Conduit IRA

A worker leaving an employer may have to decide where to keep a former 401(k) balance, and a direct rollover to an IRA is one route if the new employer plan is not ready. A conduit IRA is the name sometimes given to the IRA used between the plans, and the account follows ordinary traditional IRA rules while it holds the assets.

Publication 590-A discusses an IRA as a holding account for rollovers to other eligible plans, and the receiving employer plan controls whether it accepts a rollover and which amounts it will receive. A direct rollover sends eligible funds from the distributing plan to the IRA without giving the worker a check for personal deposit, whereas an indirect rollover has timing and withholding consequences.

The 60-day deadline concerns certain indirect rollovers, not when a completed conduit IRA must be emptied, and employer-plan distributions paid to a person may have mandatory withholding, so a worker trying to roll over the full eligible amount may need replacement funds for the withheld portion. The one-rollover-per-year limit applies to certain IRA-to-IRA 60-day rollovers, not every movement involving an IRA, because direct trustee transfers and eligible plan-to-IRA rollovers have different treatment.

Assets can remain in the IRA while a worker changes jobs or waits for plan eligibility, and there is no universal deadline requiring a later IRA-to-plan transfer. Not all money in an IRA can move into a qualified employer plan, since taxable amounts eligible for rollover are distinct from after-tax IRA basis and required minimum distributions.

A Roth IRA is not interchangeable with this traditional rollover route, because moving pretax assets to a Roth account can create current taxable income under conversion rules. Mixing in personal IRA contributions can make tracing and recordkeeping harder, but a contribution does not automatically destroy all tax benefits in the account.

Modern rules allow many eligible IRA-to-plan rollovers without maintaining a historically pristine conduit IRA, though plan acceptance, tax character and records still decide the actual move. The IRA custodian may offer investments unavailable in either employer plan, and fees and protections differ.

A later plan may offer institutional fund pricing or permit a particular strategy, so compare costs, investments, creditor protections and distribution features rather than assuming one destination is always best. Some workers wish to move traditional IRA balances into a 401(k) before assessing a Roth conversion, in which case the pretax and after-tax split must be documented carefully.

Preserve plan distribution statements, IRA statements and rollover confirmations, because a missing record makes it harder to demonstrate which assets moved and how they were taxed. The rollover is not a way to spend retirement money tax-free, since taking an amount out for consumption can trigger ordinary income tax and, depending on age and exceptions, an additional tax.

A plan loan generally is not freely portable through an IRA, so outstanding loans and plan-specific rights need separate review before closing the old account. Compare actual plan and IRA terms, because the conduit label does not guarantee later acceptance or favourable tax treatment.