Benefits and Risks of a Conduit IRA

A conduit IRA is a type of account that allows you to roll over funds from a qualified retirement plan. You can then transfer the money into another qualified retirement plan in the future. If you are considering using a conduit IRA, you should be aware of some of the benefits and risks that are involved.

Transfer to New Account

One of the biggest advantages of using a conduit IRA is that you can transfer your money into a new qualified retirement account when the time is right. This is beneficial for many people who end up leaving one job to go to another job. When you quit your job, you will need to do something with the funds from your qualified retirement plan such as a 401k. If you do not necessarily have another job lined up, it might be a while before you get a new job. When you start your new job, it will typically take some time before you qualified to put money into your new retirement plan with the company. With the conduit IRA, you can transfer the funds from the IRA into your new qualified retirement plan when you are ready. This allows you to keep all of the money in tact and avoid paying any early distribution penalties for taking possession of the money.

Tax Averaging

If you had money in a qualified retirement account for a number of years, you may qualify for a 10 year forward tax averaging when you take a lump sum distribution. This allows you to spread the tax bill out over 10 years when you take a lump sum distribution. This means that you will be taxed at lower tax rates on these distributions. If you use a conduit IRA, you will be able to retain this tax status. 

Co-mingled Funds

One of the potential disadvantages of this type of account is that you cannot co-mingle funds. Once you roll your funds from a qualified retirement plan into the conduit IRA, you cannot put any other type of money in the account. If you do, you will lose the tax advantages that come with this type of account. The money in your account will no longer be allowed to accumulate capital gains without paying taxes on them. 

No Contributions

Another potential disadvantage of this type of account is that you cannot make contributions. Once you have money put into the conduit IRA, you can no longer continue making regular contributions out of your pay. This means that if you get a new job and you have to wait through a waiting period before you can get set up with your new qualified retirement plan, you will not be able to save for your retirement with this account. This could put you behind where you want to be with your retirement savings and it could force you to have to work longer before you retire.

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