Custodial IRA Application
|
To contribute to an individual retirement account (IRA) requires having earned income. Luckily for minors, babysitting money and household employment both count.
To open an IRA for a minor, Schwab requires the “Custodial/Minor IRA Account Application.”
Most minors benefit from contributing post-tax (Roth) to an IRA as their earnings are usually the lowest they will ever be. For this reason, we have prefilled the form to open a Roth IRA.
Important language to understand: The minor is the account holder. The guardian/parent/adult on the account is called the custodian. Until the age of termination, the custodian is the only one who will be permitted to make decisions on the account even though the assets are owned by the minor. The custodian is held to the fiduciary standard, meaning they are legally required to act in the minor’s best interests.
In Section 4, you must select under which state law you are opening the account. By default, most people pick where they reside.
You also need to pick the age of termination, at which age you would like the assets to revert to being owned outright by the minor. Most states have age 21 as the maximum age of termination allowed. You can look up your state’s age of majority rules here . By default, we recommend picking age 21.
Other than that, most of the form is simply filling out your personal information for the account open. First, you enter the minor’s information. Then, you enter the custodian’s information. At the end, only the custodian needs to sign.
At the very end of this form in Section 9, you can nominate a successor custodian who will serve in the event of the custodian’s incapacity, death, resignation, or removal as custodian. You should nominate someone other than the guardian/parent/adult who you selected as the custodian. For example, if mom is the custodian, you could nominate dad as the successor custodian.
While this section is not required to open a custodial account, we recommend completing it to take advantage of the opportunity to engage in smart estate planning for this account. The signature for this appointment must be witnessed. The witness can be almost any adult, but, as the note says, “The witness may NOT be designated as the successor custodian.”
You will notice that there is not a section for beneficiary designations. Instead, Schwab’s form says:
The Minor Account Holder of this Custodial IRA may not designate his/her own beneficiaries until he/she reaches the age of majority… .In the event the Minor should die before attaining the age of majority or age for termination, or dies thereafter without having designated any beneficiaries, the account will be distributed to the Minor’s estate.
In most states and circumstances, this means that in the event of the minor’s death the assets will be left to his or her parents.