A Conduit IRA is an individual retirement account which can be used to house your funds temporarily after they have been distributed from a qualified retirement plan. This type of IRA may also be called a Rollover IRA. Not a permanent solution, the Conduit IRA is particularly useful when you need to transfer funds from a former employer’s benefit plan to the plan offered by a new employer.
The real advantage of using a Conduit or Rollover IRA is that you can take your funds with you as you move from job to job, putting it all into the same account. This relieves you of the obligation of keeping up with multiple IRAs. Since your new employer may require you to wait a while before you are eligible to participate in their retirement plan, your funds can wait safely, still earning interest, in a Conduit IRA. Think of it as a parking spot for your retirement account while you are in transition.
There are no limits to the funds you can transfer to your Conduit IRA, and by making such a move you avoid paying penalties typically associated with withdrawing funds from an IRA before retirement age. However, you must make sure you don’t place any other assets into the Conduit IRA or it will lose its status and the assets in it will no longer be eligible for capital gains and forward averaging tax treatments.
Make sure that the new employer will allow you to transfer your funds from your Conduit IRA into your new retirement account. At such time as you do, the Conduit IRA is closed and ceases to exist.