Target date funds should not be held outside 401K or I.R.A

Today in NYTimes tax section

This tax problem hasn’t arisen for people who hold these so-called target date funds in tax-sheltered accounts — workplace retirement accounts like 401(k)s, or I.R.A.s. But for investors holding target date funds in ordinary, taxable accounts, it’s a different story.

One man in California who sent me copies of his Vanguard account data on the condition that he not be identified has an unexpected tax bill of more than $70,000 this tax season.

The simple answer is that a series of seemingly routine actions taken by Vanguard that lowered costs for the majority of shareholders who own these funds in retirement accounts resulted in unexpected bills for everyone else.

Vanguard, which has in the past been happy to discuss the merits of its target date funds, declined to comment about them for this column.

Morningstar, the investment research company, estimates that more than 99 percent of people who own target date retirement funds do so in tax-sheltered accounts, where the funds can compound without taxes for decades.