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You are having a nightmare. One by one all of your individual retirement account holders are running away from you with fistfuls of cash. Suddenly they bump into an Internal Revenue Service agent and disappear, money and all.
You wake up and realize that you are having this dream because you mistakenly put an IRA holder's qualified retirement plan (QRP) distribution into his existing IRA, when he specifically directed you to put it into a conduit IRA. Thinking fast, you decide you will patch things up tomorrow and, if necessary, take responsibility so the IRA holder will not suffer for your mistake. The IRS will be sympathetic to your IRA holder since the transaction was out of his control - or will it?
An IRS private letter ruling (PLR), PLR 9604028, addresses a scenario similar to the one played out above. It underscores the importance of properly maintaining conduit IRAs as well as the need to obtain and follow clear, complete directions from IRA holders/plan participants. This article examines the issues at hand in PLR 9604028 and reviews the rollover rules as they pertain to conduit IRAs.
Note: Although PLRs may only be relied upon by the individual who submitted the request, they do provide some insight as to the IRS' interpretation of various rules and requirements.
Conduit commandments
Before exploring the events...