A Roth IRA can be a great way to save for retirement. But what happens if you don't have an employer-sponsored retirement plan? Or, what if you want to contribute more money than your employer will match in a 401(k)?
In this case, you might want to consider opening a Custodial Roth IRA. This type of IRA is a bit different from the traditional Roth IRA, so it's important to understand the benefits and fees associated with it. In this article, we will cover everything you need to know about Custodial Roth IRAs!
Custodial Roth IRA: Benefits, Fees & Everything You Need to Know Table of Contents
What is a Custodial Roth IRA?
A Custodial Roth IRA is an individual retirement account (IRA) that is established by a parent or guardian for the benefit of a child. The account is held in trust by a custodian, who manages the account and makes investment decisions on behalf of the child.
How Does a Custodial Roth IRA Work?
A custodial Roth IRA is a retirement savings account that is established and maintained by a parent or other adult for the benefit of a child under the age of 18. The account owner (the "custodian") manages the account and makes investment decisions on behalf of the child.
The money in a custodial Roth IRA grows tax-free, and withdrawals are also tax-free if they are used for qualified education expenses.
How to Get a Custodial Roth IRA
There are a few things you need to do in order to get a Custodial Roth IRA. First, you need to be sure that you have a custodian who is willing to open and manage the account for you. Second, you need to make sure that the custodian is qualified to do so. Third, and most importantly, you need to find an investment that meets your needs and objectives.
Once you have found a custodian and an investment, you will need to fund the account. This can be done by making contributions directly from your paycheck or by transferring funds from another retirement account. Once the account is funded, you will be able to start investing!
What Are The Different Types of Custodial Roth IRAs?
There are three different types of custodial Roth IRAs: traditional, SEP, and SIMPLE. Each has its own set of benefits and drawbacks, so it's important to understand the difference before choosing one for your retirement savings.
Traditional Custodial Roth IRA
The traditional custodial Roth IRA is the most common type of account. It offers tax-deferred growth on your investment earnings, which means you won't have to pay taxes on them until you withdraw the money in retirement. There are no income limits for contributions, and you can contribute up to $6000 per year (or $ 7000 if you're 50 or older).
SEP Custodial Roth IRA
A SEP custodial Roth IRA is a good choice for self-employed individuals or small business owners. It allows you to make much larger contributions than a traditional IRA, up to 25% of your income (up to $56,000 per year). However, there are some income limits that apply to SEP IRAs.
SIMPLE Custodial Roth IRA
A SIMPLE custodial Roth IRA is similar to a traditional IRA, but it has lower contribution limits and fewer investment options. You can contribute up to $12,000 per year (or $14,500 if you're 50 or older), and your investment choices are limited to a few specific types of mutual funds.
What Are The Benefits of a Custodial Roth IRA?
As we mentioned earlier, one of the benefits of a Custodial Roth IRA is that your money can grow tax-free. That means that you won’t have to pay any taxes on the earnings when you withdraw the money later in life.
Another benefit of a Custodial Roth IRA is that you can withdraw the money for qualified educational expenses without having to pay any taxes or penalties. This can be a huge help if you’re looking to send your kids to college.
Finally, if you pass away before reaching retirement age, your beneficiaries will be able to withdraw the money from your Custodial Roth IRA without having to pay any taxes or penalties. This can provide them with a nice financial cushion in an already difficult time.
What Are The Disadvantages of a Custodial Roth IRA?
There are a few potential disadvantages to consider with a custodial Roth IRA. First, if the account owner dies before the child reaches age 18, the account will be distributed to the child as part of the estate and may be subject to income taxes.
Second, there is always the possibility that Congress could change the rules regarding Roth IRAs in the future, which could impact how much money your child ultimately has available for retirement.
Finally, if your child decides not to use all of the money in their custodial Roth IRA for retirement expenses, they may be subject to penalties and taxes on any withdrawals they make prior to age 59 ½.
What Are The Best Custodial Roth IRA Accounts?
There are a lot of great custodial Roth IRA providers out there. I've compiled a list of some of the best, along with their fees and features.
Fidelity has no account minimums and no annual fees for IRAs. They also have 24/seven customer service and offer mobile check deposit.
Schwab has no account minimums and no annual fees for IRAs. They also offer 24/seven customer service, mobile check deposit, and online bill pay.
TD Ameritrade has no account minimums and no annual fees for IRAs. They also offer 24/seven customer service, mobile check deposit, online bill pay, and bank transfers.
E-Trade has no account minimums and no annual fees for IRAs. They also offer 24/seven customer service, mobile check deposit, online bill pay, and bank transfers.
Interactive Brokers has a $100 account minimum and $20 annual fee for IRAs. They also offer 24/seven customer service, mobile check deposit, online bill pay, and bank transfers.
Merrill Edge has a $250 account minimum and $30 annual fee for IRAs. They also offer 24/seven customer service and mobile check deposit. Online bill pay and bank transfers are available through their parent company Bank of America.
Ally Invest has a $0 account minimum and $0 annual fee for IRAs. They also offer 24/seven customer service and mobile check deposit. Online bill pay and bank transfers are available through their parent company Ally Bank.
Vanguard has a $20 annual fee for IRAs, but they waive the fee if you have an account balance of $50,000 or more. They also offer 24/seven customer service and mobile check deposit. Online bill pay is available through their parent company The Vanguard Group.
These are some of the best custodial Roth IRA providers out there, along with their fees and features. Choose the one that's right for you and start saving for your future today!
What Commissions and Management Fees Come With Custodial Roth IRAs?
When it comes to fees, there are two main types that come with custodial Roth IRAs: commissions and management fees.
Commissions are paid every time you buy or sell an investment within your account. They can range from a few dollars to a few hundred dollars, depending on the value of the investment and the type of transaction. For example, buying stocks will typically have a higher commission than buying mutual funds.
Management fees are charged by the financial institution that manages your account. These fees cover the costs of running the account, such as record-keeping and customer service.
Management fees are usually a percentage of the assets in your account, and they’re deducted directly from those assets. For example, if you have $100,000 in your account and the management fee is 0.25%, you’ll pay $250 in fees that year.
What Is The Minimum Amount Required to Open a Custodial Roth IRA?
There is no minimum amount required to open a custodial Roth IRA. However, most financial institutions will require that you have at least $500 to $1000 to open an account.
Additionally, many financial institutions will also require that you have a certain amount of money deposited into the account each year.
The specific requirements vary from institution to institution, so it is important to check with your chosen financial institution before opening an account.
What Are The Eligibility Requirements for a Custodial Roth IRA?
To be eligible to open and contribute to a custodial Roth IRA, you must meet the following requirements:
- You must be under the age of 18.
- You must have earned income from a job or self-employment. Investment income does not qualify.
- Your modified adjusted gross income (MAGI) must fall below certain thresholds. For 2021, the MAGI limit for single filers is $140,000 and $208,000 for joint filers.
If you meet these requirements, you can open a custodial Roth IRA and begin contributing up to $6000 per year (or 100% of your earned income if it's less than $6000). The money in your custodial Roth IRA will grow tax-free and you can withdraw it tax-free when you reach age 59 ½.
How Much Can You Contribute to a Custodial Roth IRA?
The contribution limit for a custodial Roth IRA is the same as it is for a traditional IRA. For 2022, you can contribute up to $6000 per year if you're under 50 years old. If you're 50 or older, you can contribute up to $ 7000 per year.
There are no income limits for contributing to a custodial Roth IRA. However, if your child's income is above a certain amount, they may not be eligible to contribute to a Roth IRA at all. The income limits for 2020 are $124,000 for single filers and $196,000 for joint filers.
What is The Custodial Roth IRA Contribution Deadline?
The contribution deadline for a Custodial Roth IRA is the same as the deadline for a Traditional IRA, which is April 15th of the year following the year in which you made the contribution.
For example, if you make a contribution to your Custodial Roth IRA on December 31st, 2018, the contribution deadline would be April 15th, 2020.
What Are Some Alternatives to a Custodial Roth IRA?
There are a few alternatives to a custodial Roth IRA.
One is a Traditional IRA. With a traditional IRA, you can deduct your contributions from your taxes, but you will pay taxes when you withdraw the money in retirement.
Another alternative is a Roth 401(k). A Roth 401(k) has the same benefits as a Custodial Roth IRA, but it is offered through an employer. The only downside of a Roth 401(k) is that you may not be able to contribute as much as you can to a Custodial Roth IRA.
Finally, another alternative is a 529 Plan. A 529 Plan is an education savings plan that offers tax-free withdrawals for qualified education expenses.
How Does a Custodial Roth IRA Compare to a 401k?
There are a few key ways in which a Custodial Roth IRA differs from a 401k. First and foremost, with a 401k, your employer is typically the one who sets up and administers the plan. With a Custodial Roth IRA, however, you are in charge of both setting up and administering the account.
This means that you will have to do a bit more work upfront in order to get the account set up and running smoothly. However, it also means that you will have more control over how your money is invested and how much you contribute to the account each year.
Another key difference between a Custodial Roth IRA and a 401k is the way in which contributions are made. With a 401k, your employer will typically make contributions on your behalf.
With a Custodial Roth IRA, however, you will be responsible for making all of the contributions to the account yourself. This can be done via payroll deduction or by making direct deposits into the account from your personal bank account.
The final key difference between a Custodial Roth IRA and a 401k is the way in which distributions are taken. With a 401k, you are typically required to start taking distributions at age 59 ½.
With a Custodial Roth IRA, however, you can choose to take distributions at any time after you turn 59 ½ years old. This flexibility can be extremely beneficial if you need access to your money sooner rather than later.
What Is The Difference Between a Traditional IRA & a Custodial Roth IRA?
There are a few key differences between a traditional IRA and a custodial Roth IRA. Firstly, with a traditional IRA, you make contributions with pre-tax dollars. This means that your contributions lower your taxable income for the year.
With a custodial Roth IRA, you make contributions with after-tax dollars. This means that your contributions will not lower your taxable income for the year.
Secondly, with a traditional IRA, you pay taxes on your withdrawals in retirement. With a custodial Roth IRA, you do not pay taxes on your withdrawals in retirement.
Finally, with a traditional IRA, there is no limit to how much you can contribute each year. With a custodial Roth IRA, there is an annual contribution limit of $5000.
When Can You Withdraw Money From a Custodial Roth IRA?
Generally, you can withdraw money from a Custodial Roth IRA at any time. However, there are a few rules to keep in mind. First, if you're under the age of 59½, you'll likely owe a federal penalty of ten percent on any earnings you withdraw.
Second, if you've only had the account for five years or less, you'll also owe taxes on your earnings (although not the ten percent penalty). So if you're thinking about using your Custodial Roth IRA for short-term goals, be aware that there could be some consequences.
Finally, it's important to remember that withdrawing money from your Custodial Roth IRA will reduce the amount of money available for future growth. So if you're withdrawing money early, be sure to take that into account when making future financial plans.
When Should You Open a Custodial Roth IRA?
You can open a custodial Roth IRA for your child as soon as they have earned income. This means that if your child has a part-time job, they can contribute to their own retirement account.
The earlier you start contributing to a custodial Roth IRA, the more time the money has to grow. For example, if you start contributing when your child is 15 years old, the money will have 40 years to grow before they retire.
Is It Easy to Switch to a Custodial Roth IRA?
The short answer is yes, it is easy to switch to a Custodial Roth IRA. You simply need to contact your current provider and let them know that you want to move your account. They will then provide you with the necessary forms and instructions.
There are a few things to keep in mind when switching to a Custodial Roth IRA, however. First, you will need to make sure that your new provider offers this type of account. Second, you will need to roll over any existing funds from your old account into your new one. And finally, you may be subject to fees or penalties if you withdraw any money from your account before you reach age 59 ½.
Can You Lose Money With a Custodial Roth IRA?
If you're wondering whether or not you can lose money with a Custodial Roth IRA, the answer is yes. However, there are some things you can do to minimize your risk.
Here are a few tips:
- Diversify your investments. Don't put all of your eggs in one basket. This will help to mitigate your risk.
- Choose investments wisely. Do your research and make sure you're investing in something that has the potential to grow.
- Monitor your account regularly. This will help you keep an eye on your investments and make changes as needed.
Following these tips will help you minimize your risk and hopefully avoid losing money in your Custodial Roth IRA.
How Much Should You Contribute to a Custodial Roth IRA?
The answer to this question depends on a few factors, including your income, your investment goals, and your tax bracket.
If you're in the 25% tax bracket, for example, you would save $25 in taxes for every $100 you contribute to a Custodial Roth IRA.
On the other hand, if you're in the 15% tax bracket, you would save $15 in taxes for every $100 you contribute.
You should contribute as much as you can afford to a Custodial Roth IRA, up to the maximum contribution limit of $5000 per year.
Does a Custodial Roth IRA Earn Interest?
The answer is yes, a Custodial Roth IRA does earn interest. However, the interest earned is not taxed as it would be in a traditional IRA. The earnings are also not subject to Social Security and Medicare taxes. This makes the Custodial Roth IRA an attractive investment for many people.
Do You Pay Taxes On a Custodial Roth IRA?
The answer to this question is a bit complicated. If you are the beneficiary of the account, then you will not have to pay taxes on the money when you withdraw it. However, if you are the custodian of the account, then you may have to pay taxes on the earnings of the account. It all depends on how much money is in the account and how long you have been the custodian.
What is a Custodial Roth IRA Rollover?
A Custodial Roth IRA Rollover is a type of contribution that allows you to roll over money from a traditional IRA or other eligible retirement accounts into a Roth IRA. This can be done without paying any taxes or penalties on the amount rolled over.
There are many benefits to doing a Custodial Roth IRA Rollover, including the ability to grow your money tax-free, the potential to withdraw your money penalty-free in retirement, and the fact that you can name a beneficiary for your account.