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Discuss Latest WCI Blog Post: 4 Lessons to Learn from the Vanguard Target Retirement LTCG Distribution Disaster

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  • Discuss Latest WCI Blog Post: 4 Lessons to Learn from the Vanguard Target Retirement LTCG Distribution Disaster

    If you have Vanguard Target Retirement Funds in your taxable accounts, you might be in for a big surprise at tax time. Here's why.

    The post 4 Lessons to Learn from the Vanguard Target Retirement LTCG Distribution Disaster appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.



    Click here to view the article!
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    Very good explanation and advice on use of target date funds. While it seems investors should already know the information in this article, it is clear many do not. Even the fund prospectus is weak on the underlying issue, merely noting that there are tax consequences unless in tax deferred accounts.

    While I don’t truly fault Vanguard in this transactional decision (Disclaimer: my 403b/401a/457 retirement funds have benefited from the move.), I do think they can and should do much more to discourage or even not allow investment in these funds outside tax free and tax deferred spaces.

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    • #3
      I have some legacy American Funds that do this also. Unexpected capital gains 12/24 every year. My mission is to gradually versus rip the band-aid off sell them. I have always thought that these gains should not be taxed unless you sell the fund.

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      • #4
        Originally posted by Hatton View Post
        I have some legacy American Funds that do this also. Unexpected capital gains 12/24 every year. My mission is to gradually versus rip the band-aid off sell them. I have always thought that these gains should not be taxed unless you sell the fund.
        I really wish the law was written that way. This is another reason why "direct indexing" is gaining popularity--the mutual fund investors are discriminated against by the bad law.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • #5
          Excellent article. I don't have any target date funds, but my standard advice for DIY newbies is to use them. Good to know the caveat of use them in pre-tax.

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          • #6
            Originally posted by The White Coat Investor View Post

            I really wish the law was written that way. This is another reason why "direct indexing" is gaining popularity--the mutual fund investors are discriminated against by the bad law.
            Counterpoint for some is that this is wealthy shareholders pay their fair share. Yes, the goal is wealth redistribution. Why change something, it’s only “fair”. Not just the 1%. O tax break harvesting, substantially the same or not.

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            • #7
              Originally posted by Tim View Post

              Counterpoint for some is that this is wealthy shareholders pay their fair share. Yes, the goal is wealth redistribution. Why change something, it’s only “fair”. Not just the 1%. O tax break harvesting, substantially the same or not.
              No, it simply hurts mutual fund investors over stock investors. People are being punished for diversifying. Funds must pass through gains (whether the investors sells or not) but cannot pass through losses. That's not the case for individual securities. If you don't sell, you don't pay capital gains.
              Helping those who wear the white coat get a fair shake on Wall Street since 2011

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              • #8
                Originally posted by The White Coat Investor View Post

                No, it simply hurts mutual fund investors over stock investors. People are being punished for diversifying. Funds must pass through gains (whether the investors sells or not) but cannot pass through losses. That's not the case for individual securities. If you don't sell, you don't pay capital gains.
                Thems the rules on the front end. And some feel that unrealized gains should be taxed and loss carry forwards eliminated. Yes, mutual funds have different rules. So do MLP’s, so do REIT’s. I do believe that gains and losses in. MF are netted for distribution purposes. I could be wrong. A security type has its on set of tax rules. That is not what I call discrimination. Different, yes. Same with account types. That is simply the rules.

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                • #9
                  Finally sold my wife’s TDF in her brokerage account. Had been putting it off for years but I’ve harvested plenty of losses from Covid. Time to use them to offset the gains.

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                  • #10
                    Originally posted by Tim View Post
                    Thems the rules on the front end. And some feel that unrealized gains should be taxed and loss carry forwards eliminated. Yes, mutual funds have different rules. So do MLP’s, so do REIT’s. I do believe that gains and losses in. MF are netted for distribution purposes. I could be wrong. A security type has its on set of tax rules. That is not what I call discrimination. Different, yes. Same with account types. That is simply the rules.
                    I'm not arguing it's some sort of illegal discrimination. I'm saying the laws are poorly written. Mutual funds should be able to pass losses through to the investors just like they have to pass gains through. You shouldn't be hurt for using a mutual fund.
                    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                    • #11
                      Originally posted by The White Coat Investor View Post

                      I'm not arguing it's some sort of illegal discrimination. I'm saying the laws are poorly written. Mutual funds should be able to pass losses through to the investors just like they have to pass gains through. You shouldn't be hurt for using a mutual fund.
                      The original argument was MF vs stock holder I believe. I do think the MF share price reflects the loss in NAV. So, you can recognize the loss, sell it. Same as a stock.
                      Could be MF vs ETF vs stock ownership Sell any one of them and you get a loss. Why should MF’s pass through losses? They didn’t take cash (yet).. 1099’s are cash a shareholder received.
                      Last edited by Tim; 02-09-2022, 01:29 AM.

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                      • #12
                        Thanks for the article! Great stuff!

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                        • #13
                          Of course the upsides of using TDFs in tax-deferred accounts are the ease of use (no rebalancing to deal with) and elimination of wash sale issues if tax loss harvesting with pure index funds in taxable accounts. While they may not be perfect, probably the best option for the typical saver in an employer sponsored retirement plan.

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                          • #14
                            I thought points 2-4 were the best. I’ve never thought about using TDFs in taxable, but now I won’t tell anyone to buy the Fidelity zero funds in taxable.

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                            • #15
                              So just the clarify - if you held this fund in a taxable account, was your basis at least reduced so that you'd have lower taxes in the future? (obviously not because people potentially are owing higher capital gains taxes then they've actually made... I just don't understand it).

                              I don't understand why the capital gains taxes that the fund owed were not fully covered by the large institutional investors who pulled their money out of the fund? Didn't they have to pay taxes on their capital gains? And the fund should only have to sell and equal number of shares as the institutional investors pulled out -- so the taxes owed by the fund should be equal to the taxes owed by the institutional investors, right? Obviously, I'm not correct, but why?

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