A new Treasury and IRS proposal would restrict Trump Account investments for 7 million children to just five low-cost index ETFs, raising questions about fees, risk, and flexibility as families weigh these accounts against 529 plans and other options
Since their launch in July 2026, Trump Accounts have attracted over 7 million sign-ups, with about 1 million newborns already receiving the $1,000 government seed deposit, according to the White House. But a new proposal from the Treasury Department and IRS could sharply limit how families invest these funds, potentially reshaping the long-term savings landscape for millions of children.
The proposed rules, published August 20, would restrict eligible investments in Trump Accounts to mutual funds or ETFs that track broad U.S. or global equity indexes, with annual fund fees capped at 0.10%. This means individual stocks, bonds, sector funds, and actively managed strategies would be off the table. The Treasury has identified five qualifying ETFs, all low-cost index funds, with the State Street SPDR Portfolio S&P 500 ETF (SPYM) set as the default option at a 0.02% expense ratio. The other four-iShares Core S&P 500 ETF (IVV), Vanguard Total Stock Market ETF (VTI), State Street SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM), and iShares Core S&P Total U.S. Stock Market ETF (ITOT)-each charge 0.03% annually.
Under the proposal, a fund must meet three criteria: it must track a broad equity index, avoid leverage, and keep annual fees at or below 0.10%. If parents do not select a fund, the account trustee will automatically invest the balance in the default ETF. Notably, the 0.10% cap applies only to fund-level fees; custodial and advisory fees are not included in this limit. This structure effectively blocks families from choosing individual stocks, bond funds, sector ETFs, or any actively managed or leveraged products during the account's growth period.
Fee Focus and Investment Trade-Offs
The Treasury argues that these restrictions are designed to protect children's savings from high fees that can erode returns over time. According to Treasury Secretary Scott Bessent, the goal is to ensure that as much of each child's investment return as possible remains in the account, rather than being lost to unnecessary costs. IRS CEO Frank Bisignano has emphasized that even small differences in annual fees can significantly impact the final account balance after years of compounding. For example, a fund charging 0.50% instead of 0.02% could reduce a child's savings by thousands of dollars over 18 years.
Yet the proposal addresses only one side of the investment equation. While low fees are important, the rules would require every dollar in a Trump Account to remain fully invested in equities throughout childhood, with no option to shift toward bonds or more conservative assets as the child approaches adulthood. This is a key difference from age-based 529 plans, which typically reduce stock exposure over time to manage risk as college nears.
For context, the average expense ratio for U.S. equity index ETFs was 0.16% in 2025, according to Morningstar, while the proposed Trump Account lineup would cap fund fees at 0.03% or lower for most options. This places Trump Accounts among the lowest-cost investment vehicles available, but at the expense of flexibility and risk management.
Tax Treatment and Policy Criticism
Beyond investment limits, Trump Accounts have drawn criticism for their tax structure. Adam Michel of the Cato Institute has argued that these accounts are the least tax-advantaged savings option for families, since personal contributions are made with after-tax dollars and withdrawals are taxed at ordinary income rates, rather than the lower capital gains rate. Michel's analysis found that a single $5,000 contribution invested for 30 years would yield $2,451 less in a Trump Account than in a standard taxable brokerage account, solely due to less favorable tax treatment on withdrawal.
Supporters of the proposal point to the $1,000 government seed deposit, potential employer contributions, and nonprofit donations as the main financial advantages of Trump Accounts. The Treasury maintains that the low-fee, index-only approach will reward patient, cost-conscious investors over the long term, preserving more of each account's compound return. Still, the lack of investment flexibility and the tax treatment may make these accounts less attractive compared to alternatives.
For families weighing their options, state-sponsored 529 plans offer broader investment menus, age-based portfolios that automatically reduce risk as college approaches, potential state tax deductions, and tax-free withdrawals for qualified education expenses. Custodial Roth IRAs, available when a child has earned income, provide tax-free growth and wider fund choices. UGMA and UTMA accounts impose no investment restrictions, though earnings are taxed annually. Trump Accounts, by contrast, offer the narrowest investment menu but include the government seed and tax-deferred growth.
Comparing Long-Term Growth Potential
While the Trump Account proposal focuses on minimizing fees, the all-equity approach means families must accept higher volatility and the risk of market downturns, especially as children near adulthood. In contrast, 529 plans and other vehicles allow for more nuanced asset allocation, which can help manage risk as college or other financial goals approach. As consistent ETF investing has shown in other contexts, low fees and disciplined contributions can drive long-term growth, but asset allocation and tax treatment remain critical factors in determining final outcomes.
Ultimately, the proposed rules would force families to weigh the benefits of the Trump Account's government seed and low fees against the loss of investment flexibility and less favorable tax treatment. The Treasury and IRS are accepting public comments on the proposal before finalizing the regulations, and families, financial advisors, and industry groups are likely to weigh in on whether the trade-offs strike the right balance for children's long-term savings.
Investment accounts for children come with a range of trade-offs that go beyond fees and returns. The structure of an account-whether it's a 529 plan, custodial Roth IRA, UGMA/UTMA, or a Trump Account-determines not just what you can invest in, but also how gains are taxed, who controls the money, and what the funds can be used for. While low-cost index funds are a powerful tool for long-term growth, the ability to adjust risk as a child ages, access tax benefits, and maintain flexibility can be just as important. Families should carefully compare all features, including fees, investment options, tax treatment, and withdrawal rules, before deciding where to save for a child's future.
