SMH - huge surprise capital gains in taxable

[RetMD21]

Many of the posters here are looking to avoid capital gains in taxable accounts.

On the other hand, DH and I are still within the space where LT capital gains and qualified dividends are taxed at 0%. I'd like to take advantage of that while we can. Right now the investment in the taxable account is $30,000 in VASGX, a balanced 80/20 fund. For 2021 the total distributions (June and Dec) were $1,124 and we are paying 12% tax on only $253 of that, the balance of $871 is taxed at 0%.

Is this the type of fund that's best for taking advantage of the 0% space? Not selling any of this, we've held it for less than one year, but we could add more and invest in something else. Point me in the right direction, please.

Well it seems to be working for you so it is hard to criticize

 

[PoF]

Like you, I try very hard to optimize my taxes. In general I think I do a pretty good job, but occasionally I make mistakes. Because of my personality, this is a hard pill to swallow.

In the grand scheme of things, given the amount of money you're talking about, 23.8% is actually probably a pretty good rate to have paid. I doubt you'll pay much less than that on average when you hit your RMD ages. And if you were going to sell it to spend on something anyway, it's not that big of a deal really given that the cash would have made nothing and the investments could have moved against you between when you did sell and when you would have sold.

The only scenario where it seems like a moderate error is where you would have and could have held that $500K in that taxable investment until death and then your heirs would have avoided the 23.8% via basis step up (assuming that's still around then). But then in that case, you've lived (presumably well) off other money, and your heirs are probably still getting a moderate to large inheritance.

You're still probably doing far better than most and making far fewer mistakes than most. I'm pretty sure I am.

There's also the scenario in which taxable lots with a low cost basis are donated. We donate directly from our brokerage account to a Vanguard Charitable DAF, and nobody pays any capital gains on those lots.

 

[SecondCor521]

There's also the scenario in which taxable lots with a low cost basis are donated. We donate directly from our brokerage account to a Vanguard Charitable DAF, and nobody pays any capital gains on those lots.

Right, good point. That's an excellent tax saving method.

 

[Gumby]

File this under misery loves company.

Interesting article in today's WSJ about how Vanguard distributed some huge capital gains in their Target Date funds. It seems that if the TD funds were not in a tax sheltered account, well.... you can guess what happened. Check Jason Zwieg's column of 1/21/2022.

https://www.wsj.com/articles/vanguard-target-retirement-tax-bill-surprise-11642781228

Following up on this. It appears that a class action lawsuit has been filed against Vanguard regarding this change. https://www.barrons.com/advisor/art...ement-funds-lawsuit-51647366034?siteid=yhoof2

Three investors are suing Vanguard Group for alleged negligence and breach of fiduciary duty, saying that changes the company made to target date retirement funds resulted in “massive tax bills” for individual investors.

 

[ERD50]

Following up on this. It appears that a class action lawsuit has been filed against Vanguard regarding this change. https://www.barrons.com/advisor/art...ement-funds-lawsuit-51647366034?siteid=yhoof2

I agree with the lawsuit, it really was negligence on Vanguard's part, IMO.

But what would a remedy be? It's different for everyone, you'd need to figure your taxes with and without the excess gain (and what would the 'normal' cap gains be?).

I suppose a 15% across the board rebate could be justified. But IIRC, Vanguard fund holders are effectively the 'owners', so it's their own money they'd be getting back, though spread across all investors. So either way, Vanguard is hurt by this.

-ERD50

 

[RunningBum]

I agree with the lawsuit, it really was negligence on Vanguard's part, IMO.

But what would a remedy be? It's different for everyone, you'd need to figure your taxes with and without the excess gain (and what would the 'normal' cap gains be?).

I suppose a 15% across the board rebate could be justified. But IIRC, Vanguard fund holders are effectively the 'owners', so it's their own money they'd be getting back, though spread across all investors. So either way, Vanguard is hurt by this.

Agree. The remedy is hard for a number of reasons.

It only applies to those who hold the fund in taxable accounts, but it hits those people differently. Some pay 0% of CGs, while others pay 20% + 3.8% NIIT.

If you were going to sell the fund eventually anyway, it's not really right to give them the taxed money back, since you now have much less in unrealized capital gains. But some may planned to give shares to people who are in the 0% CG range, or donate them to charity, or hold onto them til death so their heirs get stepped up basis (assuming that's still around when they die). I've done the first two already, and plan to leave a lot for stepped up basis if I never need it, so this isn't far fetched.

 

[Gumby]

The issues you raise go to the commonality of the claims and could preclude class certification.

Federal Rule of Civil Procedure 23

a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

 

[SecondCor521]

I understand why the investors are pissed off.

But I for one think that Vanguard has no fiduciary responsibility to me (or anyone else) with respect to the tax consequences to me of their actions, especially when the funds in question are specifically not tax-managed funds.

Their job, IMHO, is to invest the money according to the mutual fund prospectus, invest any new money, process redemptions, and provide accurate and on time tax informational documents such as 1099s.

Vanguard is an investment company. They're not a tax advisory or accountancy firm, and they don't and won't give tax advice.

I'm sure somewhere in the paperwork we all sign we acknowledge that we're responsible for our own tax situations and Vanguard isn't.

I'm not even sure I buy the central argument of the suit (at least per the article) - Vanguard may have had better options, but if the option they chose was reasonable, I think they can't be found negligent.

I predict the suit fails. (But then again, I also was doubtful of the James Webb telescope, and that worked out just fine.)

 

[ERD50]

Agree. The remedy is hard for a number of reasons.

It only applies to those who hold the fund in taxable accounts, but it hits those people differently. Some pay 0% of CGs, while others pay 20% + 3.8% NIIT.

If you were going to sell the fund eventually anyway, it's not really right to give them the taxed money back, since you now have much less in unrealized capital gains. But some may planned to give shares to people who are in the 0% CG range, or donate them to charity, or hold onto them til death so their heirs get stepped up basis (assuming that's still around when they die). I've done the first two already, and plan to leave a lot for stepped up basis if I never need it, so this isn't far fetched.

Those are big points. Especially being in an IRA, where it really doesn't matter.

The issues you raise go to the commonality of the claims and could preclude class certification.

That makes sense, the "class" ought to have the common issues. Maybe they need to break out only those invested in taxable accounts (more similar, but still variables involved).

I understand why the investors are pissed off.

But I for one think that Vanguard has no fiduciary responsibility to me (or anyone else) with respect to the tax consequences to me of their actions, especially when the funds in question are specifically not tax-managed funds.

Their job, IMHO, is to invest the money according to the mutual fund prospectus, invest any new money, process redemptions, and provide accurate and on time tax informational documents such as 1099s.

Vanguard is an investment company. They're not a tax advisory or accountancy firm, and they don't and won't give tax advice.

I'm sure somewhere in the paperwork we all sign we acknowledge that we're responsible for our own tax situations and Vanguard isn't.

I'm not even sure I buy the central argument of the suit (at least per the article) - Vanguard may have had better options, but if the option they chose was reasonable, I think they can't be found negligent.

I predict the suit fails. (But then again, I also was doubtful of the James Webb telescope, and that worked out just fine.)

I get your point, but I can't be that lenient. Legally they may be in the clear, but they did not "do right" by the customers, and it certainly looks to have been foreseeable and avoidable. So they should have taken steps to prevent it.

-ERD50

 

[pb4uski]

Agree. The remedy is hard for a number of reasons.

It only applies to those who hold the fund in taxable accounts, but it hits those people differently. Some pay 0% of CGs, while others pay 20% + 3.8% NIIT. ...

DS has investments in one of the Vanguard target retirement funds... some in taxable and some in a tIRA. When I did his tax return this year I thought it odd that the fund had a huge capital gain distribution... in his case the 2021 capital gain distribution was 382% of the ordinary dividends for the 2021. Since his CG distributions are subject to 0% tax, I just shrugged.

 

[jazz4cash]

I’m in favor of the class action even though I don’t expect there will be any compensation for shareholders in taxable accounts. I hope the lawsuit is so uncomfortable for Vanguard they will never make such a radical change to how a fund is managed without better warning to shareholders. It has certainly been uncomfortable for those shareholders. So many better options that VG could’ve met their objective. Their current tagline about “Invest Like You Own the Place” sounds really insincere in light of this. I hope VG gets back on course since they still set the bar in many ways for individuals.

 

[FLSUnFIRE]

Slippery slope -there was no fraud or deception just an unfortunate circumstance and I think the publicity black-eye Vanguard got will reduce the odds of this particular circumstance occurring again. The funds were not marketed as tax-efficient which might give some validity to a lawsuit IMO. Should I sue if my fund distributes more than what I was expecting for whatever reason and I have a tax liability? There is no way for any fund to manage taxes to optimize for everyone.



I've been surprised a few times but that's part of delegating some of my investment tasks to a fund -even then, I could get a surprise dividend or gain/loss if I managed a portfolio of individual stocks. I agree it sucks but sometimes life does; I reserve my anger wrt taxes to the taxing authority that is taking my money.

 

[RetMD21]

Crybabies, when I had actively managed funds such distributions were not unusual

 

[ERD50]

Crybabies, when I had actively managed funds such distributions were not unusual

But people expect (and expectations have historically been met) that a target fund like this is mostly passive.

The large cap gains that were experienced were not due to the underlying fund investments (that should be expected), it was due to the way Vanguard moved money between funds when they created the lower fee version. That was not expected by the fund holders and should not have happened as it did.

-ERD50

 

[ERD50]

I’m in favor of the class action even though I don’t expect there will be any compensation for shareholders in taxable accounts. I hope the lawsuit is so uncomfortable for Vanguard they will never make such a radical change to how a fund is managed without better warning to shareholders. It has certainly been uncomfortable for those shareholders. So many better options that VG could’ve met their objective. Their current tagline about “Invest Like You Own the Place” sounds really insincere in light of this. I hope VG gets back on course since they still set the bar in many ways for individuals.

I suspect the above is about the best we can expect. Cold Comfort.

DS has investments in one of the Vanguard target retirement funds... some in taxable and some in a tIRA. When I did his tax return this year I thought it odd that the fund had a huge capital gain distribution... in his case the 2021 capital gain distribution was 382% of the ordinary dividends for the 2021. Since his CG distributions are subject to 0% tax, I just shrugged.

DD has a good income and a good sized stake in this fund, and this was 100% taxable to her. I can't do much other than shrug, but not because it didn't hurt.

-ERD50

 

[RetMD21]

But people expect (and expectations have historically been met) that a target fund like this is mostly passive.

The large cap gains that were experienced were not due to the underlying fund investments (that should be expected), it was due to the way Vanguard moved money between funds when they created the lower fee version. That was not expected by the fund holders and should not have happened as it did.

-ERD50

Did Vanguard move the funds? I thought the entities newly eligible for the lower cost shares jumped out. In funds you are always at risk of CG distributions from redemptions from other investors. These funds are not likely to be very tax efficient since the glidepath includes a plan to sell equities as the target approaches.

 

[SecondCor521]

Did Vanguard move the funds? I thought the entities newly eligible for the lower cost shares jumped out. In funds you are always at risk of CG distributions from redemptions from other investors. These funds are not likely to be very tax efficient since the glidepath includes a plan to sell equities as the target approaches.

From the article linked earlier, no.

Vanguard changed some things, and as a result a number of investors sold some Vanguard funds and bought others. This caused CGs to be realized in the funds.

The argument is that Vanguard (a) could have realized this ahead of time and (b) done something differently and (c) had an obligation to do so. I see each of those three assertions as varying degrees of wobbly, so the whole argument seems weak to me.

But there's a lot of money involved, so it's not surprising that a lawsuit was started.

I do think Vanguard has an obligation to try to do well in serving their customers, and I think they made a mistake for which they will rightfully suffer damage to their reputation and lose customers over it. And perhaps the Vanguard folks who made the bad decision should experience some career setbacks as a result. I just doubt their errors rise to whatever legal standards apply here for negligence.

 

[RunningBum]

These funds are not likely to be very tax efficient since the glidepath includes a plan to sell equities as the target approaches.

That's a good point. No need to call them crybabies though.

 

[SeanPizzle]

I exercised some stock options last year and accidentally clicked on the option to receive the shares as cash (immediate exercise and sale). So I got hit with STCG on about 50K in gains. I call it my stupid tax.