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Investors Hit with Tax Bills, Vanguard to Pay $6 Million

July 8, 2022 By E.J. Smith - Your Survival Guy

By Gustavo Frazao @Shutterstock

I’m not a big fan of target date funds especially in non-retirement accounts where the allocation is adjusted automatically based on your years to retirement. The stock side tends to hug the S&P 500 and the bonds have longer maturities than I’m comfortable with. In addition, the timing of the selling may not be in line with your tax situation in any given year.

Last year institutional investors in Vanguard’s target date funds sold their positions when Vanguard offered them another set of funds to buy. That left retail investor holding the bag, stuck paying the tax bill on the realized gains. (In a mutual fund realized gains in the fund are mutually shared.) That’s another reason I’m not a huge fan of these funds especially in non-retirement accounts. Now the lawsuits are flying. We’ve seen this movie before. The WSJ reports:

Vanguard hadn’t explicitly warned investors that the funds could generate gigantic tax bills, the Journal reported. One investor told the Jour

nal that he incurred a roughly $150,000 surprise tax bill in 2021 on his holdings in Vanguard’s Target Retirement 2035 fund.

In January, following the Journal’s report, Massachusetts regulators launched an investigation into how Vanguard had marketed the funds. As part of the settlement, Vanguard will establish a $5.5 million restitution account for eligible Massachusetts investors, the state’s Securities Division said. Vanguard also will cover $750,000 in costs for the state.

In the agreement, Vanguard neither admitted nor denied wrongdoing.

Action Line: If you own target date funds in retirement accounts, hold your nose. If you own target date funds in non-retirement accounts beware you might be stuck with an unexpected tax bill. When you own your own dividend paying stocks you control the selling. If you need help crafting a mix of dividend payers let me know.

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E.J. Smith - Your Survival Guy
E.J. Smith - Your Survival Guy
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998.

E.J. has trained at Sig Sauer Academy in Epping, NH, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention.

E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris.

Please get in touch with E.J. at ejsmith@yoursurvivalguy.com

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