A custodial IRA constitutes an account opened by an adult to save money earned by a minor -- usually a child or grandchild. Custodial IRAs assume the form of traditional or Roth IRAs, and the same rules apply regardless of the type of account in question. Rules for custodial IRAs cover the opening of the account, maximum contribution amounts and issues of ownership and transference. Various other rules regarding custodial Roth IRAs exist, many of them institutionally specific.
Opening the Account
In order to open a custodial Roth IRA, the custodian of the account must make a minimum contribution for the minor in whose name the account exists. The amount of the required minimum contribution for a custodial IRA depends upon the institution in question. As of the time of publication, Charles Schwab maintains a minimum opening contribution of $100. Companies provide you with all information regarding opening minimum contributions upon inquiry. Any legal guardian of the minor in whose name the account exists may open the account and serve as the custodian.
Custodial Roth IRAs follow the same maximum annual contribution laws as all other IRA accounts. As per Internal Revenue Service (IRS) regulations, the maximum permissible annual contribution to an IRA stands at $5000 for anyone younger than 50 as of the time of publication. Anyone aged 50 and older can contribute as much as $6000 per year to an IRA, though age limits depend upon the person in whose name the account exists. This means that even if a 65-year-old grandparent contributes to a custodial IRA, the amount must abide maximum contribution rules for those younger than 50.
Ownership and Transference
Though a minor cannot access an IRA, a custodial account technically belongs to the person in whose name it exists regardless of the circumstance. Upon reaching age 18, the custodial account owner assumes complete control of the account and it becomes a standard, rather than custodial, Roth IRA. Rules expressly forbid transferring money from a custodial IRA to any account not in the name of the IRA account owner. This provision prevents a custodian from siphoning money from a custodial Roth IRA.
Paying for Education
The funds from a Roth IRA may go towards educational costs. As per custodial IRA rules, capital from a Roth IRA may go toward the cost of higher education and any eligible institution. Eligible institutions constitute any college or university participating in the federal Department of Education’s Student Aid Program. You can withdraw funds from any IRA without tax penalty to pay for educational costs for a child or grandchild. This exception applies to custodial IRAs used to cover educational costs.
IRS Rules and More
The IRS maintains a handful of regulations regarding custodial traditional and Roth IRAs. As per these rules, banks, federal credit unions, savings and loan institutions and federally approved entities like mutual funds, stockbrokers and insurance companies may host custodial IRAs. As with all IRAs, custodial IRA rules prohibit the commingling of the account and assets other than a common trust or common investment account. The prospectus of any IRA contains all the fine print information of the account -- for rules regarding a specific custodial IRA, request a copy of this document.