Saving for Children in 2026: 529 Plans, Trump Accounts, and Silicon Valley Realities

New federal accounts for newborns and expanded 529 rules give Bay Area parents more options. Choosing among them depends on what the money is for.

Raising a family in Silicon Valley is expensive, and education is a large part of the bill. Whether the goal is private K-12 tuition, a four-year university, graduate school, or simply a head start in life, families now have several tax-advantaged vehicles to consider. The One Big Beautiful Bill Act of 2025 changed the landscape in two notable ways.

529 plans: broader uses

A 529 plan allows contributions to grow tax-deferred and to be withdrawn tax-free for qualified education expenses. Contributions are not deductible federally, and California, unlike many states, offers no state income tax deduction or credit for 529 contributions. The benefit is entirely in the tax-free growth.

According to Fidelity's summary of the 2025 law, the annual limit on 529 withdrawals for K-12 tuition rose to $20,000 per beneficiary beginning in 2026, and qualified K-12 expenses now include items such as tutoring, standardized test fees, and certain educational therapies. Post-secondary credential and certificate programs also became eligible. Fidelity cautions that a withdrawal may be tax-free federally but taxable at the state level if the state has not adopted the same definitions; California has historically not conformed to the federal treatment of K-12 withdrawals, so families should confirm the current state rules before using a 529 for private school.

Other 529 features remain valuable. Contributions qualify for the $19,000 annual gift tax exclusion for 2026, and a donor can elect to spread a single contribution of up to five times that amount over five years. Unused 529 funds can, subject to conditions including a 15-year account age, be rolled to a Roth IRA for the beneficiary up to a lifetime limit. Accounts can also be transferred to another family member.

Trump accounts: a new vehicle for young children

The 2025 law created a new type of account for children. As described in the Fidelity summary linked above, children born between January 1, 2025, and December 31, 2028, who meet eligibility requirements receive a one-time $1,000 federal seed contribution. Parents and others may contribute up to $5,000 per year (indexed for inflation beginning in 2028), and the accounts are invested in diversified U.S. equity index funds. Funds are generally inaccessible until the child turns 18, after which the account is treated much like a traditional IRA.

Because contributions are after-tax and growth is tax-deferred rather than tax-free, these accounts are best understood as a long-term supplement rather than a replacement for a 529 or a custodial account. For Silicon Valley families who can afford to fund several vehicles, the sequence matters less than getting started; for those with limited savings capacity, a 529 is generally the more flexible choice for education goals.

Custodial accounts and Roth IRAs for teens

A custodial (UTMA) account offers complete flexibility in how the money is used but provides no tax deferral, and the assets become the child's property at the age of majority, which in California is 18 for most UTMA accounts (or up to 25 if specified). Investment income above modest thresholds may be taxed at the parents' rate under the "kiddie tax."

A Roth IRA for a teenager with earned income from a summer job or internship is often overlooked. Contributions are limited to earned income, up to the $7,500 limit for 2026 per the IRS, and decades of tax-free growth can be substantial.

Financial aid considerations

Assets held in a parent-owned 529 are assessed at a relatively low rate in federal financial aid formulas, while assets in a child's name are assessed at a higher rate. Grandparent-owned 529s are no longer reported on the federal aid application under recent simplification rules. For many Bay Area families, income alone places them outside need-based aid at most institutions, but the rules still matter for merit and institutional aid.

Bringing it together

A practical approach for many families is to fund a 529 for education first, take advantage of the Trump account seed contribution if a child is eligible, and use custodial accounts or gifts of appreciated stock for goals that fall outside education. Given Silicon Valley tuition levels, starting early and investing consistently matters far more than choosing the perfect vehicle.

This article is for educational purposes only and is not tax or investment advice. Before investing in a 529 plan, consider whether your home state offers benefits available only through its own plan, and read the plan's offering document. Consult a qualified professional regarding your situation.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.