The Treasury Department and the Internal Revenue Service have released proposed regulations spelling out exactly which mutual funds and exchange-traded funds qualify as eligible investments for Trump Accounts, the tax-deferred savings vehicles created for American children under the Working Families Tax Cuts law.
The guidance, which takes into account public feedback from the IRS's request for comment last December, gives financial advisors and American investors a clearer idea of the investment guardrails trustees must build into these accounts.
For advisors already fielding client questions about Trump Accounts, the proposed rules will shape which funds custodians can offer during what the IRS calls the "growth period" – the stretch from when an account is opened until December 31 of the year the child beneficiary turns 17.
"These proposed regulations will provide clarity for trustees and beneficiaries of Trump Accounts, thus encouraging eligible participants to invest in low-fee mutual funds and ETFs that will grow on a tax-deferred basis potentially over their entire lives," said IRS Chief Executive Officer Frank J. Bisignano, who was tasked with ensuring wider adoption of Trump Accounts shortly after the program's July 4 launch.
"Funds deposited in Trump Accounts enable American children to start investing now and enjoy years of compound earnings for their future college, retirement and other needs," Bisignano said Thursday.
Under the proposal, an eligible investment must be a mutual fund or ETF that tracks a qualified index, avoids leverage, and keeps combined annual fees and expenses at or below 0.1% of the fund balance. The definition of ETF would be broadened to include ETF share classes of mutual funds, a change Treasury made after a stakeholder pointed out that such share classes function the same way as conventional ETFs already in the market.
Read more: Fidelity unveils first ETF share classes
The proposed rules also draw a firm line around active management. Funds that adjust index exposure based on manager discretion to outperform or underperform a benchmark would not qualify, though the proposal clarifies that ordinary index-replication decisions – like which components to hold or when to trade – do not disqualify a fund. Securities lending is permitted so long as the fund retains full economic exposure to the securities lent, a carve-out Treasury added after commenters flagged how common the practice already is among index products.
On leverage, the proposed rule shifts from a strict test tied to any use of borrowing or derivatives toward a standard based on whether those tools materially increase risk of loss. That means short-term borrowing for redemption liquidity, or derivatives used to gain synthetic index exposure, would not automatically disqualify a fund.
Qualified indexes must be composed entirely of equity holdings in primarily U.S. companies, with a safe harbor set at 90% domestic weighting. Sector-specific and industry-specific indexes remain excluded, and the proposal explicitly disqualifies ESG funds, arguing that ESG criteria are functionally similar to a sector screen.
"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 said.
The proposal on Thursday also addressed lingering questions around the 0.1% fee ceiling for Trump Accounts, clarifying that it covers both fund-level fees and operating expenses. However, it doesn't cover the costs a trustee charges separately for administering the account itself, which are treated as custodial fees outside the scope of the cap.
Under the proposal, trustees would be required to designate a default eligible investment for uninvested contributions, disclose that default to account beneficiaries, and review fund eligibility at least once every 12 months using public disclosures such as prospectuses. If a fund somehow becomes ineligible for Trump Accounts – the manager decides to change the underlying index or strategy, for example – trustees would generally have 30 days to sell the holding and reinvest proceeds in a qualifying fund.
The proposed rules, which the IRS estimates would affect 85 million children in 44 million families, build on Treasury's initial fund lineup of index ETFs from Vanguard, BlackRock, and State Street, with State Street's S&P 500 tracker ETF being set as the default at launch.
The agency has opened a two-month window for public comments ending on October 20, with a request for feedback on next steps for Trump account trustee fee limits still open.
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