Home/Business/A huge tax bill that came out of nowhere in Vanguard Business A huge tax bill that came out of nowhere in Vanguard johnpaul8 hours ago It’s easy for a small investor to make a big mistake. It would be even easier for big investment companies to help prevent them — but sadly, the asset management industry seems to have other priorities. See what happened to some investors in Vanguard’s Target Retirement Fund last month. They were overwhelmed by the huge distribution of capital gains. These payments caused a painful tax bill that could have been easily avoided if Vanguard simply warned against holding these funds outside the tax-favorable severance pay account. Like many investment companies, Vanguard offers target date funds. Bundles of stocks, bonds and cash automatically become conservative as investors approach their retirement date. These funds are tuned for investors in 401 (k) or other retirement plans with deferred taxes. Therefore, target funds are not managed to minimize dividends and capital gains. Keep them in a taxable account instead of a severance pay system. That way, you will pay far more taxes than any other type of fund. Intelligent Investor Jason Zweig writes about investment strategies and how to think about money. This demonstrates the importance of what financial advisers call an “asset location,” that is, the importance of choosing whether to put a particular investment in a taxable or non-taxable account. Most of Vanguard’s Target Fund funds come from corporate and individual severance pay schemes where the fund’s profits and income are not currently taxed. However, some investors put non-retirement money into target funds, and in December they got a nasty surprise. For example, Vanguard’s Target Retirement 2035 and Target Retirement 2040 funds have distributed approximately 15% of their total assets as capital gains. This is taxed on non-retirement accounts. Fury erupted on Bogleheads.org, a website popular among Vanguard investors. One investor posted there: I think it’s frustrating that Vanguard has led me on this path. “ In another online forum, Reddit’s Bogleheads area, an investor who posted as “Sitting-Hawk” said he received a distribution of approximately $ 550,000 from Vanguard’s Target Retirement 2035 fund. Therefore, he owes 23.8% federal tax and 4.95% Illinois tax. All are over $ 150,000. “How” he asked in capital letters, “Did Vanguard make this happen ??” Share your thoughts How did you get burned by the unexpected tax surprises in your investment portfolio? Join the conversation below. Asked not to reveal his real name, Sittinghawk says he invested about $ 1.9 million in taxable account funds in 2015 after maximizing contributions to the tax deferral fund. He added more savings. By last year, he had about $ 3.6 million in taxable funds in the fund. “I didn’t want to be that guy who is constantly trading,” he says. “I just wanted to set it up and forget about it, rather than tinkering with it every few days.” “It’s a shame that this had to happen,” he says. It happened because a big client left a bag for a small client. Vanguard Target Funds are offered in multiple formats. Smaller clients get the standard version. Larger customers, such as corporate retirement plans, can get an institutional version of the same holding at a lower price. At the end of 2020, Vanguard reduced the organization’s minimum investment in the Target Retirement fund from $ 100 million to $ 5 million. It caused a crowd of elephants as the retirement plans of millions of dollars moved from standard target funding to institutional equivalents. (The client must sell out one format and buy the other.) Last year, Vanguard’s 2035 target fund’s assets shrank from $ 46 billion at the end of 2020 to $ 38 billion. The fund in 2040 shrank from $ 36 billion to $ 29 billion. When big customers left, their sales caused funds to offload some holdings and caused capital gains-it could only be distributed to a declining group of stranded investors. rice field. Some have made the mistake of owning these funds in a taxable account. Vanguard said nothing about how he infuriated individual investors who had taxable money on these funds. “ These funds are best provided in a tax deferred account,” said spokeswoman Carolyn Wegeman, as the target retirement approach seeks to reduce risk over the long term by automatically trimming equity positions. Said. However, nowhere on Vanguard.com’s fund’s main page tells investors that the fund is not ideal for taxable accounts. The prospectus summary is a document that almost no one has read, and on page 10 of the 14 pages, “Distributions may be taxed as recurring profit or capital gains.” Vanguard is not alone. Few major asset managers clearly and simply state which fund should be held in a taxable account. Eric Johnson, a marketing professor at Columbia Business School and author of The Elements of Choice, says it’s a shame. When an investor in a taxable account tries to buy a fund that may not belong to it, a dialog box similar to the following may appear: Click here for more information before trading. It links to a better choice. Related ideas are working well for online investment adviser Betterment, said Dan Egan, head of behavioral science at the company. When clients tried to sell an investment that could cause taxes, some clients saw a pop-up prompting them to confirm their estimated tax obligations. Others didn’t. People who see the popup are 15% less likely to enter a sell order. Such small interventions can make a big difference to small investors. They were the people that Vanguard’s late founder John Bogle had defended for decades. In this situation, Vanguard made them fail.
Good read. I used to be Registered Ser. 7. I got registered when I was 30. Years ago. My impression is that most people who manage these funds couldn't care less about the investors. They just care about annual returns, fees, etc. This cap gains and taxable divs problem are just footnotes in a complex legal document. If you want to avoid these problems, probably have to do it yourself.
Yeah, I remember the book "Money" by Tony Robbins years back and he spent quite a bit of time in that book roasting financial advisors because of the attitude you're referring to, mainly that financial advisors are way more concerned about the fees they are earning from the sales of certain investments than they are about the investor's best interest.
I will never forget calling Fidelity after stocks close to liquidate an options position. The registered feller argued with me that 'the markets are closed', etc. I even tried to imagine how that suit and tie moron looked like. He didn't 'remember' that the options had another 15 minutes to go, his super told me afterwards. My guess is that firms like that don't employ ppl off the street, he must have been somebody's nephew. That was in the 1990s.