Retirement terms of endearment: Contributory IRA

Estimated reading time: 2 minutes, 27 seconds

Retirement terminology can be quite confusing for the average investor. While much of it is born of the Internal Revenue Code and regulation like the Employee’s Retirement Income Security Act (ERISA), several commonly used words and phrases actually originated in the IRA service industry.

Every industry has its jargon. It is muddied by acronyms, colloquial terminology and even figures of speech that are commonplace to industry veterans but confounding to newcomers or the customers to whom the industry provides a service. The retirement industry is no different. To help clear the confusion about a term or its misuse, Kingdom Trust has created the Retirement Terms of Endearment blog series.

Today’s post focuses on “Contributory IRA,” a term that relatively few seem to have heard of but is still used by some in our industry.

The term “Contributory IRA” does not appear in the Code or any regulations. Its origins can most likely be traced to a distinction in the code between a Conduit IRA (also called a “Rollover IRA” by some IRA custodians and administrators) and an IRA that contained funds contributed directly by the account holder. Funds from a Rollover IRA, a widely-used term that also doesn’t appear in the Code or regulations, could be rolled back into a qualified plan. And prior to 1993, funds distributed from an IRA containing account holder contributions could not be rolled over into a qualified plan.

Retirement terms of endearmentFor tax purposes, the distinction between a Rollover IRA and a Contributory IRA no longer exists. Effective January 1, 1993, pre-tax funds from an IRA could be rolled over into a qualified plan regardless of whether the account contains annual contributions, rollovers or both. Plans with post-tax funds (i.e. Roth IRAs and designated Roth accounts) can only be rolled over into like accounts.

However, for credit purposes, a distinction between Rollover and Contributory IRAs still remains. Rollover IRAs have an unlimited exemption in bankruptcy. A Contributory IRA has a $1 million exemption (adjusted for inflation) in bankruptcy. So for those that may end up in bankruptcy court, the distinction is relevant and it might behoove them to keep an IRA funded solely with a rollover from a qualified plan separate from other IRAs.

Perhaps it’s because of the above asset protection-related reason that some IRA custodians and administrators still use the “Contributory IRA” label. Unfortunately, it can be confusing for account holders who open a Traditional IRA at a firm, for instance, only to receive paperwork for their so-called “Contributory IRA.”

Kingdom Trust strives to be consistent in its terminology to avoid confusion, but more than that, we make every attempt to ensure the client’s account needs are met. From simple forms to manage your account to educational opportunities like this to assist in simplifying our industry (if even just a bit), Kingdom Trust is here to help make the retirement investing and custody process as easy as possible.

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