The Best Investment for Your Child’s Future: A Guide for High-Earning California and Washington Parents

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

For most high-income families in California or Washington, the best investment for a child’s future is not a special fund. It is the right account, filled early, with low-cost, broadly diversified stock index funds inside it. In practice that usually means a 529 plan for education (often front-loaded while the child is young), a brokerage account in the parents’ own names for flexible goals, and a custodial Roth IRA once the child has real earned income. A custodial (UTMA) account has a place, but at a $750,000-plus household income it is rarely the first choice.

The reason is taxes and control. When the parents are in the 35% or 37% federal bracket and pay California or Washington state taxes on top, where the money sits matters more than which index fund you pick. Below is how each account works for 2026, a worked example for a Bay Area family with two young kids, and the decision you actually need to make.

Why the account matters more than the fund at your income

At a household income of $900,000, a couple filing jointly is likely in the top 37% federal bracket. For 2026 that bracket applies to taxable income over $768,700, and the 35% bracket covers $512,450 to $768,700 (IRS Rev. Proc. 2025-32). Long-term gains and qualified dividends in a regular brokerage account are taxed at 20% federally once taxable income passes $613,700 (MFJ, 2026), plus the 3.8% Net Investment Income Tax once modified AGI passes $250,000 (IRS).

California adds its own layer. It has no lower rate for capital gains, so gains are taxed as ordinary income at up to 13.3% (2025 rates, the latest published) (FTB). Washington has no wage income tax in 2026, but it taxes long-term capital gains at 7% above an annual standard deduction ($278,000 for 2025, the latest published figure) and 9.9% on taxable gains above $1,000,000 (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR), so “no income tax” is a short-term statement for this reader.

Put together, a dollar of growth can lose a third or more to tax in a taxable account in California. The same growth inside a 529 used for qualified education costs, or inside a Roth IRA, can come out tax-free. That gap is larger than the difference between any two reasonable index funds.

The four accounts compared for 2026

Sources: gift exclusion, five-year election and kiddie tax thresholds from Rev. Proc. 2025-32 and Form 709 instructions; IRA limit from IRS Notice 2025-67; California 529 treatment from the FTB bill analysis of SB 529, a proposed deduction that did not pass.

529 plan: the default for education money

A 529 is usually the strongest home for money you expect to spend on college. Growth is not taxed while it stays in the plan, and withdrawals for qualified higher-education expenses are free of federal and California income tax. You keep control as the owner, and if one child gets a scholarship or skips college, you can switch the beneficiary to a sibling.

Two points specific to California families. First, California gives no state deduction for 529 contributions, so any California resident can pick another state’s plan if its fees or investment menu are better. Second, California generally does not follow the 2025 federal tax law (P.L. 119-21), including its new categories of 529 expenses (FTB Form 540 booklet). Before using 529 money for anything other than college costs, check how California treats it.

A Coverdell education savings account is sometimes suggested as an alternative. Total contributions are capped at $2,000 a year per child from all contributors, and the ability to contribute phases out between $190,000 and $220,000 of modified AGI for joint filers (figures for 2025, the latest edition of IRS Publication 970), so it is out of reach for most families reading this.

Front-loading a 529 with the five-year election

For 2026, each parent can put up to $95,000 into a child’s 529 at once and elect to treat it as spread over five years of $19,000 annual exclusions. A married couple can put in $190,000 per child. The election is made on Form 709 (IRS). Grandparents can do the same. For a family with a large RSU vest or bonus, this is often the cleanest place to send education money while the child is under five, because it gives the money the most years to grow. We cover the mechanics in our guide to 529 superfunding.

Parent-owned brokerage: the flexible bucket

Not everything should be tied to education. Money for a future down payment, a business, or simply a later gift can sit in a brokerage account in your own names, earmarked for the child. You pay tax at your rates, which is the cost. What you get is full control: you decide when, whether and how much to give, based on who your child becomes. For many delegating parents, that control is worth the tax.

UTMA custodial account: a real gift, with trade-offs

A UTMA account belongs to the child from day one. You manage it as custodian, but the gift is irrevocable, and the child takes control at the transfer age. In California that is 18 by default, and a lifetime gift can delay it to no later than 21 if the delay is written into the transfer (Cal. Probate Code §3920.5). In Washington, gifts end at 21, and the transferor can extend to 25 when naming the custodian (RCW 11.114.200).

The kiddie tax limits the tax benefit. For 2026 the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and anything above $2,700 is taxed at the parents’ rate (Rev. Proc. 2025-32; Form 8615 instructions). Only the first $2,700 a year gets the child’s lower treatment. With index funds yielding around 1.5%, that ceiling is reached at a balance of about $180,000, and income above it is taxed as if it were yours. There is also no “UTMA contribution limit”. The $19,000 figure is the gift tax annual exclusion, which applies to any gift. For how custodial money comes out, see withdrawing from a custodial account.

Custodial Roth IRA: only with real earned income

A custodial Roth IRA may be the best long-term account a child can have, but it needs taxable compensation. For 2026 the child can contribute the lesser of $7,500 or their earned income. Allowance, gifts and investment income do not count (IRS Publication 590-A). For children under 12 this is usually years away. When your teen starts babysitting, tutoring or working a summer job, it becomes a strong option, and you can fund it as a gift up to the amount they earned.

What to hold inside the account

There is no special “kids’ mutual fund” that beats the market. For money a child will not touch for 10 to 18 years, most families use a low-cost total-market or broad index fund, or a 529 plan’s age-based portfolio that shifts from stocks toward bonds and cash as college gets closer. What matters is low fees, broad diversification and a mix that gets more conservative as the spending date approaches.

One thing to avoid: filling the kids’ accounts with your employer’s stock. If one parent already holds a large amount of Apple, Amazon or Genentech stock through RSUs, the children’s money is a chance to own the rest of the market, not more of the same company.

Worked example: a Bay Area family with two young kids

Assumptions, for illustration only: married couple in San Jose, $950,000 W-2 income including RSUs, children aged 2 and 6. In 2026 they put $190,000 into a 529 for the 2-year-old using the five-year election. We assume 6% average annual growth, not a forecast, and ignore fees.

• Value at 18 (16 years): $190,000 x 1.06¹⁶ is about $482,700, a gain of about $292,700.
• In the 529, spent on qualified college costs: no federal or California income tax on the gain.
• Same money in their California brokerage account, sold at the end: the 20% federal long-term gains rate plus 3.8% NIIT is about $69,700. California taxes the gain as ordinary income. For simplicity, assume $950,000 of California taxable income before the sale and use the 2025 schedule: the whole gain falls in the 11.3% bracket, and the roughly $242,700 that lifts taxable income above $1,000,000 also pays the 1% Behavioral Health Services Tax, about $35,500 of California tax in all. Total: about $105,200, or roughly 36% of the gain. That understates the cost, because it ignores tax on dividends each year.
• Same money if they lived in Washington: 23.8% federal (about $69,700), plus WA capital gains tax of 7% on gains above the standard deduction. Using the 2025 figure of $278,000 and no other gains that year, that is about $1,000. This ignores Washington’s 9.9% income tax on AGI over $1,000,000, which starts in 2028. A sale that pushes AGI past $1,000,000 in 2028 or later could owe more, and how that tax will interact with the capital gains tax is still pending DOR guidance.

For the 6-year-old, the same $190,000 has 12 years to grow and reaches about $382,300 at 6%. The shorter runway is why the five-year election is usually most valuable when the child is youngest. Many families at this income use the 529 for expected tuition and put the next dollars into the parent-owned brokerage account, so they are not overfunding an account that is only tax-free for education.

The decision to make this year

1. Estimate education costs. Decide roughly what share of private-college or graduate costs you want pre-funded. That sets the 529 target per child.
2. Choose timing. A lump sum using the five-year election, or yearly $19,000 per parent contributions (up to $38,000 per couple, per child).
3. Decide how much should become the child’s outright. If the answer is “not until we see who they become”, keep flexible money in your own names rather than a UTMA.
4. Set the investment mix and fees. Broad index funds or an age-based portfolio, and no concentration in your employer’s stock.
5. Plan the Roth IRA for later. Put a note on the calendar for your child’s first paid job.

Common mistakes

• Opening a UTMA by default at the bank, then learning the child controls it at 18 or 21.
• Waiting until the child is 10 to start, which gives up most of the compounding years.
• Assuming California gives a 529 deduction. It does not.
• Treating $19,000 as a legal cap. Gifts above it use part of each parent’s $15,000,000 lifetime exclusion for 2026 and require Form 709 (IRS).
• Putting RSU shares into the kids’ accounts and doubling the concentration risk.

What to write down for your kids

The accounts are the easy part. What children rarely get is the reasoning: why you chose a 529 over giving them the money outright, what you hope it pays for, and what you would want them to do if they do not need all of it. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

A one-page note per account, kept in your FamilyKnowledge® Library, is enough: what the account is for, who controls it and until when, and the values behind the decision. Our Age Five Wealth Education work helps families turn those notes into conversations as children grow.

Frequently asked questions

What is the best way to save money for a child?

For education, a 529 plan is usually the best way, because growth is tax-free when spent on qualified higher-education costs and the parent keeps control. For other goals, a brokerage account in the parents’ names keeps flexibility. A custodial Roth IRA is excellent once the child has earned income. Plain savings accounts are fine for short-term money but lose ground to inflation over 18 years.

Is a UTMA or a 529 better for a high-income family?

For education money, a 529 is usually better. It avoids tax on growth for qualified costs, the parents keep ownership, and the beneficiary can change. A UTMA is an irrevocable gift that the child controls at 18 or 21 in California (up to 25 in Washington if set up that way), and the kiddie tax taxes its unearned income above $2,700 a year (2026) at the parents’ rate. For a side-by-side view, see 529 plans vs. custodial accounts.

Can I use my child’s 529 for private elementary school in California?

Federal law allows some K-12 uses, but California generally does not conform to recent federal 529 changes, so a withdrawal that is qualified federally may be taxable in California. Confirm the California treatment for that year before withdrawing, and keep 529 money for college if the numbers are unclear.

Next step

List each child, what you want to fund, and which account holds it today. If the answer involves RSUs, a large vest or a five-year 529 election, our tax management team can model it with you as part of a Tax & Wealth Assessment from Age Five Family Office™. This article is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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