{"id":91,"date":"2026-07-03T19:21:01","date_gmt":"2026-07-03T19:21:01","guid":{"rendered":"https:\/\/unitedonlineshopping.com\/?p=91"},"modified":"2026-07-03T19:21:01","modified_gmt":"2026-07-03T19:21:01","slug":"things-you-may-not-know-about-target-date-funds","status":"publish","type":"post","link":"https:\/\/unitedonlineshopping.com\/?p=91","title":{"rendered":"6 Things You May Not Know About Target Date Funds"},"content":{"rendered":"
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Money expert Clark Howard recommends target date funds<\/a> more often than any other investment. Pick the fund with the year closest to when you plan to retire, put your retirement money into it and let the fund handle the rest. That part is well covered.<\/p>\n

But target date funds have some quirks that surprise even people who have owned them for years. A few of these quirks can cost you real money if you get them wrong. Here are six things you may not know.<\/p>\n

1. They Belong in Retirement Accounts Only<\/strong><\/h2>\n

This is the big one. Target date funds are designed for tax-advantaged accounts like a 401(k), traditional IRA or Roth IRA.<\/strong> They are a poor fit for a regular taxable brokerage account.<\/p>\n

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\u201cWith target date funds you should be investing inside a traditional IRA, Roth IRA, 401(k),\u201d Clark says. \u201cThat would also include Simplified Employee Pensions (SEPs) and any other account where there are no tax implications to the mix of investments being changed over time.\u201d<\/span><\/p>\n<\/blockquote>\n

The reason comes down to how these funds work. A target date fund constantly sells stocks and buys bonds as it moves toward its target year. Inside a retirement account, all that trading is invisible to the IRS. Inside a taxable account, every one of those sales can generate capital gains that get passed on to you as a tax bill, even if you never sold a single share yourself.<\/p>\n

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\u201cThe very nature of a target date fund is that as you get closer to that target, they change that mix of investing,\u201d Clark says. \u201cSo it keeps generating taxes for you if you own it in a regular investment account.\u201d<\/p>\n<\/blockquote>\n

If you think the risk sounds theoretical, consider what happened at Vanguard. In late 2020, Vanguard lowered the minimum for the institutional version of its target retirement funds, and large retirement plans rushed to switch. Those redemptions forced the regular investor funds to sell holdings, which triggered capital gains distributions dozens of times larger than normal. People who held the funds in 401(k)s and IRAs were fine. People who held the exact same funds in taxable accounts got surprise tax bills, some reportedly in the tens of thousands of dollars. Vanguard later agreed to pay more than $100 million to settle SEC charges over the episode.<\/p>\n

If you want a simple all-in-one fund in a taxable account, Clark suggests a total stock market index fund or ETF or a balanced index fund instead.<\/p>\n

2. Nothing Dramatic Happens When You Reach the Target Date<\/strong><\/h2>\n

A common worry: \u201cMy fund says 2030. What happens in 2030? Does it all get sold? Does it go to cash?\u201d<\/p>\n

No. The target date is not an expiration date. The fund keeps operating, you keep owning it, and the portfolio keeps holding stocks.<\/p>\n

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\u201cWhen we hit next year, it doesn\u2019t suddenly all go into bunker mode. There will continue to be a need in that fund for years to come to have meaningful exposure to the stock market,\u201d Clark says. \u201cIt goes into a retiree mode\u2026 And in retiree mode, the thinking is the portfolio has to be more defensive. So that in down years for the market, you go down a lot less than the market goes down. And in up years, you\u2019ll go up less.\u201d<\/p>\n<\/blockquote>\n

The gradual shift from stocks to bonds is called a glide path<\/a>, and it works more like a dimmer switch than an on-off switch. Even after the target year arrives, most funds keep 30% to 40% of the portfolio in stocks so your money can keep growing through what may be a 25- or 30-year retirement.<\/p>\n

One housekeeping note: Years after the target date passes, many fund companies eventually fold the fund into their retirement income fund, which holds the final, most conservative mix. Your money moves over automatically. There is nothing you need to do, and there are no tax consequences inside a retirement account.<\/p>\n

3. Two Funds With the Same Year Can Be Very Different<\/strong><\/h2>\n

A 2045 fund at one company and a 2045 fund at another company can hold meaningfully different amounts of stock, both today and after the target date arrives.<\/p>\n

Part of the difference is the \u201cto\u201d versus \u201cthrough\u201d design. <\/p>\n