taxpayer has to make up the funds missing from the conduit IRA within 60 days or pay taxes and penalties associated with making an early withdrawal.

A conduit IRA may not have assets other than those previously distributed from an individual's qualified plan. So, conduit IRA assets cannot be commingled with the assets of a traditional IRA or Roth IRA. If commingling does occur, a rollover to a new qualified plan will not occur without incurring tax.

Prior to 2002, a conduit IRA was the only way to make a transfer between qualified plans. Due to legislative changes that became effective in 2002, however, conduit IRAs will outlive their usefulness as a vehicle to transfer assets between plans.

Starting in 2002, an eligible rollover distribution from an IRA may be rolled over into a qualified employer plan, 403(b) annuity, or 457 government plan. This applies whether or not the distributing IRA qualifies as a conduit IRA. Therefore, conduit IRAs may still be around, but their usefulness is questionable.