Custodial Roth IRAs allow children to save some of their earned income into an account until they reach legal adult age in their state. It functions similarly to regular Roth IRAs until that happens.
Some custodians allow you to select your investments individually, while others provide managed accounts or robo advisors that offer hands-off investment management with reasonable fees.
The I in IRA stands for Individual
Custodial Roth IRAs offer your children an ideal way to build up a retirement nest egg that will support them once they stop working.
IRS rules allow individuals to contribute up to the lesser of either their earned income or $6,500 annually to an IRA. Small-business owners and self-employed workers can utilize either a traditional or SEP IRA as another way of saving for retirement beyond workplace plans.
Since most IRA providers only provide traditional investments, some also allow self-directed IRAs (SDIRAs).1 An SDIRA offers greater flexibility; however, it’s essential that any alternate investments be carefully assessed and account statements checked against before investing with one.
Lack of industry knowledge is the top complaint from IRA holders regarding their former custodians, which is understandable given that an IRA’s success hinges on a custodian understanding what investors need and want from their investments. Fee transparency also plays an integral part, including account maintenance fees, transaction fees and any cost of investments with hard to value characteristics such as real estate investments or infrastructure assets.
The I in IRA stands for Investments
Investors looking into opening an IRA tend to prioritize what types of investments they can place into an account, and selecting an IRA custodian accordingly. Your choice can have a dramatic effect on investment options, fees and services available – depending on your specific requirements it might make sense to look for an account with low fees/commissions/account maintenance/load charges in mutual funds etc.
Custodians may vary greatly in their ability to provide nontraditional assets in an IRA. Although the Internal Revenue Code outlines what can be invested, individual custodians often impose their own restrictions on which investments they will allow – usually related to alternative investments like real estate, private mortgages, oil and gas limited partnerships or precious metals. Self-directed IRA custodians that specialize specifically in these kinds of assets often allow more flexible investing compared with regular custodians – this makes them an excellent option for high net worth investors looking to diversification of alternative assets in an IRA.
The I in IRA stands for Fees
Custodial IRA and UTMA accounts share similar properties: their legal owners serve as custodians who must oversee assets on behalf of minor beneficiaries until they reach 18 or 21.
When setting up a custodial IRA, there are many considerations. First and foremost is how the IRS sets limitations on what can be invested. For instance, you cannot invest in real estate with immediate benefits (i.e. living there or taking out loans against it or fixing leaky toilets).
Contributing to an IRA each year must not exceed either your earned income or $6,500, with tax benefits offered through Roth IRAs dependent upon fulfilling 5-year holding period rules and not commingling funds from various sources; furthermore disqualified parties (like parents) must not access your account directly. However, these restrictions are less stringent when using self-directed IRA custodian services.
The I in IRA stands for Transparency
When making nontraditional investments in their retirement account, individuals should be mindful that their custodian may impose additional rules above and beyond what are mandated by the Internal Revenue Service. Sometimes these policies can be confusing or even deceptive.
Custodians often prevent individuals from purchasing certain assets within their IRAs, such as collectibles (like baseball cards and rare coins) or real estate. This is not due to any misdeed on behalf of the IRA owner – rather due to not verifying whether such an asset can legally be held within an IRA account by checking its eligibility with the IRS first.
Custodians must also remind IRA beneficiaries that they only have 60 days to transfer distributions between IRA/Roth IRA accounts, while lack of information and liquidity for alternative investments is often an issue since custodians cannot provide accurate financial details regarding these assets.
