A custodial IRA is an individual retirement account that a custodian (usually a parent) has for a child with earned income. Once the custodial IRA is opened, the custodian manages all the assets until the child turns 18 (or 21 in some states). All of the funds in the account belong to the child, allowing them to start saving money right from the start. In addition to taking advantage of the benefits of combined growth, your child may be able to use the funds for future expenses, such as college tuition or even to buy a first home.
You can open a Roth IRA with custody or a traditional IRA with custody, and the appropriate account rules and benefits will apply. Once the money has been deposited in your Roth IRA, you can invest and accumulate capital gains and dividends. The same contribution and distribution rules that apply to traditional and Roth IRAs also apply to custodial IRAs. Waiting until the last minute to try to set up a custodial Roth IRA is a bad idea, and it's wise to contact your financial institution as soon as possible to ensure that you have all the necessary documentation and procedures.
Opening a Roth IRA account on behalf of your child is one of the most impactful and beneficial things you can do to prepare them for a secure financial future. However, a Roth IRA allows your children to choose investments that, in the long term, can generate the type of growth described above. Fortunately, many institutions allow parents to act as custodians of a Roth IRA with custody for the benefit of their children. For example, a Roth IRA allows the account owner to withdraw 100% of what they have contributed at any time and for any reason, without taxes or penalties.
However, until the child turns 18, the account will require a designated custodian (usually a parent) to supervise the account and invest the money. Those two rules make the Roth IRA a good middle ground between children who want easy access to their money and parents who want to ensure that part of that money is saved for the future. If you're ready to create a Roth IRA for a child, the first step is to contact a brokerage agency that offers Roth IRAs for minors. One way to do this is to establish a Roth IRA with custody, or what Fidelity is known as a Roth IRA for children and, more generally, as a Roth IRA for minors.
In addition, at the time of retirement, the account owner must have had a Roth IRA open for at least 5 years, counting from the start of the first calendar year in which a Roth IRA was opened.