What Is a Custodial IRA?

Kids & Money
What Is a Custodial IRA?

Parents will do many things to set their children and other loved ones up for a successful future. This might include opening and operating a guardian IRA or custodial IRA for a child or any person with a disability. 

ESTABLISHING CUSTODIAL IRA

While parents or legal guardians manage the account, the child or person living with a disability still owns it. Once the child reaches the age of 18 or 21, depending on the state, they will have the account transferred to them for proper handling if they are able.  

Establishing a custodial IRA requires the beneficiary’s: 

  • Social security number 
  • Employment information
  • Annual income
  • Banking information

The account is typically set up in the beneficiary’s name and then funded by taxable earnings regardless of age. The maximum limit for the account is $6,000 a year. 

KINDS OF CUSTODIAL IRA ACCOUNTS

There are two common types of custodial IRA accounts: Traditional and Roth. 

A Traditional IRA will accrue money over time while remaining untaxed. However, once you reach retirement age, any money withdrawn from the account will incur an income tax. 

A Roth IRA is the opposite. Although the account is still growing over time, the funds entering the account will suffer an income tax. However, the money you withdraw will not receive any further tax penalties. 

The ability to withdraw your funds from a Roth IRA without penalty will only assist with managing emergencies, attending college, or other money-related concerns. 

BENEFITS OF A CUSTODIAL IRA

While many people do not consider retirement funds well into adulthood, you'll be able to kickstart your loved one’s retirement savings and help them prepare for the future. 

TAKEAWAY

A Roth or Traditional custodial IRA is an excellent option for setting your loved one for a successful retirement.  

To explore additional IRA options, visit our financial advice page here. 

Published November 2022

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