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TD Ameritrade Kids IRA. Custodial Account Fees (2022)

2022 TD Ameritrade child IRA review, custodial account rating. Minor IRA brokerage cost. TDA ROTH IRA investments for kids.

Overview of Custodial IRA’s

If you’re trying to teach your children the importance of saving, the IRS has provided you a tax-advantaged way of doing it. Although Individual Retirement Accounts are usually opened by old, stodgy, middle-aged workers, kids can have an IRA, too. Called a Minor or Custodial IRA, this retirement account is opened by a custodian (usually the parent) with a child named as beneficiary.

Not all brokerage firms provide a Minor IRA, although TD Ameritrade does. Let’s see what the broker has to offer.

TD Ameritrade Minor IRA Fees and Account Requirements

TD Ameritrade charges no fees to open a retirement account, including a child’s IRA. There is also no fee to close one. The brokerage house has eliminated annual fees, low-balances charges, and maintenance fees. Another great feature is that TD Ameritrade has no minimum deposit requirement to open a Minor IRA; so you can literally start with nothing.

TD Ameritrade imposes the same commission schedule on retirement accounts as on taxable accounts. This includes $0 stock trades, a large selection of commission-free funds, and an even larger assortment of no-load, no-transaction-fee mutual funds.

Opening a Minor IRA at TD Ameritrade

To open an IRA for your son or daughter at TD Ameritrade, you can use broker's current online form: Get $0 commissions and ACAT fee reimbursement. The process for opening a Custodial IRA is the same as for any other IRA. On the first page of the application, scroll down to the account selection section. Here, you’ll want to click on the ‘Retirement’ tab to see all the IRA choices.

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A Custodial IRA can be opened either as a Roth or Traditional account. The difference is the same as for regular IRA’s. Traditional accounts offer tax deductions on contributions but tax withdrawals. Roth accounts use after-tax contributions but don’t tax withdrawals.

You’ll need both the minor’s name and the custodian’s name. The account uses the minor’s tax ID number (not the custodian’s).

Kid’s IRA Details

Parents, grandparents, and minors can all contribute to a Minor IRA. However, the IRS requires the child who is named on an account to have earned income for the tax year in which the contribution is made. This is an important caveat for retirement accounts for kids. If they don’t have earned income, no contributions can be made for that year.

But on the flip side, parents and grandparents can make contributions. So, for example, if your 5-year-old daughter is a child actress and earns $900 for the year, Grandpa can contribute $900 to her IRA. She keeps $900 in gross income and also gets $900 in her IRA. It’s a total gain of $1,800 in the year for her; even though she only has $900 in total income. But she does have earned income; otherwise, no contributions can be made by anyone.

Under IRS regulations, earned income cannot include any type of inheritance or gift. It must be money earned through labor. Labor can include babysitting, a lemonade stand, or many other activities that young people may earn income from.

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Another rule is that Custodial accounts are capped at the regular IRA contribution limit. Currently, that’s $5,500 per year. So if your aspiring actress does really well for the year and nets $6,000, she can only put in $5,500 for the year. The absolute limit is the lower of the two figures, earned income or the IRA annual maximum.

And one last thing: withdrawals from either a Roth or Traditional Custodial IRA normally cannot be made until the standard IRA withdrawal age, which just so happens to be 59½. That’s going to be a long time until Johnny and Sally are able to access all those contributions they have been getting since setting up their lemonade stand.

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Exceptions the IRS Makes

Withdrawals can be made from a Minor IRA (or other IRA type) before age 59½ without a 10% penalty under some situations. The IRS allows penalty-free withdrawals for higher education expenses, for example. These expenses can include books, fees, tuition, and supplies. If the funds come out of a Traditional account, the withdrawal will be taxed as usual, but without the 10% penalty. Early IRA distributions can be used to pay for room and board as well. For any expense, however, the account beneficiary must be enrolled at least part time at a qualifying center of higher education.

It is the responsibility of the U.S. Department of Education to decide which institutions of higher learning are eligible for penalty-free withdrawals. If the school qualifies for student aid, it will most likely qualify for penalty-free withdrawals.

Another caveat in order here is that any scholarships or grants the IRA beneficiary is eligible for must be used first before IRA monies are used.

If you do decide to take money out of an IRA early, you’ll need to file Form 5329 with your annual tax return. Be sure to use code 08 on this firm to specify that the withdrawal was used for educational expenses.

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Don’t Forget About Education Accounts at TD Ameritrade

If you’re thinking about opening a Custodial IRA for your child for educational purposes, it may be better to open a Coverdell account or 529 plan instead. These are available at TD Ameritrade and are designed for education planning.

To open the 529 college saving plan at TD Ameritrade, you’ll need to go to the same account opening section and select ‘Education Savings’ instead of ‘Retirement.’ Then, select ‘529 College Savings Plan’ as the account type. TD Ameritrade will direct you to an affiliated site to complete the online account opening process.

Like the Minor Roth IRA, contributions to a 529 plan are made after-tax, and contributions grow tax-deferred. Withdrawals for higher education expenses are not taxed at the federal level, and TD Ameritrade’s 529 plan is not taxed at the Nebraska state level. The broker’s plan is sponsored by the State of Nebraska and administered by the Nebraska State Treasurer.

There is no minimum required annual contribution for a 529 plan, and the maximum is $15,000 per year.

TD Ameritrade also offers a Coverdell Education Savings Account. This could be used in lieu of a Minor IRA if contributions are being made to cover educational expenses. To open a Coverdell account at TD Ameritrade, just follow the same instructions already given. Under the ‘Education Savings’ tab select Coverdell.

Keep in mind that the Coverdell account has a much lower contribution level (just $2,000 per year) compared to the 529 plan. The Coverdell has the same tax scheme as the Roth IRA (taxed on the way in, but not taxed on the way out).

Available Investments for a Child’s Brokerage Account

TD Ameritrade offers a lot of attractive investments for both long-term and short-term custodial accounts. If Johnny is 16, and he plans to use the funds in two years to pay for college, short-term investments would be best. TD Ameritrade offers several short-term bond ETF’s that are free to trade. For example, AGZ, the iShares Agency Bond ETF invests in short- and mid-term government agency debt. Distributions are paid monthly.

For longer term-investing (maybe Sally has another 10 years before she’s off to college), TD Ameritrade offers equity funds (both in ETF and mutual fund variety) that can be traded without paying any commissions. For instance, AAGPX, the American Beacon Large Cap Value Fund, carries zero load and zero transaction fee. As the name suggests, it invests in large-cap stocks that are considered undervalued relative to the market.

Open TD Ameritrade IRA

Get $0 commissions and ACAT fee reimbursement.

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