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VOL. 132 | NO. 80 | Friday, April 21, 2017

Dana and Ray Brandon

Target-Date Funds and Taxes

BY RAY AND DANA BRANDON

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Ray’s Take Target-date funds are mutual funds that contain a collection of other mutual funds that are designed to invest aggressively at the beginning and, over a long time horizon, move money into progressively more conservative holdings as the target date approaches.

These type of funds have become very popular in recent years in company-sponsored retirement plans. They’re a kind of ‘set it and forget it’ retirement savings vehicle. The fund should adjust itself to meet your time horizon. These plans may be a good choice inside a tax-deferred plan, but outside of that the consequences are different.

A tax-deferred plan, like a company-sponsored 401(k), does exactly what it says – defers any taxes on the funds until withdrawal. But if these type of accounts are held outside of a tax-deferred plan, the tax hit at the end of the year may come as an unpleasant surprise.

Because of the integrated strategy in a target-date fund, current holdings must be periodically sold and new ones that are less aggressive in nature must be purchased. This means that investors in these funds in taxable accounts will be hit with capital gains/losses when the fund exercises its reallocation procedure, as well as when positions within a given fund are sold and gains are realized.

Additionally, investors will have to pay taxes on any gains/losses, dividends or interest income generated from the fund that year. These are over and above any gains/losses generated by the reallocation procedure. 

Target-date funds can provide automated investment management for those who don’t want to actively manage their portfolios, but their taxability might make them a less-effective choice to hold outside an employer-sponsored retirement plan.

Having said all of that, it is still better to invest than not. Further, no one ever went broke making a profit.

Dana’s Take Target dates can be a good thing when it comes to what you want to do with your life, such as purchasing your first home by the age of 30, or getting that dream job by 25. Targets like these give you a time frame that can help motivate you to reach those goals since you know there are steps you have to take to meet that target date. 

Along with target dates, add photos to your visions. Whether you call it the laws of attraction, vision boards, or simply prayer, committing your dreams to positive thoughts and images can help move those dreams toward reality. 

Before I met Ray, I wrote a list on an index card of the traits I would like to find in a partner. Within a month, I met had Ray and checked off every item. A coincidence? Perhaps. 

Target the life you want and achieve it. 

Ray Brandon, CEO of Brandon Financial Planning, and his wife, Dana, a licensed clinical social worker, can be reached at brandonplanning.com.

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