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Email Guidance – Establishing IRAs for Young Children

Posted by James M. Carlson
Mar 06 2019

Q-1 We had a gentleman contact us wanting to open an IRA for his six grandchildren who. are minors. He would make contributions into their account for last year and this year. My question is this... can we open an IRA for a minor? He mentioned having their parent sign the IRA docs for them and making them an UTMA IRA if possible. We've never done anything like this. Any information you can provide would be greatly appreciated.

A-1 There is no federal law requiring a child be a certain age in order to establish an IRA. A baby actor or a child actor will benefit by establishing an IRA. A child is eligible to establish an IRA as long as the child has compensation- earnings from a job or because there are self-employment earnings. Having compensation is the key requirement. This is, of course, a tax issue for the child, parents and the grandparent. Did each child earn compensation for 2018 and wil each earn compensation for 2019. A child with a certain amount of income is required to file a federal income tax return even if no tax is owed.

I believe it can be very beneficial for a child who has definite proof of compensation to make an IRA contribution. The law is unclear as to whom is eligible to make the IRA contribution. The conservative approach is- the grandparent gives the funds to the child or who then makes the IRA contribution. The law is not clear that a third party other than an employer or a spouse has the right to make an IRA contribution for some one else.

Caveat. An excess IRA contribution situation exists if a person makes an IRA contribution or has one made on their behalf when the person has no compensation. The law assesses a 6% excise tax each and every year the excess IRA contribution(s) remain in the IRA. Interest and penalties would accrue each year the 6% excise tax is not paid. I don't believe there is any statute of limitations applying to excess IRA contributions.

I presume the bank has procedures regarding when it will allow a minor to have a banking account. When will a parent's signature be required or requested? These are issues for the bank's attorney.

Most states have laws that provide a minor who executes a contract has the right to void that contract. My personal opinion is, as long as the IRA contributions go into saving or time deposits the risk to the bank is minimal.

The grandparent should understand that once the money is contributed to the IRA it is owned by the child and the child has the right to withdraw the funds. Could an IRA plan agreement be modified to give the parent authority over distributions? I don't believe so. It may be done with respect to an inherited IRA but not the child's own IRA.

Each child should designate both primary and contingent beneficiaries.

The grandparent, of course, could decide to not give additional funds to a child if distributions were taken.

Are the IRAs being established Roth IRAs or traditional IRAs? There may come a time in the future where the IRS will decide to set up an exam program for Roth IRAs set up when a person was very young. I suggest the bank have some documentation that the bank had no role in the decision to make these IRA contributions other than sharing this email.

Categories: Email Guidance