By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
Investing for beginners comes down to three decisions: which accounts to fill, which low-cost broad index funds to hold in them, and an automatic schedule that runs without you. For a high-income family, the order of the accounts and where each fund sits matter more than which fund you pick, because taxes, not fund choice, are usually the largest avoidable cost. A household earning $750,000 or more can often put more than $100,000 a year into tax-advantaged accounts before a single dollar goes to a taxable brokerage account, especially when an employer plan allows after-tax (mega backdoor Roth) contributions.
This guide is written for W-2 parents in California and Washington who are new to running their own money, or who have let RSU shares and cash pile up because nobody set up a plan. It covers the passive building blocks, how they fit your accounts in 2026, a worked example at $950,000 of income, and the decisions you actually have to make.
Why passive investing suits a family with equity compensation
Passive investing means owning whole markets through index funds or ETFs instead of trying to pick winning stocks or managers. For a family where both parents work long weeks, it has three practical advantages.
- Low cost. Broad index funds often charge a few hundredths of a percent a year. On large balances, the gap between that and a 1% fee compounds into a large sum (see the fee example below and our guide on how much to pay in investment fees).
- Less to decide. A two-to-four fund portfolio can be rebalanced once a year. That frees your attention for the choices that move the needle at your income, like RSU sales and account order.
- You already carry active risk. If you work at Apple, Amazon, Genentech or Gilead, your salary, bonus and unvested RSUs all depend on one company. Owning the broad market in your portfolio offsets that concentration instead of adding to it.
The account order for a W-2 family with RSUs in 2026
Fill accounts roughly in this order. Each line uses 2026 federal limits.
- 401(k) or 403(b) up to the employer match, then to the full limit. The 2026 employee deferral limit is $24,500 per person, plus $8,000 catch-up at 50 or older ($11,250 if you turn 60 to 63 in 2026). If your 2025 wages from that employer were over $150,000, 2026 catch-ups must go in as Roth (IRS Notice 2025-67).
- HSA, if you are on a qualifying high-deductible plan. The 2026 family limit is $8,750 (IRS Rev. Proc. 2025-19). Invested and left alone, it works as a second retirement account for federal tax. California does not recognize HSAs: contributions are not deductible for California and earnings are taxed by the state in the year earned (FTB 2025 Form 540 booklet).
- Mega backdoor Roth, if your plan allows it. Total 401(k) additions (your deferrals, employer money and after-tax contributions) are capped at $72,000 for 2026. The room left after deferrals and employer contributions can go in as after-tax money and be converted to Roth, if the plan permits after-tax contributions and in-plan conversions. See our retirement and employee benefits work for how to check your plan.
- Backdoor Roth IRA. The 2026 IRA limit is $7,500 per person. Direct Roth contributions phase out at $242,000 to $252,000 of joint MAGI, so families at this income contribute to a nondeductible traditional IRA and convert. Existing pre-tax IRA balances trigger the pro-rata rule, so check them first (Form 8606 instructions).
- 529 plans for the children. Growth is tax-free for qualified education costs. California gives no state deduction for 529 contributions, so the benefit is the tax-free growth. The 2026 gift tax annual exclusion is $19,000 per donor per child, and a five-year election lets each parent put in up to $95,000 per child at once, reported on Form 709 and treated as spread over five years (Form 709 instructions).
- Taxable brokerage account. Everything else, including proceeds from RSU sales, goes here. This is where fund choice and tax placement make the biggest difference.
The nine common “passive strategies”, rated for this family
Most beginner lists name the same tools. They are not equally useful at your tax bracket. Here is how each fits.
| Tool | What it is | Fit for a CA/WA family earning $750k+ |
|---|---|---|
| Broad index funds | Funds that own a whole market, such as total US or total international stock | The core holding in every account |
| ETFs | Index funds that trade like stocks | Usually the best wrapper in a taxable account, because they rarely distribute capital gains |
| Target-date funds | One fund that shifts from stocks to bonds as a date approaches | Fine inside a 401(k). In a taxable account they hold bonds you would rather keep in tax-deferred accounts, and they ignore your other accounts. See target-date fund fees |
| Robo-advisors | Automated portfolios with rebalancing and often tax-loss harvesting | Useful for a taxable account, but they typically manage only the account they hold, not your RSUs, 401(k) or 529s, so they manage one slice in isolation |
| Dividend reinvestment (DRIP) | Dividends automatically buy more shares | Sensible inside retirement accounts. In taxable, it creates many small tax lots; directing dividends to cash and reinvesting during rebalancing is often cleaner |
| REITs | Funds that own real estate | Most REIT dividends do not get the lower qualified-dividend rate, because only the portion the REIT designates counts as qualified (IRC §857(c)(2)), so if you hold them, hold them in tax-deferred accounts |
| Low-cost mutual funds | Traditional index mutual funds | Good in retirement accounts; in taxable, check the fund’s history of capital gain distributions |
| Asset location | Putting tax-inefficient assets (bonds, REITs) in tax-deferred accounts and tax-efficient stock index funds in taxable | High value at a 35% to 37% federal bracket plus California tax |
| Automatic contributions | Payroll deferrals and scheduled transfers | Essential. It turns the plan into a habit that runs through busy years |
How taxes on a taxable account differ in California and Washington
For 2026, federal long-term capital gains and qualified dividends are taxed at 20% once joint taxable income passes $613,700, and the 3.8% Net Investment Income Tax applies above $250,000 of joint MAGI (Rev. Proc. 2025-32, IRS NIIT page). That is 23.8% federal for most families reading this.
California has no lower rate for capital gains; they are taxed as ordinary income (FTB). At 2025 rates, the top bracket is 12.3%, plus a 1% Behavioral Health Services Tax on taxable income over $1,000,000, for 13.3%. Dividends and interest are taxed the same way. That makes low-turnover ETFs and asset location more valuable in California than almost anywhere else.
Washington has no wage income tax in 2026, but it taxes long-term capital gains from sales at 7%, and 9.9% on taxable gains above $1,000,000, after a standard deduction of $278,000 (2025 figure; the 2026 amount was not yet published) (WA DOR). Gains inside retirement accounts are exempt. Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting in 2028 (WA DOR), so families expecting large gains in 2028 or later should plan around the details as the state issues guidance.
Worked example: a $950,000 household with RSUs and two young children
Assumptions (hypothetical, for illustration): married, filing jointly, in California. Two children, ages 4 and 8. Combined salaries of $520,000 plus $430,000 of RSUs vesting during the year. Both under 50. Each employer contributes $12,000 to the 401(k). Only one spouse’s plan allows after-tax contributions with in-plan Roth conversion. No existing pre-tax IRA balances. On a qualifying HDHP.
| Account | 2026 amount | How it is calculated |
|---|---|---|
| 401(k) deferrals, both spouses | $49,000 | 2 x $24,500 |
| Mega backdoor Roth, one spouse | $35,500 | $72,000 – $24,500 deferral – $12,000 employer |
| Backdoor Roth IRAs | $15,000 | 2 x $7,500 |
| HSA, family | $8,750 | 2026 family limit |
| 529s | $20,000 | $10,000 per child, a family choice |
| Total tax-advantaged saving | $128,250 | Before any taxable investing |
In every account, the family holds the same simple mix: a total US stock index fund, a total international stock index fund and, in the 401(k) only, a bond index fund. Bonds sit in the 401(k) because bond interest would be taxed as ordinary income in a taxable account.
The RSUs. RSU shares are taxed as wages at vest, and the value taxed becomes their cost basis (IRS Pub 525). Selling right at vest usually creates little or no extra gain, so moving vested shares into index ETFs in the taxable account costs almost nothing in tax. The larger tax issue is withholding: employers usually withhold 22% federal on RSU income (37% on supplemental wages over $1,000,000 in a year), while this family’s top federal bracket is 37% for 2026. The family sets aside the gap from each vest so April does not bring a surprise.
Why placement matters here. Say the taxable account holds $500,000 and yields a hypothetical 1.5% in qualified dividends, or $7,500 a year. At a 20% federal rate, 3.8% NIIT and an assumed 11.3% California marginal rate (the 2025 rate on joint taxable income from $891,542 to $1,485,906; this family sits near the bottom of that band), the tax is about $2,633 a year (35.1%). The same family in Washington would pay about $1,785 (23.8%), because Washington’s capital gains tax applies to gains from sales, not to dividends. Holding high-yield assets in the 401(k) instead of taxable can reduce that drag every year.
Why fees matter here. On a hypothetical $1,000,000 earning 6% a year before fees for 20 years, a 0.05% annual cost leaves about $3.18 million. A 1.0% cost leaves about $2.65 million. The difference, roughly $520,000, is the price of the more expensive option over two decades.
The decisions the family actually has to make
- Stock and bond mix. With children under 12 and decades until retirement, many families hold mostly stocks. The right mix depends on how much a 30% drop would change your behavior, not on a formula. Our investment and risk management work starts here.
- US versus international. A total world allocation is one reasonable default; some families tilt toward the US. Either way, count your employer stock as US exposure.
- How much company stock to keep. Many families set a written cap (for example, no more than 10% of net worth in the employer’s stock) and sell vests above it on a schedule.
- Traditional versus Roth. At a 37% federal bracket plus California tax, traditional 401(k) deferrals often make sense today, with Roth money coming from the mega backdoor and backdoor IRA. Washington families pay no state income tax on wages in 2026, so the choice rests mostly on federal rates, with the 2028 income tax on AGI over $1,000,000 as a new factor.
Common mistakes we see
- Letting RSU vests accumulate for years, so one stock becomes half the portfolio.
- Holding cash for a year while “deciding”, then investing at a worse moment. If a lump sum makes you nervous, a fixed schedule over a few months is a reasonable compromise; see lump sum or dollar-cost averaging.
- Holding bond funds and REITs in a taxable account while the 401(k) holds only stocks.
- Doing a backdoor Roth with an old rollover IRA still open, which can make much of the conversion taxable under the pro-rata rule.
- Buying the same or a substantially identical fund within 30 days before or after selling it at a loss. The wash sale rule disallows the loss for that year and adds it to the basis of the new shares (IRS Pub 550).
Passing the investment plan to your children
A passive portfolio is easy to hand over. The reasons behind it are not. Write one page: why you own index funds, what mix you chose and why, your company stock cap, and what you did when markets fell. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” A page like this, kept in your FamilyKnowledge® Library, lets a 15-year-old understand what you did and why.
Questions families ask
Where should a high-income family invest $100,000?
First check that every tax-advantaged account for the year is full: 401(k), HSA, mega backdoor Roth, backdoor Roth IRAs and 529s. Whatever is left typically goes into broad, low-cost stock index ETFs in a taxable account, with bonds held inside retirement accounts. Many families keep six months of spending in cash or Treasury bills before investing, if that reserve is not already in place.
What does $1,000 invested for 10 years grow to?
At a hypothetical 7% annual return, $1,000 grows to about $1,967 in 10 years, before taxes and fees. Real returns vary year to year and can be negative over a decade. The point for a family is that contributions and time do most of the work, which is why automatic monthly investing matters more than timing.
Is a robo-advisor enough for a family like ours?
It can run a taxable account well, including tax-loss harvesting. What it typically does not do is coordinate RSU sales, the mega backdoor, 529 funding, withholding gaps and asset location across both spouses’ accounts. At this income those decisions usually matter more than the portfolio mechanics, which is where a fee-only adviser earns their cost.
Your next step
List every account both parents own, its balance and what it holds, on one page. Then check two things: whether your 401(k) plan allows after-tax contributions, and what percentage of your net worth sits in employer stock. If you want a second set of eyes on the result, our Tax & Wealth Assessment walks through it with you, including the tax planning side.
This is general education, not individual advice. The right move depends on your family’s full picture.
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.
Connect on LinkedIn → · About KevinThis is part of how we approach Investment & Risk Management for high-income W-2 families at Bright Advisers.
Keep reading