The Treasury Department and the Internal Revenue Service have proposed a rule that would sharply narrow how money in the new Trump Accounts for children can be invested, limiting it to low-cost stock index funds and capping combined annual fees at one-tenth of one percent, or 0.1%, of the balance. Released on August 20, the proposal would also steer uninvested contributions into a default S&P 500 fund and apply through the year a child turns 17. It is open for public comment and has not been finalized, so nothing about the current lineup is locked in yet.
What the proposed investment limits would require
Under the proposal, an eligible investment would have to be a mutual fund or exchange-traded fund that tracks an equity index made up primarily of U.S. companies, such as the S&P 500. The fund could not use leverage, and its annual fees and expenses would need to stay at or below 0.1% of the fund balance. Funds that let a manager stray from the index to try to beat it would not qualify, though ordinary index-tracking decisions would be allowed. Separate trustee fees charged to administer the account would sit outside that ceiling.
The agencies described the limits as a way to keep account balances growing over the long term by holding down investment costs and encouraging broad diversification, rather than leaving young children’s money exposed to concentrated bets or expensive, actively managed products. During the years the restriction applies, the money is meant to sit in plain, diversified stock-index funds and little else, a design that leaves families with fewer choices but far less to monitor.
The plan builds on a fund lineup Treasury had already identified, and it names the State Street SPDR Portfolio S&P 500 ETF as the default choice when an account is first opened. If a family does not pick an eligible fund, the balance would automatically be invested during the account’s growth period in an eligible option selected by the trustee. That growth period runs from the day the account is established through December 31 of the year the child turns 17; after that point, the investment restrictions would no longer apply.
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How Trump Accounts and the $1,000 federal seed work
Trump Accounts were created by the 2025 tax law often called the One Big Beautiful Bill Act as a new kind of individual retirement account for children. A pilot program provides a one-time $1,000 contribution from the federal government for eligible children born after 2024 and before 2029, and parents, grandparents and others can add up to $5,000 a year in after-tax money until the year before the child turns 18. The accounts are opened through an online IRS election tied to the child’s Social Security number.
Money inside a Trump Account grows tax-deferred, and the rules on contributions and withdrawals follow the retirement-account framework the law set up rather than an ordinary brokerage account. That structure is part of why the government is willing to seed the accounts and hold down their costs: the aim is a long-term nest egg meant to sit untouched for years, not a short-term savings pot families dip into.
Because the money can compound for close to two decades before a child reaches adulthood, the cost of the funds inside the account matters a great deal. A fee of a few tenths of a percent, left unchecked, can quietly erode a meaningful share of the final balance over 18 years. Treasury framed the low-fee requirement and the broad-index default as a way to protect that long-term growth and keep the accounts simple for families who do not want to actively manage investments.
What the fee cap could mean for families and older relatives
For grandparents and parents weighing whether to fund an account, the proposed structure trades investment choice for cost discipline. The bargain is narrower control over where the money goes in exchange for a near-guarantee that fees stay minimal and the balance tracks the broad market. That is a familiar tradeoff for anyone who has watched high fund expenses drag down a retirement account over time, and it mirrors the low-cost index approach many financial planners already favor for long horizons.
The accounts also give older relatives a defined way to move money to the next generation. A grandparent who wants to set aside cash for a grandchild can contribute within the annual limit, and the low-fee, index-only design removes much of the guesswork about how the gift will be invested. For families already thinking about how to pass on wealth efficiently, a tax-advantaged account with tightly capped costs is a straightforward option to weigh alongside 529 college plans and custodial accounts.
The proposal also leaves room for change. Treasury and the IRS requested public comments and said the rules generally would apply to tax years beginning on or after January 1, 2026 once finalized. Fund companies, advisers and families can weigh in before the agencies settle on a final version, which means the specific fee ceiling, the default fund and the definition of an eligible index could still be adjusted before anything takes hold.
What remains unsettled is how the fund industry will respond to a 0.1% ceiling that squeezes out all but the cheapest products, and whether the final rule keeps a single S&P 500 tracker as the fallback for millions of children’s accounts. Until the comment window closes and a final regulation appears, the lineup described in the proposal is a starting point, not the last word on how a child’s Trump Account will be allowed to grow.
This article was researched and drafted with the assistance of AI and reviewed by The Money Overview editorial team.
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