Most people figure they’ll just put their kid’s name on their IRA or 401(k) and call it a day. Simple, right? Not quite.
Here’s the problem: minors can’t legally manage large sums of money on their own. So if you name a child as a direct beneficiary and something happens to you, a court typically has to step in and appoint a legal guardian to manage that money until the child is old enough to handle it themselves. That process isn’t free — and it’s not fast either.
What the law actually says is more nuanced than most people realize. According to the IRS, minor children of the account owner are considered “eligible designated beneficiaries” — which is actually a special status. It means they can take required minimum distributions (RMDs) based on their own life expectancy until age 21, rather than being forced to drain the account in 10 years like most other non-spouse beneficiaries. That’s a real benefit worth knowing about. (After age 21, the 10-year rule does kick in, so the full account would need to be withdrawn within 10 years of that point.)
But here’s the catch — and it’s a big one. Just because they’re allowed to inherit doesn’t mean they can manage the money themselves. Investopedia notes that if you name a minor as your IRA beneficiary, you also need to name a custodian to manage the account until they come of age. If you don’t set that up properly ahead of time, the court figures it out for you — on the court’s timeline, with the court’s choice of person, and with legal fees coming out of the inheritance.
Once the child reaches the age of majority — typically 18, though this varies by state, and some states set it as high as 21 for purposes like this — they can start making their own decisions about withdrawals.
The cleaner move that many estate planning attorneys recommend is setting up a trust and naming the trust as the beneficiary instead of naming the child directly. A properly written trust lets you spell out exactly how and when the money gets used, who manages it, and what it can be spent on — all without a judge getting involved.
This isn’t something most 16-year-olds need to think about for themselves. But if your parents or grandparents have retirement accounts and haven’t updated their beneficiary forms in years, this is worth a conversation. Beneficiary designations don’t automatically update when a kid is born, when someone gets married, or when laws change. They stay exactly as they were written until someone goes in and changes them.