Guardian IRA

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 own finances due to a physical or mental disability. 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, while a traditional IRA will result in a deferred tax liability. 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 own finances due to a physical or mental disability. Like a typical IRA, the money inside a guardian IRA grows tax-free while it’s in either a traditional or Roth IRA. The guardian IRA can be either traditional or Roth in nature, and function identically to their non-guardian varieties.

A guardian IRA is a custodial retirement account held on behalf of a minor or incapacitated dependent.

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 own finances due to a physical or mental disability. This is also called a custodial IRA.

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 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 is able to handle their own 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 2020, the standard deduction is up to $12,400 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.

Benefits of a Guardian IRA

Like a typical IRA, the money inside a guardian IRA grows tax-free while it’s 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, while a traditional IRA will result in a deferred tax liability. What's more, there are currently no required minimum distributions (RMDs) on Roth accounts. For traditional IRAs, money must be withdrawn once age 72 is reached on an annual basis or 70 1/2 if you reached 70 1/2 before Jan. 1, 2020.

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.

Related terms:

Custodial Account

A custodial account is a savings account set up and managed by an adult for a minor. Discover how custodial accounts work and their pros and cons. read more

Custodian

A custodian is a financial institution that holds customers' securities in electronic or physical form to minimize the risk of theft or loss. read more

Federal Income Tax

In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more

Fiduciary

A fiduciary is a person or organization that acts on behalf of a person or persons and is legally bound to act solely in their best interests. read more

Guardian

A guardian is an individual who has been given the legal responsibility to care for a child or an adult who does not have the capacity for self-care.  read more

Income Tax

Income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. read more

Individual Retirement Account (IRA)

An individual retirement account (IRA) is a savings plan with tax advantages that individuals can use to invest for retirement. read more

Retirement Planning

Retirement planning is the process of determining retirement income goals, risk tolerance, and the actions and decisions necessary to achieve those goals. read more

What Is a Roth IRA? Guide to Getting Started

A Roth IRA is a retirement savings account that allows you to withdraw your money tax-free. Learn why a Roth IRA may be a better choice than a traditional IRA for some retirement savers. read more

Social Security Number (SSN)

A Social Security number (SSN) is a numerical identifier assigned to U.S. citizens and some residents to track their income and determine benefits. read more