If Your a DIY Person…Know What You Don’t Know

Target Date Funds are great for their simplicity if they are in a tax-deferred account like an IRA, 403b, 401k, or 457 plan. However, these funds can create nasty tax surprises if you have them in a taxable account. They can distribute a large amount of capital gains that you will get stuck paying taxes on.

Many millionaires put their assets, unbeknownst to them, in a taxable target-date fund thinking it’s like the one in their 401K.

The Bogleheads at Vanguard were furious, One investor who calls himself “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??”

It happened because Vanguard does not advise you on how to manage your money, you need to DIY. If these investors put their money in a non-deductible traditional IRA they would not have any tax bills.

All those years of accumulating money and investing it without help was totally undone with one small costly mistake. As a teacher, I was the ultimate DIY guy, however, I religiously did my homework and put in many hours per week of reading which of course led me to get all my securities licenses. You must know what you don’t know in order to avoid costly mistakes.

https://www.wsj.com/articles/vanguard-target-retirement-tax-bill-surprise-11642781228?st=am12gov72gaud0r&reflink=desktopwebshare_permalink