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I like target date funds due to their simplicity. However, one disadvantage is that the stocks and bonds are now combined together in one fund and the flexibility to sell one of them individually is lost e.g., if market is very high, I'd like to sell some stocks while keeping the bonds intact.

Because of this I am thinking of doing it myself and simulating a target date fund by yearly rebalancing my stocks and bonds (option 1). However, in a taxable non-retirement account, the rebalancing (sell some stocks to buy bonds) will generate some income (assuming stocks make a profit) on which I will have to pay taxes. What if I had instead invested in a target date fund (option 2)? Would I pay the same tax indirectly or is there a genuine tax advantage to be had in this scenario?

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You would probably have similar tax impact for similar reasons.

The fund itself does nothing with regards to taxes, and is not in particular tax efficient - you lose the tax advantage of certain bonds, and you get hit with the capital gains distributions due to the rebalancing.

The benefit of doing it on your own is the bonds' tax advantage (treasuries/munis), if you do indeed buy individual bonds or tax-qualified funds. But the cost is some work to manually rebalance.

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    Target Date funds can generate "surprise" capital gains in certain conditions that have nothing to do an individual's actions (like when other investors perform abnormally high volume of redemptions), as happened with Vanguard in 2021: morningstar.com/stocks/…
    – nobody
    Commented Oct 7, 2023 at 0:43
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    That's true for any mutual fund, though
    – littleadv
    Commented Oct 7, 2023 at 2:20

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