A guardianship is an investment account for the benefit of a minor or incapacitated adult. When such an account is an IRA, children with earned income can contribute to their retirement savings and take strong advantage of compounding market growth.
Guardianship Features
The “guardian” of a guardianship relationship is typically the parent, grandparent, or trustworthy adult. The guardian manages the investments or entrusts them to a financial advisor until the child reaches adulthood. Guardianships for an incapacitated adult end when the adult is capable of managing their own assets again, according to the court.
Guardianships can be opened for a child of any age. Guardian IRAs, also called custodial IRAs, are the same, but contributions will be based on the child’s income. This learning opportunity can help the child learn wise financial responsibility. Those considering gifting their child or grandchild a head start may instead consider a UTMA, UGMA, or trust. The annual IRA contribution limit of $7,000 in 2024 applies to guardian IRAs as well.
The Financial Benefit of a Head Start
Since children have many years until retirement, starting early allows them to take great advantage of compounding market growth. For example, a 14-year-old’s $1,000 investment with an 8% annual growth target grows to over $50,000 by age 65 without any withdrawals or additional contributions. This figure drops to about $25,000 if starting at age 24 – an over 50% drop.
Further, guardian IRAs can be opened as either traditional or Roth. Traditional IRAs allow pre-tax contributions to defer taxes. However, Roths allow after-tax contributions for tax-free qualified withdrawals, potentially assisting with college savings or emergency funds without looming concerns over taxes.
Opening a Guardianship
Getting an investment account open early has many benefits that last through retirement. First State manages guardianships with fiduciary responsibility to the highest degree. For a free consultation with Tulsa financial advisors, contact us at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.