What Is a Custodial Roth IRA

What Is a Custodial Roth IRA?

Learn about these investment vehicles that can be set up by an adult on behalf of a minor, designed to help the minor save for retirement.

How Do Custodial Roth IRAs Work?

• Contribution Limits

Contributions to a custodial Roth IRA can be made by people other than the beneficiary, but cannot exceed either the beneficiary's earned income or $6,000 whichever is greater.

• Distribution Guidelines

If you do not follow the IRS guidelines for a Roth IRA withdrawal, a 10% federal tax penalty could apply, and any earnings withdrawn could also be subject to taxation

•Investment Options

Roth IRAs can hold a wide variety of assets,

including stocks, bonds, alternative investments, cash and fund-style vehicles that contain various combinations of assets. There are still rules and requirement to what assets cannot be placed in these accounts, though, such as life insurance contracts.

PRO TIP

While a custodial Roth IRA allows for the penalty-free withdrawal of contributions before retirement age, any money put into the account should be left to grow as long as possible to maximize the tax advantages.

Pros and Cons to Custodial Roth IRAs

Pros

• More growth potential than traditional savings accounts

• A good way to teach financial awareness

• Flexible and can house a variety of assets

• Can be low-cost and have minimal upkeep effort

• Tax-exemption benefits

• Contributions can be withdrawn penalty-free anytime as long as 5 years has passed since the IRA was established

•No IRS required minimum distributions

Cons

• Annual contributions are limited to the lesser of $6,000 or earned income

• No tax deductions are available; all contributions are made with after-tax dollars

• Generally, a 10% penalty applies for distributions of earnings taken prior to age 59 1/2