What Are the Benefits of Minor IRAs?
Tax Benefits
IRAs may offer tax advantages for contributions (Traditional IRA) or withdrawals (Roth IRA).1
Flexible Use
IRA withdrawals may be used for higher education or buying a first home, not just retirement.2
Full Control at Adulthood
Control of the assets is transferred to the minor when they reach the age of majority.3
What Are the Types of Minor IRAs?
You can choose a Roth or a Traditional IRA, just like adult accounts. Contributing to a Roth IRA is generally the better option for minors. They will owe taxes on the money the year they earned it but can enjoy tax-free qualified withdrawals later in life. Earnings on contributions will be tax-free for qualified withdrawals.
Contributions to Traditional IRAs may be deductible when filing a tax return, and income tax on earnings is deferred. But unless the minor has a large income now, it may be more beneficial to invest in a Roth IRA now to receive tax benefits at retirement.
Who Is Eligible?
A minor must have earned income to open a Minor IRA. A Responsible Individual or custodian (a parent or other adult) opens the account on behalf of the minor.
Who Owns and Controls the Account?
The assets belong to the minor, but the Responsible Individual manages the account until the child reaches the age of majority (age 18 or older, depending on the state). At that time, control of the account is transferred to the former minor.
How Much Can the Minor Contribute?
The minor must have earned income to contribute. The maximum annual contribution amount is 100% of the minor’s taxable compensation for that year, up to annual IRA contribution limits.
How Will This Impact Financial Aid?
Retirement accounts, such as IRAs, are not reported on the Free Application for Federal Student Aid (FAFSA). However, withdrawals for college expenses are considered income, which could affect financial aid eligibility for the following year.
Additional Details
Read more about Roth IRAs and Traditional IRAs before opening an account
How Can I Use the Money?
IRAs are generally used for retirement, and withdrawals may begin at age 59½. Roth IRA contributions can be withdrawn at any age without penalty, but there is a 10% penalty on earnings if the account is less than five years old and the owner is under age 59½.
The IRS allows special-purpose withdrawals under specific conditions (examples: first home, higher education) that are penalty-free, but you may owe tax on earnings and deductible contributions.
What Happens if the Money Isn’t Used?
The Minor IRA is transferred to a regular IRA at the age of majority. The IRA account can stay open as long as you choose, although Traditional IRAs are subject to required minimum distributions.
How Much Money Is Needed to Open an Account?
You must invest a minimum of $1,000 to open a Minor IRA at American Century, or you can start with $500 if you set up a $100 automatic monthly investment.
How Long Can Contributions Be Made to the Account?
The money is transferred to a regular IRA at the age of majority. There is no age limit on making contributions to Traditional or Roth IRAs as long as you have earned income.
Are There Any Income Limitations?
The minor must have earned income to contribute. The maximum annual contribution amount is 100% of the minor’s taxable compensation for that year. Compare IRAs to see the annual contribution limits.
Compare IRAs for more details on tax benefits for each IRA type.
The IRS allows special-purpose withdrawals under specific conditions (examples: first home, higher education) that are penalty-free, but you may owe tax on earnings and deductible contributions. See link for related policies.
The age of majority is generally 18 but could be higher in some states.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.