If the money is given to the designated beneficiary (your children in this case) after the death of the account holder there is no penalty. It will be taxable to the beneficiaries as ordinary income, but no penalty will apply. The only drawback to that strategy is if the account holder lives past the age of 70 1/2 then Required Minimum Distributions (RMDs) must beging in the year the account holder turns 70 1/2. Of course the distribustion will not be subject to any penalty once the account holder turns 59 1/2 anyway.