A custodial IRA is a tax-free retirement investment account established by a parent or grandparent for a minor child. It allows the child to learn about saving and investing money, and the funds can be used for qualified purposes such as education and first-time home purchase. The account has significant tax advantages.
A custodial IRA is a specific type of retirement investment account. This type of account is established for a minor child by a parent or grandparent. In short, a custodial IRA allows adults to open retirement investment accounts for the benefit of a child.
Similar to a traditional investment retirement account, a custodial IRA establishes an account that allows money invested today to benefit the child in the future. Investing in this type of account at an early age benefits the child because the money and investments in the account have an extended period of time to grow. Second, it helps parents teach their children to save and invest money for the future.
When a child begins working as a teenager and young adult, a custodial IRA also allows the child to make contributions to the account. This promotes the lessons of saving and investing money. It can also help teach the child the value of a dollar because she is putting the money she earns to work for them and their future.
When custodial IRAs are established, the child officially owns the account and any investments or money in the account. However, as an adult, the parent or custodian of the account is the administrator of the account until the child reaches majority. The age of majority is between 18 and 21, depending on the state where the account is held.
The ultimate purpose of a custodial IRA is to save for the child’s retirement. However, the ways in which the child uses the money when they come of age may change before they reach retirement. For one, the child may choose to use some of the funds to pay for her college education. Another permitted use of the funds is to purchase her first home.
Borrowing or withdrawing money from the custodial IRA for qualified purposes, such as education and first-time home purchase, entitles the child to access the money for his or her needs. There are also some advantages to taking money from the IRA instead of traditional borrowing routes. In addition to the use of funds, the custodial IRA has a significant tax advantage.
The main tax advantage of this type of IRA is that the interest or growth in the account is tax free. The account, the child and the custodian are not taxed on the growth of the account. In essence, a custodial IRA is a tax-free retirement account that a custodian establishes for the benefit of a child. The child benefits from the savings and investments in the account to use for qualified purposes.
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