One Small Investor on Tax Effect of Vanguard Fund Changes: ‘I Think I’m Screwed’

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bag of cash
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Vanguard's changes to a retirement fund had significant tax consequences for smaller investors.

Owing to a change that Vanguard made to its institutional Target Retirement funds, many of its smaller investors got unexpectedly saddled with huge tax bills, writes Jason Zweig for The Wall Street Journal.

Vanguard offers target-date funds: bundles of stocks, bonds, and cash that become more conservative as investors near retirement. These funds are specifically tailored for investors in a 401(k) or other retirement plans with deferred taxes.

They are not managed to minimize dividends or capital gains, and if they are held in a taxable account instead of a retirement plan, investors will owe taxes on the payouts.

When Vanguard reduced the minimum investment in its institutional Target Retirement funds from $100 million to $5 million at the end of 2020, the move set off a stampede, as multimillion-dollar corporate retirement plans were transferred out of the standard target funds and into their institutional equivalents. At the same time, Vanguard did not tell investors that these funds are not ideal for taxable accounts.

As a result, many small investors are voicing their anger online because they have lost significant funds to taxes.

“I think I’m screwed by Vanguard, resulting in an enormous tax bill,” wrote one investor.

Read more about Vanguard in The Wall Street Journal.

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