Minor Child as IRA Beneficiary: Requirements

A minor IRA beneficiary is a child who inherits an individual retirement account (IRA). Special rules apply when a minor is a beneficiary, including requirements for managing the account and making 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 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 their life expectancies. Because their life expectancies are much longer than those of their parents or grandparents, the money can have decades longer to grow.

However, minor beneficiaries who inherit IRAs today generally cannot stretch RMDs as they did in the past. This is due to the SECURE Act, which mandates that IRA beneficiaries 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 An IRA is taxed as income when funds are withdrawn.

The exception is a Roth IRA. Here, the beneficiary can make immediate tax-free withdrawals. However, 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, some requirements do apply.

Minors Can’t Inherit an IRA Directly

Minors cannot inherit an IRA directly. This is because minors may not legally own property, including 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 do not legally have to name a custodian, but experts strongly recommend it if leaving your IRA to a minor. If you don’t name a custodian, the court system will name one for you. That person may not manage the IRA according to your wishes.

Another option is to set up a trust. This option can be more costly and time-consuming. However, it gives you more control over the use of your funds.

Withdrawal Requirements for Minors

The SECURE Act fundamentally changes how inherited IRA funds can be used.

Before the act, the beneficiary could stretch RMDs for the remainder of their life expectancy. That means 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, this must be done by the end of the 10th year following the original owner’s death. The beneficiary can then distribute the funds as they see fit. However, the money must be 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. ¹ 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 must withdraw all 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 you receive them. Distributions from an inherited Roth IRA are generally tax-free. However, the original account must be 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 gradual withdrawal strategy can help manage tax liabilities over time.

How to Choose a Custodian or Trust for a Minor Beneficiary

Deciding who will manage an inherited IRA for a minor is a critical consideration in estate planning for a younger beneficiary.

The custodian or type of trust you choose will shape the management of the account, the handling of distributions and ultimately, how much of the inheritance the minor actually receives. Taking this decision seriously, rather than treating it as a formality, can make a significant difference in outcomes.

Expertise

When naming an individual custodian, most people default to a spouse, sibling or close friend. While that instinct is understandable, the right choice goes beyond personal trust. A good custodian should have basic financial literacy and a genuine understanding of IRA distribution rules. They should also have the temperament to make decisions in the minor’s best interest rather than out of convenience. A custodian should be young and healthy enough to reasonably expect to fulfill the role until the minor reaches the age of majority.

If your named custodian dies or becomes incapacitated before that point, the court may step in to appoint a replacement. This can be a slow and disruptive process. Naming a contingent custodian as a backup is a simple precaution that many people overlook.

Taxation

It is also worth considering how the custodian’s decisions will affect the minor’s tax situation.

Distributions from a traditional inherited IRA are taxed as ordinary income. ² A custodian who takes large distributions in a single year could inadvertently push the child into a higher tax bracket. A financially savvy custodian who spreads distributions strategically over time can help preserve more of the inheritance.

Using a Trust

For those who want greater control over the use of funds, a trust can be a stronger option despite the added cost and complexity. A properly drafted trust allows you to specify conditions for distributions, such as limiting withdrawals to education or healthcare expenses. It can protect assets from mismanagement or premature depletion.

A trust also provides more stability than relying on an individual custodian. This is because a successor trustee can step in seamlessly if the original trustee is unable to continue.

The tradeoff is that setting up a trust requires working with an estate planning attorney. This involves upfront legal costs and adds an ongoing layer of administration.

Whether that tradeoff is worth it depends largely on the size of the IRA, the age of the minor and your confidence in the available individual custodians. For larger accounts or situations in which the minor may need protection from outside influences, a trust often provides the peace of mind that a single custodian cannot.

Regardless of which structure you choose, revisit your decision periodically. Life circumstances change, and relationships evolve. The person you name today may not be the right choice five years from now.

Keeping your beneficiary designations and custodian arrangements up to date is just as important as choosing the right party.

Bottom Line

Passing an IRA to a minor involves a mix of legal structure, distribution timing and tax planning. While the SECURE Act changes the rules, 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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