Can I Withdraw Money From a Custodial IRA?

Irrevocable Gift

Most minors aren't making money to put into a retirement savings account. Part-time summer income is usually spent on a car, Friday night movies or the latest electronic gizmo. If Jimmy earns $3,000, Grandma can gift the money into the IRA. As soon as the money goes into the IRA, it is owned by the minor, regardless of whether Grandma or Jimmy's mom is the custodian. This is an irrevocable gift, so Grandma can't change her mind and take the money back later if Jimmy isn't getting good grades in school.

An IRA is designed for retirement savings, though a minor's IRA might be used for college savings as well. Minors can have either the traditional IRA or the Roth. The money a minor earns in a part-time job is generally not enough to put a minor in a high tax bracket. As such, a Roth IRS is better suited for minors who don't need the tax deduction. This creates a large benefit. Any taxable distribution from an IRA prior to age 59 1/2 is an early distribution and penalized 10 percent. Early distributions from a Roth IRA take contributions first; contributions are always tax-free.

The custodian is the person managing the assets in the IRA. The custodian is responsible for investment decisions and managing distributions. A custodian is usually a parent or legal guardian with control given to the minor when he reaches legal age. Every state varies, but most states turn control to the minor at age 18 or 21. The custodian has a fiduciary responsibility to manage the funds and maintain the IRA assets in the best interest of the child, but once the child reaches legal age, he is in complete control of the money.

No reason is required to take a distribution from the IRA. However, if the funds are used for college or even buying a first home, the minor is exempt from the 10 percent early distribution penalty. Taxable distributions are still added to income in these situations, so traditional IRA distributions or Roth earnings are added to income.