Guardian IRA

DEFINITION of 'Guardian IRA'

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


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

Benefits of Guardian IRAs

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 that you contribute 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, you pay taxes when you put the money into the account, so it contains earnings after tax.

The money grows tax free while it’s in either a traditional or Roth IRA. But the benefit of a Roth is that when the child withdraws the money many decades from now, he or she won't have to pay income tax on it. What's more, there are no required minimum distributions (RMDs) on the money. Of course, these rules may change in the next 40 years, but that's where they are now.

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

IRAs make sense for kids who have enough earned income that they would have to file income taxes--at least $5000. Note that for 2018, the standard deduction goes up to $12,000 for an individual, so kids could make that much and not have to pay 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 covert up to the standard deduction each year and pay little to no federal taxes.