IRS Proposes Strict Investment Guardrails for ‘Trump Accounts,’ Limiting Growth-Phase Holdings to Low-Fee U.S. Equity Funds

WASHINGTON — In a major regulatory step that will shape the financial futures of millions of American children, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury unveiled comprehensive proposed regulations on Thursday governing "Trump accounts."

The newly released framework (CC-00349938-26) aims to maximize long-term yields and safeguard young savers by restricting investment choices during the critical growth phase to low-fee, broadly diversified stock index funds and exchange-traded funds (ETFs).

Under the proposed rules, investments during a beneficiary’s formative years will be funneled into vehicles tracking major U.S. equity benchmarks—such as the S&P 500—while capping annual fund expenses at a remarkably low 0.1%. The regulatory push is designed to shield accounts from high management fees and speculative volatility, ensuring that federal pilot contributions and private savings compound efficiently over decades.

Main Facts

The newly proposed guidance establishes a tightly regulated investment ecosystem for Trump accounts, a novel subclass of individual retirement accounts authorized under Section 530A of the tax code.

The core parameters of the IRS proposal include:

• Strict Asset Class Limitations: During the designated growth period, eligible investments are restricted to mutual funds and exchange-traded funds (ETFs) that track an equity index composed primarily of U.S. companies.
• Leverage Prohibitions: Funds utilizing leverage, derivatives to amplify returns, or speculative trading strategies are strictly barred from the portfolio options.
• The 0.1% Expense Cap: Annual management fees and operating expenses for eligible funds cannot exceed 0.1% (10 basis points) of the fund’s total balance. This fee restriction, however, does not apply to baseline administrative or trustee fees charged by financial institutions.
• The Growth Period Timeline: The investment restrictions are tethered to the age of the beneficiary. The growth period commences the moment the initial account is established and terminates on December 31 of the calendar year in which the beneficiary turns 17. Once the calendar flips to the year the beneficiary turns 18, these strict asset restrictions lift entirely.
• Default Options and Trustee Responsibilities: The Treasury previously designated the State Street SPDR Portfolio S&P 500 ETF (SPYM) as the initial default investment vehicle. Four additional low-cost index ETFs have also been greenlit. If a parent or account custodian fails to make an active selection from the menu of eligible funds, the trustee is required to automatically allocate the capital into an approved, low-cost qualifying investment.

Chronology

The rollout of Trump accounts and their governing regulations represents a fast-moving legislative and regulatory timeline that stretches from Capitol Hill to federal regulatory agencies.

• Legislative Genesis: The framework for Trump accounts was established through H.R. 1, Public Law 119-21, commonly known as the Omnibus Budget and Benefits Balancing Act (OBBBA). This sweeping legislation introduced Section 530A to the Internal Revenue Code, creating a specialized vehicle for youth savings backed by a federal pilot program.
• Initial Guidance (Notice 2025-68): Laying the groundwork for implementation, the Treasury Department and the IRS issued Notice 2025-68 in early 2026, soliciting public comments from financial institutions, consumer advocates, and tax professionals regarding how these accounts should be structured and managed.
• Treasury Default Designation: Prior to the formal regulatory release, the Treasury announced that the State Street SPDR Portfolio S&P 500 ETF (SPYM) would serve as the operational baseline default investment, alongside a curated list of four other low-cost index products.
• Proposed Regulations Published (Thursday): The IRS formally filed the proposed regulations (CC-00349938-26) with the Federal Register, putting meat on the bones of the statutory framework by legally defining fee caps, index requirements, and the parameters of the growth period.
• Comment Period and Effective Date: The IRS has established a public comment window running through October 20. According to the regulatory text, the rules are slated to take effect formally for tax years beginning on or after January 1, 2026.

Supporting Data

To understand the weight of the Treasury and IRS decisions, one must examine the mechanics of compound interest, administrative drag, and the demographics targeted by the pilot program.

Fee Drag and Long-Term Yields

Financial economists have long demonstrated that even seemingly small management fees eat away exponentially at long-term returns over a 17-year horizon.

• The 10-Basis-Point Ceiling: By capping internal fund expenses at 0.1%, a portfolio holding $10,000 will pay a mere $10 annually in underlying fund costs. In contrast, standard actively managed mutual funds often charge between 0.5% and 1.0% or more, which can siphon thousands of dollars out of an account over a childhood and adolescence.
• Index Replication: By restricting choices to funds tracking broad U.S. equities (such as the S&P 500), the regulations hitch the financial wellbeing of America’s youth to the historical growth trajectory of the country’s top 500 corporations. Over multi-decade periods, broad market index funds have historically outperformed the vast majority of active stock-pickers after accounting for fees.

Pilot Program Parameters and Eligibility

• The $1,000 Federal Seed: Under Section 6434, the federal government provides a direct $1,000 baseline contribution to kickstart accounts for eligible children.
• Birthdate Windows: The pilot program specifically targets children born after December 31, 2024, and before January 1, 2029.
• General Eligibility: To qualify for a Trump account, an individual must have been issued a valid Social Security Number and must not have turned 18 years old prior to the close of the calendar year in which the account is opened.

Official Responses

Reaction from federal agencies, financial institutions, and tax policy experts has highlighted the delicate balance between preventing excessive Wall Street fees and preserving parental choice.

In its official news release, the Treasury Department emphasized that the rules are explicitly crafted to protect young savers from exploitation while harnessing the power of the equity markets.

"These proposed regulations are designed with a singular, vital objective: to ensure that every dollar contributed to a Trump account works as hard as possible for the child’s future," a Treasury spokesperson noted. "By insisting on broad diversification and aggressively capping internal fund expenses at 0.1%, we are ensuring that Wall Street management fees do not erode the foundational savings built during these crucial growth years."

Regulatory analysts have noted that the framework draws clear lines of accountability. By specifying that trustees must step in and automatically deploy unallocated funds into approved low-cost vehicles, the IRS is closing potential loops where cash could sit idly in low-yielding sweep accounts or high-fee proprietary products.

Industry groups representing mutual fund providers and broker-dealers have begun reviewing the text to evaluate compliance burdens, particularly regarding how trustee administrative fees will interact with the strict 0.1% underlying fund cap. Tax professionals have similarly begun digesting the operational adjustments needed ahead of the January 1, 2026, effective date.

Implications

The introduction of Trump accounts—and the strict guardrails outlined in Thursday’s proposed regulations—carries sweeping implications for American families, financial markets, and the future of youth wealth-building.

1. For Beneficiaries and Families

For millions of American children born during the pilot window, the accounts offer a formalized, government-backed introduction to equity investing. Because the growth phase locks in low-fee, passive index funds, parents do not need to possess advanced financial literacy or fall prey to high-fee advisors pitching complex, actively managed products. The automatic default mechanisms ensure that even if parents take no active role, the federal seed money and subsequent contributions will be safely and cheaply invested in the bedrock of the U.S. economy.

2. For Financial Institutions and Fund Managers

The 0.1% expense cap creates a highly competitive environment for ETF providers and mutual fund complexes. Only institutions capable of scaling massive low-cost index products will be able to capture Trump account volume. Furthermore, trustees and custodians must overhaul their account-opening software and default allocation pathways to ensure compliance before the January 1, 2026 effective date. Financial institutions failing to provide compliant, low-cost options risk running afoul of IRS oversight.

3. Macroeconomic and Intergenerational Wealth Effects

By locking capital into U.S. equities for up to 17 years, the policy injects a steady, predictable stream of retail capital into the broader stock market. More importantly, it creates a bridge for intergenerational wealth accumulation. When account holders reach age 18 and the strict investment restrictions sunset, they will inherit a mature portfolio with a robust principal balance, providing a financial springboard for higher education, housing down payments, or long-term retirement security.

As the public comment period runs toward its October 20 deadline, stakeholders across the financial and legal sectors will continue fine-tuning their positions. However, the overarching message from Washington is clear: the era of Trump accounts is officially underway, and low-cost, passive investing will be the engine driving them forward.

To submit comments on the proposed regulations (CC-00349938-26) or to reach out regarding this coverage, contact Martha Waggoner at [email protected].