Aug 7 (Reuters) - Vanguard Group settled a lawsuit accusing the mutual fund giant of saddling investors in its popular target-date funds with inflated tax bills, after a federal judge rejected an earlier settlement.

In a filing on Thursday in Philadelphia federal court, Vanguard and the investors said they agreed in principle following private mediation to resolve all claims.

They plan by September 22 to seek preliminary approval of the settlement from U.S. District Judge John Murphy, who rejected a $40 million accord on May 19.

Terms were not disclosed. Vanguard said it was pleased to settle. Lawyers for the investors did not respond to requests for comment.

Target-date funds contain mixes of stocks, bonds and cash that are designed to become less risky as investors age, and also be tax-efficient.

The lawsuit stemmed from Vanguard's December 2020 decision to reduce the minimum investment in lower-cost fund classes meant for institutional clients to $5 million from $100 million.

Many investors shifted to those fund classes from higher-cost retail fund classes. This forced the retail funds to sell assets to meet redemptions, and pass taxable capital gains to investors like the plaintiffs who remained.

Murphy said the $40 million settlement did nothing for investors because Vanguard could have offset that amount from its related $106.4 million settlement in January with the U.S. Securities and Exchange Commission.

The judge also said investors would have been worse off, once more than $13 million was taken out for legal fees.

Vanguard is based in Valley Forge, Pennsylvania. It had $10.4 trillion of assets under management as of January 31.

The case is In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.

(Reporting by Jonathan Stempel in New York; Editing by Daniel Wallis)

((jon.stempel@thomsonreuters.com; +1 646 223 6317; Reuters Messaging: jon.stempel.thomsonreuters.com@reuters.net))