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A minor IRA beneficiary refers to a child who inherits an individual retirement account. Special rules apply when a minor is named as a beneficiary, including requirements for managing the account and guidelines for withdrawals. Typically, a custodian or guardian must oversee the IRA until the child reaches the age of majority. Additionally, minors who inherit an IRA from a parent don’t need to follow the SECURE Act’s 10-year rule for distributions until they reach age 21.
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Naming a Minor as an IRA Beneficiary
Naming your minor child or grandchild as an IRA beneficiary was historically an excellent estate planning strategy. In the past, this move permitted minor beneficiaries to stretch required minimum distributions (RMDs) over the remainder of their life expectancies. Because their life expectancies would be many years longer than their parents or grandparents, the money would have potentially decades longer to grow.
However, minor beneficiaries who inherit IRAs today generally cannot stretch RMDs like they could in the past. This is due to a new rule that is part of the SECURE Act, which we’ll discuss in greater detail ahead. For now, the important point is that IRA beneficiaries must distribute the entire amount of the IRA within 10 years of the original owner’s death.
There are also tax considerations if you pass an IRA to a minor beneficiary. An IRA will be taxed as income when money is withdrawn. The exception is a Roth IRA, which the beneficiary can withdraw from tax-free right away, as long as at least five years have passed since you opened the account.
IRA Requirements for Minor Beneficiaries
It is still possible to pass your IRA to a younger beneficiary. However, here are the requirements to keep in mind.
Minors Can’t Inherit an IRA Directly
The first thing to know about minors inheriting an IRA is that they cannot do so directly. This is because minors are not legally allowed to own property, and this includes IRAs. However, you can name a custodian who is of legal age, typically the minor’s legal guardian. This person will manage the money until the beneficiary is no longer a minor.
You are not legally required to name a custodian, but it is strongly encouraged if you want to leave your IRA to a minor. If you don’t name a custodian, the court system will name one for you, and that person may not manage the IRA according to your wishes.
Another option is to establish a trust. This option can be more costly and time-consuming, but it also gives you more control over how the money should be used.
Withdrawal Requirements for Minors
As mentioned, the SECURE Act fundamentally changed how funds in an inherited IRA can be used. Before the act, the beneficiary could stretch RMDs for the remainder of their life expectancy. Thus, if the beneficiary was a minor, they may have had decades of additional growth in the IRA, only taking RMDs during that time.
The SECURE Act changed these rules. Certain beneficiaries now must distribute all the money in the IRA within 10 years; specifically, by the end of the 10th year following the original owner’s death. The beneficiary can then distribute the funds in any manner they choose, as long as the money is fully distributed by the end of the 10th year.
However, the IRS considers minor children to be “eligible designated beneficiaries” to whom the 10-year rule does not apply. This means they can make distributions from the IRA using their own life expectancy. There is a caveat, though: once the minor reaches age 21, they have 10 years to empty the account.
Eligible designated beneficiary status also applies to:
- Surviving spouses
- Disabled individuals
- Chronically ill individuals
- Individuals not more than 10 years younger than the deceased account owner, including siblings, close-in-age friends, etc.
Keep in mind that minors who are not children of the deceased generally do not qualify as eligible designated beneficiaries. For example, a minor who inherits an IRA from a grandparent would have to withdraw all of the funds from the account within 10 years.
Do Minors Pay Taxes on Inherited IRAs?
All distributions from a traditional inherited IRA are subject to income tax in the year they are received. Distributions from an inherited Roth IRA are generally tax-free, provided the original account had been open for at least five years prior to the owner’s death.
Because a minor’s income may be low, early distributions could be taxed at lower rates compared to distributions taken later in adulthood. However, large distributions in any year could potentially push the child into a higher tax bracket. In some cases, a strategy of gradual withdrawals can help manage tax liabilities over time.
Bottom Line
Passing an IRA to a minor involves a mix of legal structure, distribution timing, and tax planning. While the rules have changed under the SECURE Act, children of the original account holder still receive more flexible options than other beneficiaries. Taking the time to understand these differences can help shape a strategy that balances long-term growth with compliance.
Tips for Estate Planning
- If you have an IRA you want to pass to a minor beneficiary, it can be challenging to know how to go about it. Working with a financial advisor can be useful as they can help you put together a strategy to keep your loved ones financially secure. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Remember that there are tax implications that come with distributed money from an inherited IRA unless it is a Roth IRA. To estimate how much tax will be assessed on the account’s earnings, use SmartAsset’s capital gains tax calculator.
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