Best Investment Account for Kids: A Guide for High-Earning Parents

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

For most high-income families, the best investment account for kids is a 529 plan for education money, backed by a small custodial (UTMA) account for money the child may use for anything, and, for a child born from 2025 through 2028, a Trump Account to collect the free $1,000 federal deposit. A custodial Roth IRA is excellent but only works once your child has real earned income. Which one leads depends on what the money is for, because each account trades control and flexibility against tax savings.

This guide is written for W-2 households earning $750,000 to $3 million in California or Washington, with children under 12. At that income, several “kid accounts” behave differently than the generic advice suggests, and some are not available to you at all.

The five accounts, compared for a high-income household

Sources for the limits: gift exclusion and five-year election from IRS Rev. Proc. 2025-32 and the Form 709 instructions; Roth IRA rules from IRS Publication 590-A; Trump Account rules from IRS Notice 2025-68.

One account is missing on purpose. A Coverdell education savings account phases out at incomes far below this household’s range, so most families reading this cannot contribute to one directly.

Why the 529 usually leads in California

California taxes all capital gains as ordinary income, with no lower rate for long-term gains (FTB). For a family in California’s 10.3% to 13.3% top brackets (2025 rate schedules; 13.3% includes the 1% tax on taxable income over $1 million), plus the 20% federal long-term gains rate and the 3.8% Net Investment Income Tax, growth in a regular brokerage account is taxed heavily when you sell. A 529 removes that tax when the money pays for qualified education.

Two California details matter. First, California gives no state deduction for 529 contributions, whichever state’s plan you use. A 2025 bill to add one died (SB 529 status). Second, California generally does not conform to the 2025 federal tax law, including its new 529 expense categories (FTB 540 booklet). A withdrawal that is qualified federally can still be taxable in California, so check before using 529 money for anything other than college.

How Washington changes the math

Washington has no wage income tax in 2026, and its 7% capital gains tax applies only above a standard deduction of $278,000 (latest published figure, for 2025) per individual or married couple (WA DOR). So the 529’s advantage for a Seattle or Bellevue family is mostly the federal tax saved. That is still large at the 20% plus 3.8% federal rate on gains. Note that Washington enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR). Families above that line should plan for higher state tax on taxable accounts before today’s toddlers reach college.

Worked example: a $1.1 million household in Palo Alto

Assumptions (illustrative, not a forecast): Priya works at a biotech company with RSUs, Daniel is a physician. They file jointly with about $1.1 million of income, live in California, and have two children, ages 1 and 4. We assume a 6% average annual return.

1. A superfunded 529. They put $100,000 into a 529 for their 1-year-old using the five-year election with gift splitting (the couple can put in up to $190,000 per child this way for 2026, and must file Form 709). At 6% for 17 years, $100,000 grows to about $269,300. The roughly $169,300 of growth comes out tax-free if spent on qualified college costs.
2. Same money in their own brokerage account. If that $169,300 gain were realized at today’s rates for their income, 23.8% federal plus 11.3% to 12.3% California (2025 rate schedules, including the 1% tax on taxable income over $1 million), the tax could be roughly $59,000 to $61,000. That gap is the main reason the 529 comes first for education money.
3. Trump Account for the 1-year-old. Born in 2025 and a U.S. citizen, the child qualifies for the one-time $1,000 federal deposit. Priya’s employer offers a $2,500 contribution, which counts toward the $5,000 annual cap. Contributions could not start before July 4, 2026.
4. A modest UTMA. Grandparents give $19,000 a year into a UTMA for the 4-year-old. They keep it small because in California the child takes control at 18 by default, or up to 21 if the donor writes that age into the gift (Cal. Probate Code 3920.5).

The same logic scales down. A child who receives $100 a month for 18 years has $21,600 contributed; at 6% compounded monthly that grows to about $38,700. A single $1,000 gift at birth grows to about $2,850 by age 18 at the same rate. Starting early matters more than starting big.

The kiddie tax limits the UTMA’s 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). A $300,000 UTMA yielding 1.5% in dividends produces $4,500 of income; $1,800 of it is taxed at your rate instead of the child’s. California has its own version of this rule (FTB 3800). For high earners, a large UTMA gives up control without saving much tax.

There is also no “UTMA contribution limit.” The $19,000 figure is the federal gift tax annual exclusion per donor, per child. Giving more simply uses part of the donor’s $15,000,000 lifetime exclusion for 2026 and requires a Form 709. Read more in our guide to UTMA contribution limits.

How to open an investment account for your child

1. Decide what the money is for. Education points to a 529. Money for a first home or a business at 25 points to a taxable account in your name or a trust. A small “learning” balance can go in a UTMA.
2. Get your child’s Social Security number. Each account in your child’s name needs it, and the Trump Account election requires a valid SSN.
3. Pick the provider. Any state’s 529 is open to you. California residents get no deduction for picking ScholarShare, so compare fees and investment options. A UTMA or custodial Roth can be opened at most brokerages.
4. Name a successor owner or custodian. If you die, someone needs to control the account. Your will or trust should match (see our estate planning page).
5. Automate funding and choose the investment. Age-based 529 portfolios shift toward bonds as college nears. For a UTMA, a low-cost broad index fund keeps costs and taxable turnover low.
6. For a Trump Account, file Form 4547 through your IRS online account (IRS Trump Accounts).

For a deeper side-by-side, see 529 plans vs. custodial accounts and superfunding a 529.

Mistakes high-income parents make with kids’ accounts

• Overfunding a UTMA. The money legally belongs to the child from the day it is given, and the child takes control at the state’s transfer age (18 or 21 in most cases). You cannot take it back or redirect it to a sibling. See how custodial withdrawals work.
• Using a UTMA to “save for college.” A 529 owned by the parent does the same job with better tax treatment and keeps you in control.
• Funding a custodial Roth from gifts. The contribution is limited to the child’s earned income. Allowance, gifts and investment income do not count.
• Assuming federal 529 rules apply in California. California does not follow the 2025 federal changes in general.

What to write down for your kids

The account matters less than whether your child understands why it exists. A one-page note for each account (what it is for, why you chose it, what you hope they learn when they gain access) is often worth more than the balance. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” Our Age Five Wealth Education work uses the FamilyKnowledge® System to capture those decisions as your children grow.

Frequently asked questions

Is there a 529 contribution limit for 2026?

There is no federal annual 529 limit. Contributions are gifts, so amounts above $19,000 per donor per child for 2026 either use the five-year election (up to $95,000 per donor, $190,000 per couple) or part of the lifetime exclusion. Each state plan also sets a lifetime maximum balance per beneficiary, listed in the plan’s disclosure booklet.

What is the best investment account for a newborn?

For a U.S.-citizen baby born from 2025 through 2028, open a Trump Account to claim the $1,000 federal deposit, and start a 529 if college is a goal. Wait on a UTMA until you know how much you want the child to control at 18 or 21. A custodial Roth needs earned income, so it rarely fits a newborn.

Can I open a 401(k) for my child?

Not directly. A 401(k) is an employer plan, so a child can join one only as an employee of a business that offers it. The closest options are a custodial Roth IRA once your child has earned income, or a Trump Account, which follows traditional IRA rules from the year your child turns 18.

Your next step

Write down the purpose of each dollar you plan to set aside for your children, then match each purpose to one account. If you want a second set of eyes on how this fits with your RSUs, estate plan and tax picture, the Tax & Wealth Assessment is a good place to start.

This is general education, not individual advice. The right move depends on your family’s full financial 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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