Table of Contents
Table of Contents

Guardian IRA Definition

What Is a Guardian IRA?

The term guardian IRA refers to an individual retirement account (IRA) that is held in the name of a legal guardian or parent for a minor. Guardian IRAs are held and managed by the guardian for a child or other minor under the age of 18 or 21 depending on state legislation. They may also be held for individuals who can't handle their own finances because of a physical or mental disability. The guardian in this kind of account is known as the custodian, which is why these accounts are also called custodial IRAs. Guardians can set up either traditional or Roth IRAs and must follow contribution limits as published by the Internal Revenue Service (IRS).

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 is funded with after-tax dollars.
  • Minors can gain control over their accounts once they turn 18 or 21 depending on the state.

Understanding a Guardian IRA

A guardian is responsible for signing documents on behalf of a minor or an adult with different needs. The responsibilities of a guardian cease once the child is no longer a minor, which is 18 or 21 depending on the state, or when the adult can handle their own finances.

There are two different types of IRAs that are suitable for children: traditional and Roth. The primary difference between these two accounts is the time you must 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), which means it contains pretax 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 (SSN) when they open the account.

IRAs do make sense for kids who have enough earned income that they would have to file income taxes. Note that the standard deduction for 2023 is up to $13,850 for individuals and $12,950 for 2022. This means that kids could earn that much and not have to pay any federal taxes, though they would still have to file a return. Keep in mind, though, that there are contribution limits for IRAs. The limit for 2023 is $6,500 and $6,000 for 2022.

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 (SECURE) Act of 2019 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

This age was raised once again following the passage of the SECURE Act 2.0. As of Jan. 1, 2023, the age to begin taking RMDs is 73.

Article Sources
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  1. Internal Revenue Service. "IRS provides tax inflation adjustments for tax year 2023."

  2. Internal Revenue Service. "IRS provides tax inflation adjustments for tax year 2022."

  3. Internal Revenue Service. "IRA FAQs."

  4. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."

  5. Congress.gov. "H. R. 2617," Page 831.

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