Keep those target-date funds inside your tax deferred retirement accounts

Keep those target-date funds inside your tax deferred retirement accounts

Some investors with Vanguard were hit with some gigantic tax bills because they didn’t have their targe-date funds sheltered inside an IRA or 401(k). That sucks!

Most of the money in Vanguard’s target funds comes from corporate and individual retirement plans, where funds’ gains and income aren’t currently taxable. However, some investors do put nonretirement money into target funds, and in December they got a nasty surprise.

Vanguard’s Target Retirement 2035 and Target Retirement 2040 funds, for example, distributed approximately 15% of their total assets as capital gains—which are taxable outside of retirement accounts.

Fury erupted on Bogleheads.org, a website popular among Vanguard investors.

One investor posted there: “I think I’m screwed by Vanguard resulting in an enormous tax bill…. I feel that Vanguard guided me down this path which is frustrating.”

In the Bogleheads area on Reddit, another online forum, an investor posting as “Sitting-Hawk” said he received about $550,000 in distributions in Vanguard’s Target Retirement 2035 fund. So he owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000. “HOW,” he asked in capital letters, “COULD VANGUARD LET THIS HAPPEN??”

The Huge Tax Bills That Came Out of Nowhere At Vanguard – WSJ

Image by Nattanan Kanchanaprat from Pixabay