Saving for retirement as early as possible makes it easy to build your retirement nest egg with less stress. You don’t have to be 18 years old to open an individual retirement account(IRA) and start making contributions. If you are a minor or you want your child to start saving for retirement at an early age; opening a custodial IRA will be a great way to save for retirement at a young age.
In this post, I will discuss how custodial IRAs, how custodial IRAs work, and how minors such as teenagers can start saving for retirement.
What is a custodial IRA?
A custodial IRA is an individual retirement account(IRA) a custodian opens for a minor who earned an income to help them save for retirement at an early age. The custodian can be a parent or a legal guardian. After opening a custodial IRA, the custodian will manage the account and all investment activities until the minor turns 18 or 21 in some states.
The only difference between a custodial IRA and a regular IRA is that a custodial IRA is designed for minors who earn an income and it must be managed by a custodian until the minor comes of a legal age.
Can a minor open a Roth IRA?
Yes, a minor can make contributions to retirement through a custodial IRA, according to Charles Schwab. With a custodial IRA, teenagers can start saving for retirement at an early age and take advantage of compound interest through long-term investments.
To have a custodial Roth IRA, however, the minor must earn an income. The account will be opened and managed by the custodian usually the parent or a legal guardian until the minor reaches the age of 18. Keep in mind that some states require that minors reach the age of 21 before they can take ownership and control of the account.
Age requirements for custodial Roth IRAs?
There is no age limit when it comes to contributing to a custodial Roth IRA or custodial traditional IRA. Whether you are 70 or 10 you can still contribute to an IRA. Also, the contribution limit will be the same regardless of age.
According to the Internal Revenue Service (IRS), you can contribute to an IRA (Roth IRA or traditional IRA) regardless of age. The limit to how much you can contribute or tax deductions will vary on the type of account you have.
Custodial IRA contribution limits in 2024
The contribution limit to a custodial IRA for 2024 is $7,000. For 2023, the IRA contribution limit is $6,500. This means that as long as the minor has made an income, they can contribute up to these limits.
If the income made throughout the year is less than these limits, the maximum contribution to an IRA, in this case, will be the income made during the year. For example, if your teenager earned $5,000, the maximum they can contribute to a custodial Roth IRA or custodial traditional IRA will be $5,000.
Where can I open a custodial Roth IRA?
To open a custodial IRA, reach out to your local banks and investment institutions that offer custodial options. You can also open a custodial IRA from online brokerage firms with custodial options including the following:
- Fidelity Investments
- Charles Schwab
When can I transfer the ownership of an IRA to my child?
The custodian will oversee all activities of the custodial IRA until the minor reaches legal age, according to Charles Schwab. In most states, the child must be 18 before the ownership is transferred from the custodian to the child. However, some states require the minor to reach 21 years old before they receive ownership of the account.
Why should you consider a custodial Roth IRA?
Before we examine the main reason a minor should contribute to an IRA, let’s see why many people struggle in retirement. According to Yahoo, 1 in 4 Americans has no retirement savings. In addition, the median retirement saving balance of people between 55 and 64 years old is $120,000. This means that the same people will be able to spend only $1,000 or outlive their money during retirement.
The same publication showed that for people who are 60 or older, 13% of them do not have retirement savings. That is they will work until they die or get taken care of by the government. In addition, the percentage of people with no retirement savings goes higher as you go lower in age.
So, why would you let minors open an individual retirement account? Based on the statistics above, the answer is obvious.
By contributing to an IRA at a young age, your minor can easily build wealth and take advantage of compounding interest. Since minors have a long time to save for retirement, the money they save in the account alone could be enough to take care of them throughout retirement.
On top of their contributions, the money they contribute to the custodial IRA will grow over time through investments. Over time, their accounts will grow exponentially due to the power of compound interest. If you want your children to have a better future, start their retirement accounts as soon as they start earning income.
