Guardian IRA

What Is a Guardian IRA?

A guardian IRA is an individual retirement account (IRA) held in the name of a legal guardian or parent on behalf of a child or other minor under the age of 18-21 (depending on state legislation) or an individual who is incapable of handling their finances due to a physical or mental disability. This is also called a custodial IRA.

Key Takeaways

  • A guardian IRA is a custodial retirement account held on behalf of a minor or incapacitated dependent.
  • A guardian IRA is best suited for minors who are earning their own income.
  • The guardian IRA can be either traditional or Roth in nature, and function identically to their non-guardian varieties.
  • A guardian Roth IRA will be funded with after-tax dollars.
  • A minor can gain control over their account once they reach age 18.

Understanding a Guardian IRA

A guardian is responsible for signing documents on behalf of a minor or special-needs adult. The responsibilities of a guardian cease once the child is no longer a minor or when the adult can handle their finances.

There are two different types of IRAs that are suitable for children: traditional and Roth. The primary difference between traditional and Roth IRAs is when you pay taxes on the money contributed to the plan. With a traditional IRA, you pay taxes when you withdraw the money during retirement (at your then-applicable tax rate). A traditional IRA contains pre-tax earnings. With a Roth IRA, the money put into the account has already been taxed, so it contains after-tax earnings.

As the custodian, the adult controls the assets in the custodial IRA until the child reaches age 18 (or 21 in some states), at which point the assets are turned over to them. The IRA is opened in the child’s name, and the custodian will have to provide their Social Security number when they open the account.

IRAs make sense for kids who have enough earned income that they would have to file income taxes. Note that for 2022, the standard deduction is up to $12,900 for an individual, and for 2021, it is $12,550. So kids could earn that much and not have to pay any federal taxes, though they would still have to file a return.

Converting a traditional IRA to a Roth may make sense for kids, especially in years when they have little to no income. They could convert up to the standard deduction each year and pay little to no federal taxes.

Benefits of a Guardian IRA

Like a typical IRA, the money inside a guardian IRA grows tax-free while in either a traditional or Roth IRA. The benefit of a Roth over a traditional IRA is that when the child withdraws the money many decades later, they won't have to pay income tax on it. In contrast, a traditional IRA will result in a deferred tax liability. What's more, there are currently no required minimum distributions (RMDs) on Roth accounts.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on Dec. 20, 2019, and made major changes to the RMD rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72 years of age.

Article Sources
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  1. Internal Revenue Service. "IRS provides tax inflation adjustments for tax year 2022." Accessed Jan. 1, 2022.

  2. Internal Revenue Service. "IRS provides tax inflation adjustments for tax year 2021." Accessed Jan. 1, 2022.

  3. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs." Accessed Jan. 1, 2022.

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