What is a conduit ira? What does this type of IRA offer that you cannot get with other types of IRAs? Is this type of IRA worth opening anyway, and should one consider having one right away? We shall talk about all that in today’s article, so if you are here to find out what this type of individual retirement account can do for you, read on till the end.
What is a conduit IRA?
A Conduit IRA is an account that investors use to roll over the funds held in one retirement plan to another retirement plan. Simply put, this type of individual retirement account is used to store funds until the time comes for them to be rolled over into the newly-opened retirement plan. Due to the nature of its use, this IRA is also referred to as a “rollover IRA“.
Understanding Conduit IRAs
Conduit IRAs are usually set up through the signing of IRA Plan Agreements, and there are no defined provisions for the creation of such IRAs. In the place of other rules and requirements, the investor is required to only avoid mixing up the assets from other sources with those held in the conduit IRA. The investor should also see to it that the funds that make their way into the Conduit IRA are only those that are meant for the rollover process.
The IRS has not set a defined limit on the amount of money that one can transfer to their conduit IRA from any qualified retirement plan. There’s also no limit on the number of rollover transactions that one can make using their conduit IRA. An investor is also not compelled to contribute the full amount held in their former qualified retirement plan to their conduit IRA.
In addition to that, there is no set time limit on conduit IRAs. Assets can be left to grow in a conduit IRA for several decades and later rolled over into the investor’s preferred retirement plan at will. The IRS will not at any time come after the investor who takes this approach requesting them to withdraw or transfer the funds from their conduit IRA.
The one thing that is worth noting, however, is that the Internal Revenue Service (IRS) places limits on the number of rollovers that investors can make from the same IRA per year. This rule does not apply to the rollovers that happen from a traditional IRA to a Roth IRA ( IRA conversions), custodian-to-custodian transfers, and plan-to-IRA rollovers.
***Read more about – Is an IRA Better Than a 401(k)?
How does one open a Conduit IRA?
As already highlighted, one can establish a Conduit IRA by simply signing an IRA plan agreement. It is not a requirement that the established IRA be designated “a conduit IRA” provided that the investor does not break the non-commingling rule, and only transfers funds from qualifying retirement plans.
For how long can an IRA operate as a conduit IRA?
There is no time limit imposed on the activity of conduit IRAs. Say you rolled over about $25,000 to your conduit IRA 15 years ago and you have not managed to roll them to another qualifying plan. You can still hold the funds in your conduit IRA for the next 10 years without the IRS requiring you to transfer them to another account.
What are the benefits of a Conduit IRA?
The main benefit of this type of IRA is the flexibility that it presents to the individuals who are no longer employed to find a place in which they can park their qualified retirement plan assets. This goes a long way into ensuring that the investor does not break the 60-day rollover rule, as stipulated by the IRS.
In most cases, it takes over 60 days for such individuals to get a new job and to go about the process of moving assets from one retirement plan to another. Without turning to a Conduit IRA or a rollover IRA, the individuals may end up getting hit with a tax penalty since the IRS perceives the holding on to their retirement funds as taking an early withdrawal.
The truth of the matter, however, is that the use/need for Conduit IRAs in the last 20 years has decreased significantly. This can be attributed to the presence of the Economic Growth and Tax Relief Reconciliation Act of 2001, popularly abbreviated as EGTRRA.
This act made it possible for all retirement plan holders to move their assets to any retirement accounts, without necessarily having to shelter them in a conduit IRA.
What are the downsides of a Conduit IRA?
Conduit IRAs sure offers a lot of flexibility to investors, but this also comes with some significant downsides. For instance, upon transferring your assets to a Conduit IRA, you cannot make any extra contribution, otherwise, the account loses its “conduit IRA” status.
If you own a conduit IRA and you do not have any other retirement savings and investment plan, you will not be in a position to make contributions to a tax-advantaged plan, which may lead to you falling behind your goals.
In the same manner, you cannot transfer funds from other sources into your conduit IRA, otherwise, it will cease being viewed as a tax-advantaged account. You will, from this instance, not be in a position to accumulate capital gains tax-free.
Frequently Asked Questions on “Conduit IRA?”
1. Can the funds rolled over from a 403(b) be held in a conduit IRA?
Yes. Conduit IRAs serve as holding tanks for funds that have their origin in a 403(b) retirement plan or are meant to finally end up in a 403(b) plan. As you may already know, 403 (b) plans are special plans generally created by learning institutions and healthcare centers. A Conduit IRA is advantageous for those who are leaving a job in which the employer has a 403(b) plan. If in their next job there is a 403(b) plan, then they can use a Conduit IRA to shelter their retirement plan funds as they move to their new job.
2. Am I required to specify that my IRA is a Conduit IRA?
No. Provided that you do not mix the funds within the IRA, by adding funds from non-allowed sources, your custodian may not require that you expressly inform them whether the IRA you are opening is a conduit IRA.
3. Must I roll over the funds in my qualified plan into the conduit IRA?
No! You can create and use a conduit IRA even when you do not intend to roll over 100% of the eligible funds. If your former IRA has about $50,000 saved up in it and you decide to only rollover $35,000 to your Conduit IRA, as you use the remaining amount to meet any other financial needs (in accordance with the law), no one will come after you.
4. Can I create several conduit IRAs to process one or several distributions from a qualified retirement plan?
Yes! The IRS does not prohibit you from creating as many Conduit IRAs to achieve your rollover or transfer needs. Say you have about $100,000 saved in your retirement plan, you can rollover about $10,000 to 10 different conduit IRAs.
5. Can I terminate my conduit IRA at any time?
Yes! You can proceed to close your conduit IRA if there are fees that are associated with the maintenance of the IRA, and you already know that you do not have any intentions of moving the funds to a qualified plan. The IRS will also terminate the “Conduit IRA” status if you commingle the IRA funds.
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That will be all for today’s post on a Conduit IRA is. I hope that you found it educative and that you now know whether establishing this type of IRA is necessary or a waste of time. If you have more questions, do let me know by dropping them in the comments section so that I can get back to you ASAP!
I wish you well,
Eric, Investor and Team Member at Gold Retired!