What Is a Guardian IRA? What It Is, How It Works, Benefits

What Is a Guardian IRA?

What is a guardian IRA? It’s an IRA that’s established and controlled by an adult for a minor. Guardian IRAs may also be established for adults who cannot manage their own financial affairs due to physical or mental disability.

Designated as guardian IRAs (also known as custodial IRAs), the account is held by and managed by the guardian for the child or other minor until age 18 or 21, depending on the laws of the state in which the child resides. Guardians can open either traditional or Roth IRA accounts.

Key Takeaways

A guardian IRA is a custodial retirement account established to hold funds on behalf of a minor or incapacitated adult.

Young people can also take control of accounts before that time, if they turn the age of majority which is 18 in some states and 21 in others.

A guardian IRA may be suited for minors who are earning their own income.

The guardian IRA can be either traditional or Roth.

Understanding a Guardian IRA

A responsible adult makes investment decisions for the minor or adult incapacitated person. A guardian IRA remains in the minor or incapacitated adult’s name. Legal responsibility ends when the minor is no longer a minor (18 years of age, or 21 in some states), or when the adult can function independently.

A guardian IRA may be either traditional or Roth, and is also very similar to a non-guardian IRA. A child can make contributions to a guardian IRA so long as the child has earned income in the tax year he or she wishes to make contributions, with children of any age allowed to make contributions to a guardian IRA.

So why use IRAs for kids? IRA contributions make sense if the kids have earned income and they are at the point where filing an annual tax return is required. The standard deduction for 2023 is $13,850 for an individual, up from $12,950 in 2022. A kid earning an income up to those sums would pay zero federal taxes and have to file a return. But there is an IRA contribution limit: $6,500 for 2023, $6,000 for 2022.

Also, like other IRAs, the total contribution to a guardian IRA cannot be more than the superior’s earned income for the year in which the contribution is made. The indisputable merits of your own IRA choices need not stop with retirement. Granting your children access to unused IRA funds is an excellent strategy to jumpstart their investment journey. Before you consider this option, however, it is essential to address several practicalities. First and foremost, US tax laws allow only a limited class of individuals to be the primary account holder and the principal beneficiary of a retirement account. Which brings us to the second and crucial limitation: once you relinquish control over your IRA – be it a traditional, Roth or guardian IRA – you will lose access to withdrawal privileges until you reach the usual age limit of 59½ (with few exceptions) to withdraw funds for non-academic purposes.

Benefits of a Guardian IRA

A guardian IRA, like any IRA, offers tax benefits: when a child removes the money decades later, they won’t pay income tax. Better yet, Roths don’t carry RMDs (required minimum distributions) the way previous generations’ traditional IRAs (or even non-Roth IRAs) do. A traditional IRA is funded with pre-tax dollars, but then you pay income tax when you take out your distributions in retirement.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 lengthened the age at which you must start taking RMDs, to age 72 (it was previously age 70½). Owners of traditional IRAs may continue to make contributions of any amount at any time. But if the owner turns age 70½ in 2019, the old rule applies. If the owner turns 70 ½ in 2020, 2021 or 2022, the owner must take the first RMD by April 1 of the year following the year the owner turns 72.

The age for RMDs was raised still further after the SECURE Act 2.0 became law in 2022. As of 1 Jan 2023, the age for triggering RMDs is 73. If you turn 74 on or after 1 Jan 2033, the age increases to 75.

Kids make good candidates for IRA conversion, especially when their income will be low (which is usually teen-age years). If they have no other income, they might be able to convert all the way up to the standard deduction, and pay no federal income tax whatsoever.

How Does a Guardian IRA Benefit Work?

A guardian IRA is an IRA opened and managed by an adult on behalf of another adult who is a current minor or who is incapacitated. Guardian IRAs can be opened as traditional or Roth IRA, and the rules for having and maintaining the guardian IRA are the same for the non-guardian IRAs. Once the child is no longer a minor (or if the incapacitated adult is able to manage his or her own finances again), the guardian’s role ceases.

Can You Open an IRA for Your Child?

Yes, you can open your child an IRA. You’ll have to open a guardian IRA in her or his name. You’ll be the guardian so you’ll make all of the decisions until your child is no longer a minor.

What’s the Youngest Age to Open an IRA?

Anyone can set up an IRA at any age. An adult will set up a custodial IRA on a child’s behalf. A child must have earned income in the taxable year in which you make your contributions.

The Bottom Line

A guardian IRA for a child could help him or her get an early start on a nest egg for retirement, even as you teach your child the value of saving and investing.

Guardian IRAs, like non-guardian IRAs, can be traditional or Roth. For more information about the differences between traditional and Roth IRAs, please see the Investopedia article ‘Traditional IRA vs Roth IRA.’ If you plan to create a guardian IRA for a minor or an incapacitated adult, please review our lists of the best IRAs and the best Roth IRAs to help with your research and due diligence.