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From HPAlumnipedia

HPAlumnipedia > Leaving > Rollovers > Conduit IRAs

In short: You can't take a partial withdrawal from your HP/Fidelity 401(k) plan, so you shouldn't roll your retirement benefit into it, and you might want to roll any HP retirement money into a conduit IRA. Details follow.

Alan Silverstein, Fall 2002:

Thanks to the nice folks at Addison Avenue Financial Partners, who gave presentations at the LHH center, I learned the following. If you are age 55 or older when separating from an employer with a 401(k) plan, you can take the money and pay taxes on it, but not owe a 10% penalty. Normally you must wait for age 59.5. (I found an explanation of this in IRS Publication 575; for 2003, on page 28.)

If you are not yet 55 and you terminate, (take a deep breath) if you...

• roll over your qualified retirement funds (DPSP, RP, 401(k)) to a traditional IRA without taking any of them out (and/or making any more contributions),

• and later if you are employed by a new employer who has a 401(k) plan and who allows incoming rollovers (not all do),

• then you can transfer that money from your IRA, thereby retroactively treating it as a, "conduit IRA", to the new 401(k) plan.

What does this buy you? It reinstates the age-55 provision for those funds.

You might only withdraw one year's worth of funds, though, since you must still pay income taxes on the distribution. Since employers probably require a single lump sum distribution from each fund type (DPSP, RP, 401(k)), you'd roll the rest into a traditional IRA to avoid immediate taxes. Thus the trick is only good for one year per fund? Yes, at least HP/Fidelity disallow partial withdrawals from the 401(k).

Of course all this is purely theoretical unless...

1. you find a j-o-b with an employer
2. offering a 401(k) and
3. allowing inbound rollovers,
4. before age 55,
5. you exit that job at or after age 55 but before 59.5,
6. you need to get your hands on some of the money penalty-free,
7. you are happy to take out just one year's worth (per fund) or else pay taxes on multiple years in one year, and
8. you won't work with the employer long enough to contribute new funds equal to at least as much as you would like to withdraw without penalty.

To be safe, read for yourself IRS Publication 590; for 2003, pages 21-25.

Andrew Flessel, Nov 2002:

"Rollover IRAs" are frequently called "conduit IRAs" because folks often use them as a temporary holding place that will serve as a "conduit" into another 401(k) when they get rehired. A change in tax law in 2001 allows you to "contribute" to a rollover IRA (called "co-mingling" and generally not an intelligent idea, I'm happy to explain if necessary...) and still later roll it into a new employer 401(k), but only if the new employer has updated their plan to allow it.

Andrew Flessel, Jan 2004:

I've been told by (my) tax advisory team (twice) that I can roll the old 401(k) into a new employer plan, even if I've commingled contributions, as long as I separate out the commingled contributions and only roll the old 401(k) dollars into the new employer 401(k) plan. ...I don't generally recommend rolling monies into a new employer's 401(k).

Arguments in favor:

• can take loans
• creditor protection
• assets all in one place

Arguments against:

• limited beneficiary alternatives (no stretch IRA)
• limited investment alternatives

Every situation/individual is different, so my general recommendation doesn't apply to everyone.

Bob Adams, Certified Financial Planner, Aug 2005:

...you can do a partial conversion. Since you must pay the tax out of non-retirement funds (unless you want to make a withdrawal that could cause you a penalty depending on your age), many in your situation would consider a partial conversion. Another reason to do partials is that for cash flow reasons you may wish to do it over several years. A word of wisdom from my own experience. Most banks and brokerages don't do conversions frequently so they neither do them well or fast. The December 31st deadline is in stone so start no later than December 1st to give yourself plenty of time to hand-hold the process.