I think I can keep this simple. So simple it's incomprehensible to me what has happened.

$10k into a Vanguard target fund last summer (brokerage account, non-tax advantaged as those are maxed). It was flat at the end of the year, and down 5% currently. So as I approached taxes, I thought, "well, I won't owe anything on that". Wrong.

SOMEHOW, there is $1300 cap gains mixed in to that 0% growth. So I owe tax on that.

What did I do wrong here? Are target funds holding the wrong sort of securities for this sort of account? I think I'm going to sell it all out and spend it before it's all gone from losses and taxes. I truly though capital gains would at least require gains, if not the sale of those gains.

To keep it also simple.

Mutual funds themselves are not taxed on what they do. They pass the tax consequences of their trading onto the owners of the shares, by law.

So, when they sell at a profit, it generates gains - independently of what the price of the mutual fund shares are doing - and those gains get assigned to the owners of the shares.

A 'target fund' has trading built into it (changing mix from asset classes over time) but all mutual funds have this aspect to some extent.

Pretty sure your issue was discussed in this thread --> https://sigforum.com/eve/forum...0601935/m/2170067884

You did nothing wrong per se, but Vanguard however...

Class Action Lawsuit filed in U.S. District Court for the Eastern District of PA --> https://www.thinkadvisor.com/2...date-fund-tax-bills/

quote:

Originally posted by nhracecraft:
Pretty sure your issue was discussed in this thread --> https://sigforum.com/eve/forum...0601935/m/2170067884

Yep. This is exactly it.

It's not a good idea to hold target date funds in a non-tax-advantaged account in general, because the fund managers don't make any attempts to minimize capital gains tax consequences (since that's not a concern for the tax-advantaged accounts for which they're intended).

Then Vanguard screwed the pooch specifically here, so the capital gains burden was even larger last year, and anyone unlucky enough to be holding these funds in a taxable brokerage account got hit even harder than usual with capital gains taxes.

So yes, definitely get out of the target date funds in your standard brokerage account. Save those for your IRA/401k/etc., where capital gains don't matter.

Thanks RogueJSK! I'll move it to cash now.

If I may make a suggestion, since it sounds like you'll have ~$10k in cash sitting around...

Read up on my posts in this other thread about Series I Savings Bonds. Especially my initial post on Page 1, and my latest post from Wednesday on Page 4.

https://sigforum.com/eve/forum...935/m/1290019094/p/1

It's worth considering I Bonds as a $10k investment, at 8.37% composite APR currently, risk-free. (Provided you're willing to sock it away for at least 1 year and preferably 5.) You'll just want to monitor the inflation-pegged variable rate, and consider cashing out sometime in the coming years after inflation gets back under and control and the rate drops, then reinvest the money into something with a better return at that time.

Interesting! Thanks! Can I by only one per year, or can I buy one for me, one for my wife? Can you buy additional for kids?

I Bonds are purchased through www.TreasuryDirect.gov

You can buy up to $10,000 in I Bonds per person, per year. So that's $10k for you, $10k for your wife, and $10k per kid.

You can buy I Bonds for your children in their own name as a gift. A child can't have their own TreasuryDirect account and can't purchase bonds on their own, but you can create a linked account for each of your kids, tied to your own account, and use that to hold bonds you buy for them.

https://treasurydirect.gov/ind...howdoi.htm#openminor

You can also include a child as a co-owner on a savings bond where you're the primary holder.

Moving $10k from a target mutual fund to i-bonds is a drastic change in terms of implied purpose and expected returns.

I have no opinion on what you should actually do. But if the purpose of the mutual fund was to get growth, then one way to get the same intent without the negative side effects of capital gains and dividends from a mutual fund is to switch to a growth etf. The growth part says it won't be focused on dividends but capital gains growth. And the etf part says you don't get any capital gains until you actually sell the etf shares.

That's one of the reasons money has been moving from mutual funds to etfs besides the lower management fees.

Here's an excerpt from a Fidelity article: Benefits of ETFs

"ETFs have 2 major tax advantages compared to mutual funds. Due to structural differences, mutual funds typically incur more capital gains taxes than ETFs. Moreover, capital gains tax on an ETF is incurred only upon the sale of the ETF by the investor, whereas mutual funds pass on capital gains taxes to investors through the life of the investment. In short, ETFs have lower capital gains and they are payable only upon sales of the ETF."

^^^^^^^^^^^^
I think the intent is to move idle cash to I Bonds as a hedge against inflation. If your time horizon precludes longer term growth it makes good sense.

As unpleasant as paying capitol gains taxes may sound, look at all the aspects of this. You said it's share price is down but did they pay any sort of dividend in extra shares, or a check that caused the 1099?
Putting you money into a lower yielding investment in these highly inflationary times may not result in a tax bill today but its loss of the value of your money from inflation may be worse.

Once one goes beyond the 401k type savings, IRAs & such, you can do ‘tax managed’ funds, Vanguard, wherever. That’s if they’re held outside the tax deferred umbrella.

The idea is to keep any trades inside the fund with fewer gain consequences to fund holders.

The way funds normally ‘churn’, one can get a tax bill even without gains, in a taxable fund.

quote:

Originally posted by ZSMICHAEL:
^^^^^^^^^^^^
I think the intent is to move idle cash to I Bonds as a hedge against inflation.

Correct. That was suggested as an alternative to r0gue's stated plan of just holding the $10k in cash.

At least with I Bonds, your $10k will keep up with inflation, rather than sitting on $10k in rapidly devaluing cash. And at 8+%, it's easily the highest return 100% safe investment option currently, compared to the risk of market investments that aren't really doing any better currently, or the paltry 0.1% to 1% return on other no-risk options like CDs and interest-bearing bank accounts.

Rey HRH is correct that I Bonds are not a replacement for long term growth investments, for purposes like planning for retirement decades down the road. But it sounds like r0gue already has that covered (at least partly/mostly), since he mentioned in his OP that he only stuck this extra $10k in a brokerage account because he's already maxed out his retirement accounts.

If your fund was flat and you had $1,300.00 Capital gains, you also had Capital losses. Find out what they are and you may end up in a wash.

quote:

Originally posted by Flash-LB:
If your fund was flat and you had $1,300.00 Capital gains, you also had Capital losses. Find out what they are and you may end up in a wash.

Can you get capital losses without selling?

You don't have as much control over the timing of capital-gains tax bills. Besides the gains you realize by deciding to sell fund shares, you may have taxable gains imposed upon you by the manager's trading and subsequent distributions. Note, though: Taxes you pay now on gains distributions can reduce the tax you'll owe down the road when you sell your position in a fund.

Although mutual funds are not permitted to pass along their net capital losses to shareholders, they can carry the losses forward on their books, just as individual investors can for regular investments.

In fact, a new law updates the tax-loss carry-forward rules for mutual funds so that they now more closely resemble the rules for individuals. In the past, funds could only carry forward capital losses for a maximum of eight years.

Now funds will have unlimited use of their capital-loss carry-forwards, just as individuals do. Specifically, net capital losses incurred in fund tax years that begin after Dec. 22, 2010, can be carried forward indefinitely. Older losses will expire according to their original schedules, but the new losses must be used before the older losses can be tapped.

Q. How might I benefit from a fund's tax-loss carry-forwards?

A. A mutual fund's tax-loss carry-forwards, along with any unrealized losses on securities it still holds, act like built-in tax shelters. Funds with a large amount of embedded capital losses—both realized and unrealized—can potentially minimize their taxable distributions for years to come. That means more of your investment in the fund can continue to compound tax-deferred.

This is a boon for investors holding funds in taxable accounts, especially since today's historically low capital-gains rates aren't likely to last forever, and investors everywhere are scaling back expectations for the market's long-term performance.

In this environment, investors need to be especially "vigilant" about their after-tax returns, says Stephen Fusi, an investment adviser at New Wealth Advisors, a registered investment-advisory firm in Tewksbury, Mass.


ABOVE AS PER WSJ 2011.

quote:

Originally posted by r0gue:
Can you get capital losses without selling?

No, but if you watch your accounts, you can sell the losing stocks and take a Capital Loss. I've done it and used it to offset Capital Gains.

^^^ Whats the most capital loss you can claim in a given year?

Capital loss in excess of gains limitation is $3000

Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income. If you use married filing separate filing status, however, the annual net capital loss deduction limit is only 1000 dollars