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What is a Custodial Roth IRA and How Can My Child Benefit?

December 28, 2023

Is your child considering getting a job? Now is the perfect time to kick-start their retirement savings! Here’s what you should know about Roth Individual Retirement Accounts (IRAs) for minors.

Roth Individual Retirement Accounts (IRAs) are powerful tax saving tools for retirement. Did you know that young investors can take advantage of Roth IRAs? Investments held in Roth IRAs build up income-tax-free. Find out the other benefits of custodial Roth IRAs here.

What is a Roth IRA?

A Roth IRA is a special individual retirement account that you fund with post-tax dollars (thus, you cannot take a deduction for contributions into the account from your income taxes). Earnings on the account and withdrawals after age 59½ are income tax-free as long as the account has been in existence for five years.

Custodial Roth IRAs

Geared toward children under the age of 18, a custodial account Roth IRA provides all the benefits of a regular Roth IRA, just with the requirement that an adult serve as custodian.

What are the benefits?

  • Tax-free, compounding growth- Your child’s money will grow tax-free for decades through custodial IRAs, setting them up for retirement down the road.
  • Establishes good financial habits- A custodial IRA can help your child establish good financial habits early. Many adults do not prioritize retirement planning until later, which hinders individuals from building a sufficient nest egg.
  • Penalty-free withdrawals- While Roth IRAs are mainly for retirement saving, your child can also withdraw money (penalty-free) for other expenses including a down payment on a home, college expenses, emergencies and more.

Who is eligible for a custodial IRA?

Your child must earn income in order to be eligible for a custodial IRA. As long as they are making money and paying taxes on that income, then they are eligible to contribute to the IRA.

What are the contribution limits?

For 2023, the IRA contribution limit is $6,500. The contribution limit for a custodial Roth IRA is $6,500 or the total amount of money that your child made during the year, whichever is less. Let’s say your son made $5,000 working at a theme park over the summer. He would be able to contribute up to $5,000 to his custodial Roth IRA. If he earned $7,000 however, he would only be able to contribute up to $6,500.

Check out our blog, New Retirement Contribution Limits for 2024 for the 2024 rates.

What are the tax implications?

When your child is ready to withdraw from the IRA upon retirement, there will be no income tax assessed, because custodial Roth IRAs are funded with post-tax dollars.

Are you interested in setting up a custodial Roth IRA for your child? We can help you get started.

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