The Treasury Department and the Internal Revenue Service on Thursday released proposed regulations specifying which mutual funds and exchange-traded funds can be held in Trump Accounts, the tax-deferred savings vehicles created for minors under the Working Families Tax Cuts law. The guidance, which incorporates feedback from a December request for comment, gives trustees and financial advisors a clearer framework for the accounts' investment options during the so-called growth period, which runs from account opening until Dec. 31 of the year the beneficiary turns 17.
IRS Chief Executive Officer Frank J. Bisignano said the proposal would "provide clarity for trustees and beneficiaries," encouraging participation in low-fee funds that can grow tax-deferred for decades. The agency estimates the rules would affect 85 million children in 44 million families. The initial fund lineup, announced at the program's July 4 launch, includes index ETFs from Vanguard, BlackRock, and State Street, with State Street's S&P 500 tracker as the default.
Eligibility criteria
Under the draft rules, an eligible investment must be a mutual fund or ETF that tracks a qualified index, avoids leverage, and keeps annual fees and expenses at or below 0.1% of fund balance. The definition of ETF would be expanded to include ETF share classes of mutual funds, a change Treasury made after stakeholders noted these function like conventional ETFs. Active management is effectively barred: funds that adjust index exposure based on manager discretion to outperform or underperform a benchmark would not qualify, though ordinary index-replication decisions—such as component selection or trading timing—are permitted. Securities lending is allowed if the fund retains full economic exposure to the lent securities, a carve-out added after commenters highlighted the practice's prevalence among index products.
Leverage, sector bets, and ESG exclusions
On leverage, the proposal shifts from a strict prohibition on borrowing or derivatives to a standard based on whether those tools materially increase risk of loss. Short-term borrowing for redemption liquidity or derivatives used for synthetic index exposure would not automatically disqualify a fund. Qualified indexes must consist entirely of equity holdings in primarily U.S. companies, with a safe harbor at 90% domestic weighting. Sector- and industry-specific indexes remain excluded, and the proposal explicitly disqualifies ESG funds, arguing that ESG criteria function similarly to sector screens. "The Treasury Department and the IRS have determined that it is appropriate to exclude investment funds that track ESG indices because they limit exposure to companies in a way that makes them similar to sector-specific funds," the proposal states.
Fee caps and trustee duties
The proposal also clarifies the 0.1% fee ceiling, stating it covers fund-level fees and operating expenses but not separate trustee administrative charges, which are treated as custodial fees outside the cap. Trustees would be required to designate a default eligible investment for uninvested contributions, disclose that default to beneficiaries, and review fund eligibility at least annually using public disclosures like prospectuses. If a fund becomes ineligible—for example, if the manager changes the underlying index or strategy—trustees would generally have 30 days to sell the holding and reinvest in a qualifying fund.
Advisors fielding client questions about Trump Accounts should note that the proposed rules are open for public comment before finalization. The guidance builds on earlier IRS clarifications, including employer contribution rules and the Saver's Match comment period. Industry surveys suggest strong interest: a Guardian survey found 52% of small business owners considering Trump Accounts for generational wealth transfer.
The proposed regulations are expected to be published in the Federal Register soon, with a 60-day comment period. Treasury officials said they aim to finalize the rules before the end of the year, giving custodians and fund sponsors time to adjust their offerings. For now, advisors should monitor fund eligibility and prepare for potential changes to default options as the regulatory landscape evolves.
