A high schooler bagging groceries or lifeguarding this summer is sitting on the one asset most adults would pay dearly to get back, which is time. Five decades of tax-free compounding is the entire engine behind a custodial Roth IRA, and it is one of the few moves in personal finance where doing almost nothing for 50 years is the whole strategy.

Most families never make it, not because the rules are hard, but because nobody tells them a 16-year-old can open a retirement account at all.

The One Rule That Unlocks Everything

A minor can contribute to a Roth IRA the moment they have earned income, and that requirement is the hinge the whole thing turns on. A child under 18 just needs earned income to open and fund a Roth IRA, even from jobs like babysitting or lifeguarding, and there is no minimum age.

Earned income means a paycheck or self-employment money, not an allowance, a birthday check, or investment gains. Earned income means money from a job or a business you actively participate in, not interest, dividends, or other passive sources, and this is the requirement that is typically the roadblock for children.

A W-2 job settles the question on its own. For cash work like mowing lawns, the fix is simply keeping a basic log. No tax return is required if the child earns under the standard deduction, which is $16,100 for single filers in 2026, but if there is no W-2, keep a simple income log.

How much can go in follows one clean formula. Total contributions from all sources combined cannot exceed the child’s earned income or the annual IRA contribution limit, which is $7,500 in 2026, whichever is lower. A teen who earns $3,000 waiting tables can put in at most $3,000, full stop. The $7,500 ceiling only matters for the rare teenager out-earning it.

Whose Money Actually Funds It

Here is the part that surprises nearly everyone, and it is what makes the strategy realistic for a teenager who wants to spend their own paycheck. The contribution does not have to come from the child’s pocket. Anyone can contribute to a custodial Roth IRA as long as the child has the earned income to qualify it, so a parent could make the deposit or match the teen’s savings, as long as it does not exceed total earned income.

That opens a straightforward household arrangement. A common setup has the teen keep their actual earnings to spend, while the parent contributes the equivalent, or less, to the Roth. The teen earns $2,500 over the summer, spends it like any teenager would, and a parent or grandparent quietly seeds the Roth with a matching $2,500. The IRS cares that the income existed, not whose dollars land in the account.

Running The Actual Numbers

The case for starting young rests entirely on compounding, so it is worth seeing real figures rather than a vague promise. The US stock market has delivered an average annual return of around 10% since 1926, though short-term results vary and in any given period returns can be positive, negative, or flat. Adjusted for inflation, that long-run figure lands closer to 7%. Neither number is guaranteed, and using both shows the honest range.

Take a single $7,000 contribution made at age 17 and left completely alone until age 65, a 48-year runway. At a 7% average return, that one deposit grows to roughly $180,000. At the historical 10% nominal average, it grows to about $679,000. Same contribution, same account, and the gap between those two outcomes is simply which return assumption the future actually delivers.

Stretch it across four teenage summers, and the arithmetic gets bigger. Contributing $3,000 a year from ages 15 through 18, then never adding another dollar, means $12,000 of total contributions. Left untouched to 65, that grows to roughly $320,000 at 7% and to well over $1.2 million at 10%. The teen’s own summer wages did the qualifying, and time did the rest.

A word of honesty on those figures. They are illustrations, not projections of what any specific account will do. Real returns arrive unevenly, fees and poor fund choices drag them down, and a market that underperforms its historical average would produce smaller numbers.

The long-run average of about 10.47% per year since 1926 assumes all dividends are reinvested, and it masks enormous year-to-year swings. The point is not a precise dollar figure decades out. It is that a modest sum invested at 16 has a reach that the same sum invested at 40 simply cannot match.

Why Roth, And Not A Regular Account

For a teenager, the Roth structure fits almost perfectly, and the reason is tax timing. A Roth IRA takes after-tax dollars now and delivers tax-free growth and withdrawals later. For a minor with little to no income tax to begin with, the upfront deduction of a Traditional IRA is nearly worthless, while the Roth’s lifelong tax-free growth with no required minimum distributions is enormously valuable when contributions have 40 to 60 years to compound.

There is also a flexibility feature that calms nervous parents. Contributions can be withdrawn without taxes or penalties at any time. The money a teen puts in is not locked away forever. Only the earnings need to stay until retirement to keep their tax-free treatment, which means the account can double as a backstop for a first car or a college gap without penalty on the contributed portion.

The Details That Trip People Up

The account is custodial, so an adult runs it until the child grows up. A parent or guardian manages the account as custodian, and when the child reaches the age of termination, typically 18 or 21 and up to 25 in some states, the child takes full control. That handoff is worth thinking about, since a new adult gains the keys to a growing balance and the discipline to leave it invested becomes their choice, not yours.

Documentation is the other place families get sloppy. The IRS requires documentation of earned income, so keep the minor’s W-2s, 1099s, or records for self-employment, because if audited, the IRS will verify the minor actually earned the amount claimed and that the contribution does not exceed it. A shoebox of pay stubs or a simple spreadsheet of babysitting dates is enough, and it matters most for cash work where no employer paperwork exists.

Finally, what the money buys inside the account decides whether the runway gets used. For a multi-decade horizon, broad-market index funds such as a total stock market or S&P 500 fund are the standard recommendation. Cash left sitting in the account earns almost nothing and wastes the one advantage a teenager has, which is time in the market rather than timing it.

The Move Worth Making This Summer

The strategy asks for very little. A teenager with a real paycheck, an adult willing to open a custodial account at one of the major no-fee brokerages, a matching contribution capped at what the teen earned, and a low-cost index fund to hold it. None of the individual figures decades out are promises, and anyone claiming otherwise is selling something.

What is real is the mechanism. A dollar invested at 16 has roughly a decade more to compound than the same dollar invested at 26, and that head start is the closest thing personal finance offers to found money.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.