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). The custodian maintains control of the child's Roth IRA, including decisions about contributions, investments, and distributions. In addition, the statements are sent to the custodian.
However, the child is still the effective account holder and the funds in the account must be used for the child's benefit. When the minor reaches a certain required age, normally 18 or 21 years old in most states, the assets must be transferred to a new account in their name. A custodial Roth IRA works pretty much the same way, except that the parent has to open the account. The parent is then designated as the guardian of the account and the minor is designated as the beneficiary.
. They don't have to wait until retirement age to withdraw the money, since the purpose of a custodial Roth IRA is for college or other major expenses. By then, the child can be expected to have learned how to manage money. Investing in a custodial Roth IRA allows my children to access their money at the legal age, for example, to pay for school.
The IRS exempts you from the 10% tax penalty for withdrawing your money before retirement age, with some exceptions, one of which is for higher education. Any of these qualified expenses can be used to pay for a student's tuition, fees, books, supplies, and equipment. If your children don't technically earn income through a job, you can't open a Roth IRA with custody. While you might see brokers touting a Roth IRA for children (like Fidelity Investments does) or some like that, there's nothing special about the way a child's IRA works, at least when it comes to the IRS.
One way to do this is to set up a custodial account (Roth IRA), or what Fidelity is known as a Roth IRA for children and, more generally, as a Roth IRA for minors. Because many children don't earn enough money to benefit from the initial tax deduction associated with traditional IRAs, in most cases it makes sense to focus on Roth IRAs. It's also important to know that any contribution by an adult to a custodial Roth IRA is considered an irrevocable transfer for the benefit of the child. Minor children usually can't open a brokerage account on their own, but you can set up a custodial Roth IRA for them to save for college, retirement, or other potential expenses.
You can avoid paying the early retirement penalty in a Roth IRA account if you use the money for higher education expenses or to build or buy your first home, among other exceptions. Another way to fund a custodial Roth IRA is through a partial contribution from an adult, perhaps a parent or guardian, if you have the financial resources to do so. The IRA is opened in your child's name, and you'll need to provide your Social Security number when you open the account. In addition, when the time comes to leverage your retirement age savings, distributions from a Roth IRA will be tax-exempt, unlike distributions from a traditional IRA.
A custodial IRA could be a great example for a child to learn about the power of capitalization while watching their income grow. Since most brokerage firms don't allow minors to open and operate accounts, a Roth IRA with custody is maintained by an adult custodian, usually a parent or guardian, until the minor is of legal age. A custodial Roth IRA is a tax-advantaged retirement account for children that allows them to invest the income they earn and take advantage of the benefits of compound growth in the coming years. If you're familiar with how Roth IRAs work, then you already understand the basic rules of Roth IRAs with custody.