Treasury Proposes Rule to Ban ESG Funds from New 'Trump Accounts' Retirement Program

The Treasury Department has proposed new regulations that formally ban Environmental, Social, and Governance (ESG) funds from 'Trump Accounts,' the new tax-advantaged retirement program for children. The rules cap investment fees at a strict 0.1% and restrict eligible assets to broad, U.S.-heavy index funds, forcing account trustees to divest any non-compliant holdings within 30 days.[1][2]

For the more than 7 million families who have opened these accounts since their July 4 launch, the guidance dictates exactly how their children's money can grow. It also signals a broader federal push to lock sustainable investing frameworks out of government-subsidized savings vehicles, setting up a clash over what constitutes a material financial risk.[1][4]

The mechanism of the ban relies on the underlying legislation that created the accounts. The One Big Beautiful Bill Act of 2025 already prohibited 'sector-specific' funds from being held in the accounts. The Treasury's new rule uses this statutory authority to explicitly exclude ESG indexes, arguing that by limiting exposure to certain companies, ESG funds function exactly like sector-specific vehicles.[8]

'Any index fund which has, or is marketed as having, a focus on ESG factors will be excluded from consideration,' the proposed regulations state. The Treasury acknowledged that classifying ESG funds as sector-specific could cause confusion in other legal contexts, so it created a separate, explicit rule making funds that track them ineligible.[3][7]

Treasury Secretary Scott Bessent framed the restriction as a protective measure for investors, arguing that the accounts must focus purely on financial returns. 'These accounts exist to build financial security for America's children, not to advance political activism or ideological agendas,' Bessent said, adding that 'Corporate America has rejected ESG ideology.'[1]

Beyond the ESG ban, the rules impose strict cost controls. Eligible funds cannot charge more than 10 basis points (0.1%) in combined annual fees and expenses. That equates to a maximum of $1 per year for every $1,000 invested, effectively locking out actively managed funds and higher-cost alternative strategies.[2][6]

To qualify, a mutual fund or exchange-traded fund (ETF) must passively track a broad equity index composed of at least 90% U.S. companies by weight. Leverage is entirely prohibited, and the index must measure the performance of a broad segment of the market using objective financial criteria.[1][2]

The Treasury has designated State Street's SPDR Portfolio S&P 500 ETF as the default investment option, alongside select low-cost vehicles from Vanguard and iShares. These funds meet the strict fee and diversification requirements, providing a safe harbor for families who do not actively select an investment.[3]

These restrictions apply strictly during the account's 'growth period'—the stretch from when the account is opened until December 31 of the year the beneficiary turns 17. During this window, contributions are capped at $5,000 annually, which will be indexed for inflation starting in 2028, and distributions are generally prohibited.[5][8]

The IRS also clarified that employers can contribute up to $2,500 annually to an employee's or dependent's Trump Account. These contributions count toward the $5,000 total limit but are excluded from the employee's gross income, provided the employer's program satisfies specified nondiscrimination requirements.[5]

Once the beneficiary reaches adulthood and the growth period ends, the account converts to a traditional IRA. At that point, the special investment restrictions lift, and the account holder gains the freedom to invest in a wider array of assets, including those previously banned.[8]

The accounts have seen rapid adoption, driven in part by a $1,000 federal seed contribution available to children born between 2025 and 2028. According to the Treasury, over 2 million of the 7 million enrolled children qualify for this federal deposit, representing a massive influx of capital into the designated index funds.[1][4]

The rules place the burden of compliance squarely on account trustees. They must review investments annually to ensure they still meet the fee and index requirements. If a fund alters its strategy and becomes ineligible—or if an ESG fund slips through—the trustee has exactly 30 days to divest the holding.[4]

The stakes for compliance are absolute. Failure to maintain operational compliance will cause the account to immediately lose its tax-advantaged status, reverting to a standard taxable account as of the first day it holds the ineligible investment.[7]

The regulation represents a significant escalation in the ongoing political battle over ESG investing. While sustainable funds make up less than 2% of the $19.4 trillion held in U.S. passively managed mutual funds, the preemptive ban ensures they cannot capture a share of the massive capital pool expected from the new child retirement system.[4]

The proposed regulations were published in the Federal Register, and the public comment period remains open until October 20, 2026. Following the review of public feedback, the Treasury and IRS are expected to finalize the rules, cementing the investment guardrails for a program that could reshape generational wealth in the United States.[4][8]