Target date funds and tax strategies

[oscalulo]

I'm having a hard time understanding the results of my googling so figured I'd ask you all here:

I see a lot about tax strategies to maximize returns, in particular tax loss harvesting.

We currently have everything (401ks and IRAs) in target date funds (TSP and Vanguard so all pretty low cost funds). We even have our 529s in target date funds. I really like the simplicity of them. That said, am I losing out a lot on taxes by not being able to take advantage of tax loss harvesting and whatever tax strategies I would be able to take advantage of if we used a robo advisor?

We're in the 24% tax bracket if that makes a difference.

Thanks!

 

[GrayHare]

A general answer is the mutual funds are doing the tax loss havesting for you which reduces the capital gains they pay out to you. Full tax loss havesting benefits can be realized only by owning and managing individual stocks instead of funds.

 

[Al18]

You pay taxes on all withdrawals from an IRA and 401K according to your tax bracket.

Capital Gains and tax loss harvesting can only be done with holdings in an after tax/brokerage account.

 

[RunningBum]

If you're a long term buy and hold investor, most likely you wouldn't have losses, so I wouldn't worry about it. I'm still carrying over some losses, mostly from the days when I was a stock picker.

Oh yeah, as Al18 says, there's no tax loss harvesting that can be done inside IRAs and 401Ks. So definitely don't worry about it.

 

[GrayHare]

I missed your mention of it all being in retirement accounts and 529s. Al18 is right, there's no ability to cancel gains with losses for tax purposes in such accounts.

 

[oscalulo]

Got it thanks so much! For a brokerage account though, would a target date fund not be recommended? We're building our savings back up after wiping them out for a renovation and expect to be investing in a brokerage account very soon.

 

[oscalulo]

A general answer is the mutual funds are doing the tax loss havesting for you which reduces the capital gains they pay out to you. Full tax loss havesting benefits can be realized only by owning and managing individual stocks instead of funds.

I've thought this too but have also seen robo advisor advertisements talking about selling a mutual fund and buying a similar one to take advantage of tax loss harvesting. Is that just misleading marketing?

 

[GrayHare]

I've thought this too but have also seen robo advisor advertisements talking about selling a mutual fund and buying a similar one to take advantage of tax loss harvesting. Is that just misleading marketing?

It's possible but uncommon for long-term holdings. Because the market generally goes up over time (thanks in part to inflation), few stock mutual funds have share prices lower than what you paid, thus there's little loss to harvest.

 

[oscalulo]

It's possible but uncommon for long-term holdings. Because the market generally goes up over time (thanks in part to inflation), few stock mutual funds have share prices lower than what you paid, thus there's little loss to harvest.

That makes a lot of sense, thanks for that context. We do anticipate any funds we start putting back into a brokerage to be relatively long term holdings so at that point, is there any downside to putting brokerage funds in a target date fund? It seems like for a negligibly higher fee, target date funds remove the work of rebalancing and would be a good choice even for a brokerage account. Am I missing anything? Thanks!

 

[mrfeh]

A general answer is the mutual funds are doing the tax loss havesting for you which reduces the capital gains they pay out to you. Full tax loss havesting benefits can be realized only by owning and managing individual stocks instead of funds.

Not true. Many people, including myself, did plenty of TLH the last 4 years while holding mutual funds.

OP - target date funds are great for simplicity, but not great for tax efficiency. I suggest you read this: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[oscalulo]

Not true. Many people, including myself, did plenty of TLH the last 4 years while holding mutual funds.

OP - target date funds are great for simplicity, but not great for tax efficiency. I suggest you read this: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Thanks. Do you do this yourself or have a robo advisor do it for you? Are the savings worth the extra you would pay for a robo advisor? I don't have the bandwidth to do it myself.

 

[mrfeh]

Thanks. Do you do this yourself or have a robo advisor do it for you? Are the savings worth the extra you would pay for a robo advisor? I don't have the bandwidth to do it myself.

I manage my portfolio myself.

Everybody has the bandwidth to do this themselves; it isn't difficult or time consuming. I strongly encourage you to spend a couple hours to learn the basics of DIY investing. It will save you a small fortune over your lifetime.

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit