Investing with the big money management firms might not always work out for individual investors. Read below the experience of one investor who faced a massive surprise tax bill after investing with Vanguard. Jason Zweig reports:
One investor posted there: “I think I’m screwed by Vanguard resulting in an enormous tax bill…. I feel that Vanguard guided me down this path which is frustrating.”
In the Bogleheads area on Reddit, another online forum, an investor posting as “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??”
“Sitting-Hawk,” who asked me not to disclose his real name, says he put about $1.9 million into the fund in a taxable account in 2015 after he maxed out contributions to his tax-deferred funds. He added more savings; by last year, he had about $3.6 million in taxable money in the fund.
“I didn’t want to be that guy who’s constantly trading,” he says. “I just wanted to set it and forget it and have some peace of mind instead of messing around with it every couple of days.”
“It sucks that this had to happen,” he says.
It happened because big clients left little ones holding the bag. Vanguard’s target funds come in more than one format. Smaller clients get the standard version; big customers like corporate retirement plans get an institutional version with identical holdings at a lower fee.
Action Line: Be careful investing with the big dogs. Isn’t it time you cut the cord and own individual positions not the groupthink mutual funds?
E.J. Smith - Your Survival Guy
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