Is there any specific advantage to investing in these targeted ETFs like the "Fidelity Freedom 2035" or Vanguard 2035 ETfs over a general S&P index ETF?

Are these meant to become slightly more risk adverse as they approach the target year?

Exactly. They automatically get more conservative as they approach the target date. Great for people who dont want to look at their portfolio

There is a difference in asset allocation by year, so look closely at the various companies. Look up "target date glide path" for more info/education.

Vanguard, T Rowe Price, American Funds, JP Morgan, etc all have their own versions.

RockOn said:

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About halfway down this page shows the glide path for the Vanguard funds.

https://institutional.vanguard.com/investment/solutions/target-date-funds

They are perfectly fine for a completely hands off approach, however they are only appropriate for retirement accounts. The likelihood of capital gain distributions makes them not suitable for taxable accounts.

You can also easily replicate these funds yourself and save a little bit in expense ratio with VTI, VXUS, BND, BNDX, and VTIP

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Great point. This burned a lot of people last year.

Here. Killed me on taxes last year

Because you withdrew the gains from your brokerage account?

I keep these target mutual funds in a trad IRA and Roth IRA

So if you had a personal brokerage account (non-retirement), you wouldn't invest it in VTI either due to the dividends distributions?

I got a 1099-DIV last year from mine, but it wasn't a big deal because I don't have much in that account, but I could see it being an issue if maybe I had 100s of thousands of dollars in the account.

When mutual funds buy and sell their underlying assets they pass those taxes on to you. Since most people hold them in IRAs or 401k they don't have to worry about that, if you hold them in a taxable account you will have to pay capital gains tax on that distribution.

Last year some of the funds distributed almost 15% which left a lot of people owing way more tax than they expected and/or having to unwind Roth contributions since it pushed their income over the limits.

Even if you don't withdraw the cash distribution from the taxable brokerage account. I thought that was the trigger.

Thanks, you are incredibly helpful on this board

Vti is more tax efficient since it only distributes dividends. The target date mutual funds distributed dividends AND capital gains. And the capital gains is what killed people last year.

Yes. Take a look at this example:

https://fundresearch.fidelity.com/mutual-funds/fees-and-prices/92202E607?type=o-NavBar

On 12/29/21 it paid a dividend of just over 2% and a capital gain of over 10% most people probably had it set to reinvest so after the distributions their position would have had the same value (they would just have more shares than they did before). If you had $100k in that fund in a taxable account you would have owed long term capital gains on over $13000 and short term gains on a little over $2000, even if you had it set to reinvest.

Thanks for the feedback. So if I hold any of these in my SEP-IRA account, I'll be good to go from a tax perspective?

Player To Be Named Later said:

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Thanks for the feedback. So if I hold any of these in my SEP-IRA account, I'll be good to go from a tax perspective?

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yes... however I personally think they are a bit too conservative so I would buy the one that is 5 years beyond your retirement date to adjust for that.

The big problem with ANY mutual fund is a volatile market like we're in now. You can own the fund and do nothing but passively own the fund and if a selling spree occurs the fund may be forced trio sell positions they don't want to sell in order to meet liquidations. That sale results in a capital gain or loss which is declared for every shareholder, usually a gain which gets reported and you owe the capital gains tax. If you've ever had a year where your fund lost 15% and you got a huge tax bill to boot you'll understand. Some clients will take those gains in cash in order to have $ to pay that tax, others may exchange or sell the entire fund before those gains are declared. It's a huge pain in the butt some years which is why I own very few funds.