Firstly, hi everyone. Huge fan of PFC — you guys introduced me to Target Date Index Funds, and I love how simple they make investing. I use them in all my tax-deferred accounts, and now that I’m planning to start investing in taxable, I was wondering if I should default to the same.
I keep reading about how TDIFs are supposedly “tax-inefficient” because their bond portion throws off dividends that are taxed at ordinary income tax rates, and how this can be a problem, especially when approaching the target date. To solve for this, I’ve been looking at robo-advisors like Betterment or Vanguard Digital Advisor because they utilise tax-exempt municipal bonds instead (plus I see how tax-loss harvesting could be a minor bonus).
I wanted to ask: Is this concern regarding TDIFs in taxable warranted? I’m in a high-tax industry/state (between 24-34%), so how bad could the costs of this “inefficiency” be over a lifetime? It’d be helpful if someone could put numbers to this. The robos all cost ~0.25%/yr — so if the cost of TDIFs’ tax inefficiency is lesser than that over a lifetime, it would be helpful to know.
The TLH and flexibility still has me leaning towards robos for now (mostly Betterment because I appreciate its UI and flexibility despite the slightly higher cost). But it’d be illuminating to actually know what I’m choosing, and what you guys think of my current plan. Thank you!