What’s the tax implication with buying a target retirement fund through a brokerage account?

[Anonymous]

Any one know?

[Anonymous]

There was a post on here around tax time this year where the op got royally screwed by trades made in the targeted fund she held in a non tax-advantaged account. I personally would not do it.

[Anonymous]

Anonymous wrote:There was a post on here around tax time this year where the op got royally screwed by trades made in the targeted fund she held in a non tax-advantaged account. I personally would not do it.

Op here - I already put some money in it. Only now realizing there may be a tax issue. Can you sff eet bf me the link or explain what the tax issue is?

[Anonymous]

I’ve bought them and there’s never been a tax issue.

[Anonymous]

There was an issue last year where Vanguard ended up encouraging institutional investors to move from one fund to another which meant the first fund had to liquidate its holdings and realize capital gains, causing a big tax bill for everyone left behind. That is very unusual and hopefully the attention/litigation on it b means it won’t happen again in quite that way.

That said, it will generally be like if you held a bond fund and stock fund in your account so you can expect to have some taxable distributions every year. You can usually look up how much they’ve had in the past if you want.

And if you change your mind it’s fine to sell and pick a different investment. For example you could invest in just a stock index fund and then use ibonds for your bond investments, although you’d miss out on automatic rebalancing.

[Anonymous]

PP above me is correct. There is a price to be paid for simplicity when it comes to investing. They are generally not very tax efficient, especially if you are in the 24% or above tax bracket. If you are in a high tax bracket, VTMFX is solid.When they have to rebalance, often you will get nailed with capital gains. It's usually not THAT big of a deal, but it is an issue. A better and equally simple option would be a LifeStrategy fund from Vanguard. Their allocations are fixed and there are many people using them in a brokerage account, so administrator are less likely to screw over taxable account holders.

[Anonymous]

Not only capital gains, but as the get more conservative, they get more bond heavy and you will be paying ordinary income rates on the bond interest.

[Anonymous]

The broader point is that you want to put the most tax efficient investments in your taxable brokerage account, and put the more tax inefficient investments in your 401k/IRAs. Because of their high turnover and bond income that others have mentioned, target retirement accounts are not designed to be tax efficient. Vanguard now states in the prospectus that these are intended to be placed in tax-advantaged accounts.

[Anonymous]

OP here: thank you everyone!

[Anonymous]

Does anyone know if there will be issues again like last year with Vanguard...realizing I never did anything about it...

[Anonymous]

Nobody knows if there will be issues like last year again. Given how much negative press they received I’m sure they will want to avoid it if possible.

[Anonymous]

Anonymous wrote:

Anonymous wrote:There was a post on here around tax time this year where the op got royally screwed by trades made in the targeted fund she held in a non tax-advantaged account. I personally would not do it.

Op here - I already put some money in it. Only now realizing there may be a tax issue. Can you sff eet bf me the link or explain what the tax issue is?

You should be able to look up your specific fund at this point and get an estimate of what the distribution will be for this year.

[Anonymous]

Anonymous wrote:PP above me is correct. There is a price to be paid for simplicity when it comes to investing. They are generally not very tax efficient, especially if you are in the 24% or above tax bracket. If you are in a high tax bracket, VTMFX is solid.When they have to rebalance, often you will get nailed with capital gains. It's usually not THAT big of a deal, but it is an issue. A better and equally simple option would be a LifeStrategy fund from Vanguard. Their allocations are fixed and there are many people using them in a brokerage account, so administrator are less likely to screw over taxable account holders.

This. The largest disadvantage with target date fund is when they rebalance as they get more conservative you will incur gains. You're probably better off with a fund that does change with time

[Anonymous]

Bonds don't belong in a taxable account for most investors, unless they are municipal. So TD funds do not belong in taxable accounts for the reasons cited of tax inefficiency from paying capital gains as the allocation changes and interest on taxable bonds. See if you can sell them when the market is down or you have very little in gains.