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Retirement Terms of Endearment: Conduit, Inherited, and Traditional IRA

Estimated reading time: 2 minutes, 50 seconds

Retirement terminology can be quite confusing for investors. While much of it originated in the tax code and regulations like the Employee’s Retirement Income Security Act (ERISA), the IRA service industry actually gave life to several of its now-commonplace words and phrases. And some of those terms, while they may be terms of endearment for some custodians, aren’t even used by others.

Inherited IRA

In previous posts, we’ve talked about a couple of retirement terms that aren’t used as heavily as they once were: “Rollover IRA” and “Contributory IRA.” Misuse of these words could lead to a client turning in the wrong paperwork or, even worse, cause a delay or problem for the account.

Retirement investing terminology has expanded over the last 40 years to cover different situations and purposes. Sometimes new terminology is created to follow Internal Revenue Service (IRS) regulation. Other times, new terms are coined to enable better administration and custody of the accounts. And while some terms have been lost to history, others linger on—whether we want them to or not!

To help clear up any confusion or misuse of a term, we created the Retirement Terms of Endearment blog series. We won’t always focus on outdated words (as with the third entry in today’s post). However, we will always seek to help clear the potentially muddy waters of retirement terminology.

Today’s post focuses on three additional “types” of IRAs: Conduit IRA, Inherited IRA, and Traditional IRA.

Conduit IRA

“Conduit IRA” is another name for a “Rollover IRA.” Both of these are industry terms. The IRS does not recognize a Conduit IRA/Rollover IRA as a separate IRA type. The terms refer to an IRA holding rolled over funds from an employer-sponsored plan, such as a 401(k).

Oftentimes, this is a temporary hold, such as when an individual takes a new job but doesn’t have immediate access to the new employer plan. Some investors believe it’s easier to identify the rolled-over funds with this designation. Some plans may have a limitation on what funds can be rolled into the new plan, which could be a benefit to segregating rolled over funds from other contributions.

Inherited IRA

The term “Inherited IRA” actually originates in the Internal Revenue Code (IRC). IRC § 219 and § 402 each refer to an “inherited IRA,” albeit briefly. But in both of those references, we find no real definition of what an “inherited IRA” is.

We can certainly infer that the meaning is an IRA held by an inheritor of a now-deceased IRA holder—more specifically a beneficiary of the account. Therefore, “Beneficiary IRA” and “Inherited IRA” can be used interchangeably in this sense.

Traditional IRA

Then there’s “Traditional IRA,” which is never once mentioned in the IRC. Of course, we all now use the term to refer to the original, tax-deferred IRA created by ERISA.

In fact, it was only after the Roth IRA was created in 1998 that the term “traditional IRA” referred to a non-Roth IRA. Reference the Code of Federal Regulations (specifically 2 CFR § 1.408A-1) and the 1998 IRS Publication 590 for perhaps the earliest references. It is now very necessary, of course, to distinguish between these two types of accounts with widely different rules.

We understand retirement terminology can sometimes be confusing, which may be detrimental to your investing situation if you’re not careful. By providing educational opportunities like this, we hope to simplify the industry (if even just a bit) and help make the retirement investing and custody process as easy as possible.

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