How should minor children be listed as IRA beneficiaries?
"First - for anyone else reading - An IRA that has no beneficiary listed on the account itself passes through the will, and this eliminates the opportunity to take withdrawals over the beneficiaries' lifetimes. There's a five year distribution requirement. Also, with a proper beneficiary set up on the IRA account the will does not apply to the IRA. An IRA with me as sole beneficiary regardless of the will saying ""all my assets I leave to the ASPCA."" This is also a warning to keep that beneficiary current. It's possible that one's ex-spouse is still on IRA or 401(k) accounts as beneficiary and new spouse is in for a surprise when hubby/wife passes. Sorry for the tangent, but this is all important to know. The funneling of a beneficiary IRA through a trust is not for amateurs. If set up incorrectly, the trust will not allow the stretch/lifetime withdrawals, but will result in a broken IRA. Trusts are not cheap, nor would I have any faith in any attorney setting it up. I would only use an attorney who specializes in Trusts and Estate planning. As littleadv suggested, they don't have to be minors. It turns out that the expense to set up the trust ($1K-2K depending on location) can help keep your adult child from blowing through a huge IRA quickly. I'd suggest that the trust distribute the RMDs in early years, and a higher amount, say 10% in years to follow, unless you want it to go just RMD for its entire life. Or greater flexibility releasing larger amounts based on life events.  The tough part of that is you need a trustee who is willing to handle this and will do it at a low cost.  If you go with Child's name only, I don't know many 18/21 year old kids who would either understand the RMD rules on IRAs or be willing to use the money over decades instead of blowing it.  Edit - A WSJ article Inherited IRAs: a Sweet Deal and my own On my Death, Please, Take a Breath, an article that suggests for even an adult, education on how RMDs work is a great idea." "I think that ""better"" is up to a discussion, but the difference is that while in trust you can control the money after your death in some way - giving it directly to children means you have no such control. I.e.: in trust you can stipulate that the children will be able to spend the money under certain terms or in certain ways (for example - for college, only after getting married, no more than 10% of the value a year, etc), giving their names as the beneficiaries means that they get the money and can do with it whatever they please. BTW: ""Minor"" has nothing to do with it. They don't have to be minors, or your children at all." I would like to bring up some slightly different points than the ones raised in the excellent answers from JoeTaxpayer and littleadv.  The estate can be the beneficiary of an IRA -- indeed, as has been pointed out, this is the default beneficiary if the owner does not specify a beneficiary -- but a testamentary trust cannot be the designated  beneficiary of an IRA. A testamentary trust that meets the requirements laid out on page 36 of Publication 590 is essentially a pass-through  entity that takes distributions from the IRA and passes them on to the beneficiaries.   For the case being considered here of minor beneficiaries, the distributions from the  IRA that pass through  the trust must be sent to the legal guardians (or other custodians) of the minors' UTMA accounts, and said guardians must invest these sums for the benefit of the minors and hand the monies over when the minors reach adulthood. Minors are not responsible for their support, and so these monies cannot be used by the legal guardian for oaying the minors' living expenses except as provided for in the UTMA regulations. When the minors become adults, they get all the accumulated value on their UTMA accounts, and can start taking  the RMDs personally after that, and blowing them on motorcycles if they wish.  Thus, the advantage of the testamentary trust is essentially that it lets the trustee of the trust to decide how much money (over and above the RMD) gets distributed each year.  The minors and soon-to-be young adults cannot take the entire IRA in a lump sum etc but must abide by the testamentary trustee's ideas of whether extra money (over and above the RMD) should be taken out  in any given year. How much discretion is allowed to the trustee is also something to be thought through carefully. But at least the RMD must be taken from the IRA and distributed to the minors' UTMA accounts (or to the persons as they reach adulthood) each year.  Regardless of whether the Traditional IRA goes to beneficiaries  directly or through a testamentary trust, its value (as of the date of death) is still included in the estate, and estate tax  might be due. However, beneficiaries can deduct the portion of estate tax paid by the estate from the income tax that they have to pay on the IRA withdrawals. Estate planning is very tricky business, and even lawyers very competent in estate and trust issues fall far short in their understanding of tax law, especially income tax law.
The most important thing is to keep in mind the deadline. If you want to have it count for 2016, you need to open the account and transfer the funds by tax day. Don't wait until the last day to do it, or you could run out of time. Setting up the initial account, and them verifying your information and transferring the money could take a few days. First decide how much of a lump sum you want to invest  initially. This will determine some of your options because the mutual fund will have a minimum initial investment. Many of the funds will allow subsequent investments to be smaller.  The beauty of a IRA or Roth IRA is that if the fund you want is out of reach for this initial investment in a few years you can transfer the money into another fund or even another fund family without having to worry about tax issues. Now decide on your risk level and you time horizon. Because you said you are student and you want a Roth IRA, it is assumed that you will not need this money for 4+ decades; so you can and should be willing to be a little more risky. As NathanL said an index fund is a great idea. Many also advise an aged based fund. My kids found that when they made their initial investments the age based funds were the only one with a low enough initial investment for their first few years.  Then pick a fund family based on the general low fees, and a large mix of options. The best thing is that in a few years as you have more money and more options, you can adjust your choices. You can open a 529 plan for your child. The minimum contribution for my state is only $25. You can setup automatic deposits, or deposit money only a few times a year; or both. You can save money on state taxes, and the money grows tax free if the money is used for educational expenses. They generally have age based portfolios, but some also let you pick from a variety of portfolios. In the US, an opposite-sex spouse who is a citizen as well, can receive an unlimited inheritance with no tax due from the estate. IRAs and retirement accounts which were pretax accounts, are inherited by a spouse who can then either treat the accounts as her own, i.e. even co-mingle with current IRAs, or treat as inherited IRA, and begin RMDs. In which case tax is due to the extent the money wasn't already taxed. I see the edits above. No tax should have been due. Mom can gift the kids up to $14,000 per year per kid with no paperwork at all. And another $14K to the kid's spouses or grandchildren. Above this number, a form 709 is used to tap into the lifetime exclusion.  As it stands now, it's unclear why any tax would have been due in the first place. IANAL, nor am I a financial professional. However, I've just looked into this because of a relative's death, and I have minor children. I am in the US. First, a named beneficiary on many accounts means that any proceeds are kept out of the estate and do not have to go through probate. That usually means that they're available much more quickly.  Second, a beneficiary statement trumps a will. The account may pay out long before a will is even filed with the probate court.  Third, you can name a trust as the beneficiary. In this case, because you want to make sure the money goes to your children, that's likely your best option. A trust is a financial arrangement to put aside money over a period of time (typically years), for a specific purpose to benefit someone. Two purposes of trusts are 1) providing for retirement and 2) providing for a child or minor. There are three parties to a trust: 1) A grantor, the person who establishes and funds a trust. 2) A beneficiary, a person who receives the benefits. 3) a trustee, someone who acts in a fiduciary capacity between the grantor and beneficiary. No one person can be all three parties. A single person can be two of out those three parties. A RETIREMENT trust is something like an IRA (individual retirement account). Here, a person can be both the grantor (contributor) to the IRA, and the beneficiary (a withdrawer after retirement). But you need a bank or a broker to act as a fiduciary, and to handle the reporting to the IRS (Internal Revenue Service). Pension plans have employers as grantors, employees as beneficiaries, and (usually) a third party as trustee. A MINORS' trust can be established under a Gift to the Minors' Act, or other trust mechanisms, such as a Generation Skipping Trust. Here, a parent may be both grantor and trustee (although usually a third party is a trustee). A sum of money is put aside over a period of years for the benefit of a minor, for a college education, or for the minor's attaining a certain age: a minimum of 18, sometimes 21, possibly 25 or even older, depending on when the grantor feels that the minor is responsible enough to handle the money. According to the link below, it does appear that you must take an RMD, or Required Minimum Distribution, from your IRA at age 70½, or face a 50% penalty of the RMD AMOUNT that has NOT been taken, which is going to be much less than 50% of your entire account balance.  Why specifically this happens would be opinion based on my interpretation of the reasoning behind those that enacted the law. I can tell you penalties like this are used to encourage behavior - you can't just leave your money in a tax-free account forever. The IRA is meant to help you build your savings for retirement, and at age 70½ you should be ready for retirement.  This means you must begin withdrawing the money - but that doesn't mean you have to spend it.  In the link below, there are outlines on what you can do to satisfy the required minimum distribution. As it specifies, you can take one lump sum, or spread it out over multiple payments, and there's a calculator to identify what your RMD will be. http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/withdrawals_and_distributions/age_70_and_a_half_and_over As noted in the linked page, you DO NOT have to take an RMD on a Roth IRA. If this is important to you, you may want to consider Rolling Over your current IRA to a Roth. Distributions from an inherited IRA will be taxed as ordinary income and there are required minimum distributions for the inherited account. Assuming you were 55 at the time of your mother's death, your life expectancy according to the IRS is 29.6 years. Your required yearly distributions on $200,000 would be roughly $6800. For each year that you didn't withdraw that, you would owe a 50% penalty of the distribution amount (~$3400). That's probably better than the tax hit you would take if you pulled it all in as income in a 5 year window (ie. all right now since you're at the end of the window). "The biggest issue is determining how committed you are to this ""niece"". When setting up an account (529/prepaid tuition/Universal Gift to Minors/Coverdell/Roth) you are making a commitment that locks you into some provisions. They all have different amounts of control, and can impact taxes and financial aid. The states involved can even be important. Some will give tax breaks. How they handle state vs private schools and out of state schools will also differ.  The problem is that it is hard enough knowing what a kid 10-18 years from now is going to want to do, or be able to do. The government has crafted some provisions to handle these complex issues: scholarships, going to a service academy, going to a private school, death of the child...what I don't think they have covered is ending the relationship.  The best option is to set aside the money in a regular account, with no special tax provisions; and then when they are close to graduating determine the best way to handle the transfer. Yes you may have given up some tax benefits, but it will still be your money. You will have to determine how this money will be transferred, but that will depend on the tax rules, and financial aid policies in the future. Options include gift to niece, direct payment, graduation gift..." For an inherited IRA, there are a few options for taking distributions. You clearly haven't done option 1. It sounds like you haven't done option 2 because otherwise you would probably know how it is taxed. That leaves you with option 3.  With option 3, you must distribute the entire amount within 5 years.  For you, I'm not sure if that means you need to distribute the entire amount by the end of 2016 or 2017.  If it was 2016, then you'll probably have to pay penalties. Distributions from an inherited IRA are taxed as ordinary income regardless of your age or the distribution option you select. "Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts in the United States are accounts that belong to your child, but you can deposit money into.  When the child attains his/her majority, the money becomes theirs to spend however they wish.  Prior to attaining their majority, a custodian must sign off on withdrawals.  Now, they are not foolproof; legally, you can withdraw money if it is spent on the child's behalf, so that can be gamed.  What you can do to protect against that is to make another person the custodian (or, perhaps make them joint custodians with yourself, requiring both signatures for withdrawals). UTMA/UGMA accounts do not have to be bank savings accounts; for example, both of my children have accounts at Vanguard which are effectively their college savings accounts.  They're invested in various ETFs and similar kinds of investments; you're welcome to choose from a wide variety of options depending on risk tolerance.  Typically these accounts have relatively small fees, particularly if you have a reasonable minimum balance (I think USD$10k is a common minimum for avoiding larger fees). If you are looking for something even more secure than a UGMA or UTMA account, you can set up a trust.  These have several major differences over the UGMA/UTMA accounts: Some of course consider the second point an advantage, some a disadvantage - we (and Grandma) prefer to let our children make their own choices re: college, while others may not prefer that. Also worth noting as a difference - and concern to think about - in these two.  A UGMA or UTMA account that generates income may have taxable events - interest or dividend income.  If that's over a relatively low threshhold, about $1050 this year, those earnings will be taxed (on the child's own tax return).  If it's over $2100 (this year), those earnings will be taxed at the parents' tax rate (""kiddie tax""). Trusts are slightly different; trusts themselves are taxed, and have their own tax returns.  If you do set one of those up, the lawyer who helps you do so should inform you of the tax implications and either hook you up with an accountant or point you to resources to handle the taxes yourself." I'm going to give the checkmark to Joe, but I wanted to convey my personal experience. I bank with TD in New Jersey and was informed by the teller that I simply needed to endorse the check myself and indicate Parent of Minor. I cannot attest if other banks will accept this, but it at least works for TD and my situation in particular. "First of all, since you're 16 - you will not invest in anything. You cannot, you're a minor. You cannot enter contracts, and as such - you cannot transact in property. Your bank accounts are all UGMA accounts. I.e.: your guardian (or someone else who's the trustee on the account) will be the one transacting, not you. You can ask them to do trades, but they don't have to. They must make decisions in your best interest, which trades may not necessarily be. If however they decide to make trades, or earn interest, or make any other decision that results in gains - these are your gains, and you will be taxed on them. The way taxes work is that you're taxed on income. You're free to do with it whatever you want, but you're taxed on it. So if you realized gains by selling stocks, and reinvested them - you had income (the gains) which you did with whatever you felt like (reinvested). The taxman doesn't care what you did with the gains, the taxman cares that you had them. For losses it is a bit more complicated, and while you can deduct losses - there are limitations on how much you can deduct, and some losses cannot be deducted at all when realized (like wash sale losses or passive activity losses). When you have stock transactions, you will probably need to file a tax return reporting the transactions and your gains/losses on them. You may end up not paying any tax at all, but since the broker is reporting the transactions - you should too, if only to avoid IRS asking why you didn't. This, again, should be done by your guardian, since you personally cannot legally sign documents. You asked if your gains can affect your parents' taxes. Not exactly - your parents' taxes can affect you. This is called ""Kiddie Tax"" (unofficially of course). You may want read about it and take it into account when discussing your investments with your guardian/parents. If kiddie tax provisions apply to you - your parents should probably discuss it with their tax adviser." The deposit slip at the institution that keeps your Roth IRA should have a place where you can designate the tax year the contribution should apply to. "They may be confused. The combination of ""my wife received stock when younger"" and ""her father just died"" leaves questions. A completed gift, when she was a kid, means she has a basis (cost) same as the original owner of that stock. This may need to be researched. The other choice is that she gets a price based on the date of dad's death, a stepped up basis, if it was his, but she got it when he passed.  No offense to them, but brokers are not always qualified to offer tax advice.  How/when exactly did she get to own the stock. Upon second reading it appears I answered this from a tax perspective. You seem to have issues of ownership. What exactly does the broker tell you? In whose name is the statement for the account holding these shares? Scott, saw your update. For the accounts I have for my 13 year old, I am custodian, but the tax ID is her social security number. When 21, she doesn't need my permission to sell anything, just valid ID. What exactly does the broker tell her?" In the US, a surviving family member that inherits the entire property may also assume the mortgage.  If the new mortgagee fails to uphold the terms of the mortgage (i.e. make timely payments), the mortgagor can begin foreclosure proceedings.  There is generally no requirement to pay off the mortgage quickly. This is obviously the simple case where one person inherits the entire property. If the estate is split and no one person inherits the house, or if the house is left to a non-relative, things get more complicated.  Effectively in that case the house is either sold to pay off the mortgage or the inheritor needs to take out a new mortgage to pay off the old one.