The Betterment Advantage: Tax
Besides fees, taxes can diminish your returns in a big way.
Betterment strives to make managing your tax liability as easy as possible.
They do that in two ways:
- Tax loss harvesting
- Strategic asset location
Tax loss harvesting is a technical term for buying and selling investments the right way.
The idea is that if you’re going to owe taxes because you sold an investment for a gain, you can offset it by selling an investment at a loss.
With some robo-advisors, you may have to handle loss harvesting yourself. Certain platforms don’t even support it all.
Betterment ensures that you get the most tax benefit possible by harvesting losses in your taxable accounts for you periodically.
Tax-loss harvesting doesn’t apply to IRAs because these accounts are tax-deferred.
They also help you organize your investments, by putting high-tax assets in IRAs and low-tax investments in taxable accounts.
And rebalancing is automatic.
When you make a deposit or earn dividends on your investments, Betterment checks your investments and makes adjustments to minimize the tax impact.
Finally, Betterment shows you the possible tax implications before you buy or sell an investment.
They’ll also help you decide in which order to buy or sell to keep tax costs as low as possible.
Altogether, those tax features can help you keep more of what you earn on your investments in your pocket.
What Is Betterment Investing And How Does It Work
Founded in 2008, Betterment is one of the first robo-advisors of its kind, especially when it comes to achieving mass appeal. And, its easy to see why with its broad range of investment management features packed into one accessible and intuitive platform.
Betterment assesses your risk tolerance, goals, and financial profile to advise investing in a diversified portfolio mix of low-cost exchange-traded funds and mutual funds. Betterment can be used to invest or save for almost any purpose, e.g. for a college fund, buying a house, retirement fund, etc. Based on your unique situation, it will automatically recommend personalized portfolio options.
To augment its automated investment advice, Betterment also offers professional one-on-one financial advice to Premium members or at extra cost. In this in-depth review of Betterment, well cover all of these features in detail.
How To Pick Your Allocation Mix
When youre young , youll have more time to absorb a loss and can make a stronger case for setting an aggressive profile in Betterment. If youre approaching retirement, youll want a higher percentage of bonds to minimize the risk. This is overly simple, but its also a pretty good rule of thumb.
Heres a slightly more advanced investment strategy formula for people in between:
Subtract your age from 120 and invest that percentage of your long-term money in stocks. If youre 30, invest 90 percent of your long-term money in stocks. If youre 40, invest 80 percent of your long-term money in stocks. And so on.
One of the nice features of the Betterment account is that it lets you adjust your asset allocation mix with an intuitive slider if you decide you want to change your asset allocation at any time.
However, one of the fundamental principles for successful investing says you shouldnt adjust your asset allocation too often.
Find your ideal formula and let your investments work for you rather than the other way around.
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Betterment Everyday By Betterment
Betterment Everyday Cash Reserve is a high-yield cash account that is part of Betterment’s new cash management suite. Betterment now offers this as a replacement to its previous Smart Saver product. According to their website, Betterment Everyday Cash Reserve can help customers earn a variable rate of up to 0.10% APY, is FDIC-insured for up to $1,000,000 once deposited at Betterment’s program banks and has no minimum balance. Additionally, unlike withdrawals from a savings account at a typical bank, Betterment Everyday Cash Reserve has no withdrawal limits on how many times you can move money from your account.
What sets the Betterment Everyday Cash Reserve account apart is its built-in cash analysis tool for your linked checking account. Every day, the tool will analyze your checking account to see if there’s excess money that you could be earning more from. If there is, Betterment will transfer the extra cash into your Cash Reserve. This is one half of it’s Two-Way Sweep feature. If the tool sees that there isn’t enough in your checking account to meet your monthly expenses, the other half kicks in and it will move money out of your Cash Reserve and back into your checking account.
The Betterment Everyday Cash Reserve is available as of October 2019 as part of this latest cash management suite. Betterment Everyday Checking will be available later in 2019 and will feature ATM reimbursements as well as no account minimums or monthly maintenance fees.
Cool Bells And Whistles
You can see the home page below. Its a summary that provides a great deal of information. The summary shows what your current balance is, how much youve earned and how your account is allocated.
The next screen shows you if you have enabled automatic deposits and if so how much. It also allows you to make one-off investments or withdrawals. This is really easy, simple and fast. A nice way to automate your investing and one of the major benefits of using Betterment.
The allocation tab is really a snap too. You simply slide the allocation dot to set your asset mix. On the far right, the graph indicates what your performance might be and how much money you might have down the line. This is a nice way to see what the impact of your allocation might be.
The next nice feature is the Advice tab. Here youll set up your various financial goals and Betterment will tell you how much you need to save each month in order to achieve them. Sweet.
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New And Notable Updates
On February 8, 2022, Betterment announced that it is acquiring crypto manager Makara. As a result of the acquisition, Betterment now gives retail investors and advisors the ability to invest in diversified crypto portfolios alongside their existing investments.
Theres a reason that Betterment is the largest stand-alone robo-advisor with nearly $27 billion in assets under management. The firm offers excellent low-fee investment management for new investors right through to high net worth clients and provides all of its users with comprehensive financial planning. Another sign of Betterments stellar reputation comes from former competitor Wealthsimple, who recently turned over all of their U.S. customers to Betterment.
Betterment goes beyond the typical offerings from robo-advisors, providing Smart Beta, income, and several socially responsible investment portfolio choices. Adding to the platforms allure, financial advisors are accessible for all users. All of this is in addition to checking and high yield cash reserve accounts, making Betterment a strong candidate to meet all your financial needs with one robo-advisor. Well dig deeper into Betterments platform to help you decide whether it is the right fit for you.
Betterment Offering / Product Features: 46
What was once just an investing platform has now become a central hub for your financial life. Betterment can help manage, grow, and save your money through several different products and services to help with daily cash management, guided investing, and even retirement planning. There are a large number of services that Betterment offers, which could be overwhelming to new users or those that are seeking a very simple investment solution.
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Roth Ira Rollovers And Transfers
What if you already have a Roth IRA and just want to transfer it into the Betterment platform?
Well, there are two different roads you can go down to get this done. Betterment will do this process for you, or you can do it manually.
If you prefer, Betterment can perform a direct transfer with their automated service. Betterment will transfer your assets from the origin brokerage into the Betterment platform. It usually takes around 7 business days to complete.
The other way is for you to withdraw your funds from the old IRA and deposit them with Betterment using a 60-day rollover. Doing it this way gives you 60 days to complete the deposit or the IRS will count it as an early withdrawal and you will pay penalties and fees.
Betterment Review: Where It Shines
After reviewing Betterment, here are the ways I think the company excels:
- No account minimums. Ive researched dozens of robo-advisor companies. Ive come across a handful of them that require minimum deposits of $5 or less. Now that Betterment has acquired Wealthsimple, its the only robo-advisor Ive seen with no account minimum Ive seen that offers tax-loss harvesting. Betterment offers a ton of impressive features for a company that doesnt require a minimum deposit.
- Inexpensive. Betterments all-in cost is about 0.34% including the annual fee and average expense ratios. Vanguards Digital Advisor undercuts Betterment at 0.22%. But youd be hard-pressed to find another cheaper robo-advisor that uses the annual fee model.
- Goal-based philosophy. If you love goals or if goals tend to help you stay on track, youll appreciate the ways that Betterment uses goal-setting and offers consistent reminders and suggestions to help you maximize your chances.
- Excellent banking options. Betterments savings account in particular is competitive with the best online banks. And it offers most of the other services youd consider to be within the purview of traditional banks.
- Highly-customizable portfolios. As I detailed in the how it works section above, Betterment offers almost every option one could want in the world of pre-built portfolios.
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Smart Beta Portfolio By Goldman Sachs
Betterment also offers custom portfolios constructed by Goldman Sachs.
The Goldman Sachs Smart Beta portfolio aims to provide a diversified portfolio strategy using a balance of actively and passively managed investments. If you’re new to investing, you might not be familiar with the terms active and passive investing. For starters, here is a brief summary:
Active portfolio management typically has the goal of beating the market, often associated with hedge funds and mutual funds. This includes buying and holding individual stocks.
Passive management has the goal of generating market returns over the long term. Index investing and buy and hold strategies are types of passive management.
The Smart Beta Portfolio uses both of the above tactics to improve your chances of a high return. Goldmans smart beta uses a variety of factors to determine investment allocations across the portfolio. Some of these factors include equities consisting of good value, high quality, strong momentum, and low volatility characteristics. Smart beta uses a variety of rules that determine allocations across the portfolio.
Tips For Finding A Financial Advisor
- First, figure out how much youre able to invest. If youre just starting out and dont have much to invest, a robo-advisor like Betterment might be the right option for you. Robo-advisors typically have lower account minimums and fees. These are the top 10 robo-advisors.
- If you have more money to invest and a more complex financial situation, a traditional advisor might better suit your needs. The SmartAdvisor financial advisor matching tool makes it easier to narrow down your choices. After you answer a series of questions about your preferences and financial goals, the program will pair you with up to three advisors near you.
- Once youve narrowed it down to a few financial advisors, research each of the advisors and interview them. You should be sure to ask about their fees, certifications and whether they have any disclosures. You should also explicitly ask them whether they abide by fiduciary duty.
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Fees For Betterment Roth Ira
Betterment charges its fees based on the assets under management in your accounts. There are two Betterment price tiers, Betterment Digital and Betterment Premium.
Digital – If you have less than $100,000 in managed assets you will be using their Digital tier which has no minimum deposit amount and charges a fee of 0.25% of your total managed assets. You get access to all of Betterment’s investment features and tools.
If you had $100,000 in this account tier, your fee would amount to $250 per year.
Premium – If you have over $100,000 or more to invest then you can opt to be included in Betterment Premium with access to a financial advisor. The Betterment Premium plan has a fee of 0.40% of your total managed assets. You will get access to all of Betterments features plus continuous access to a financial planner.
If you had $100,000 in this account tier, your fee would amount to $400 per year.
You DO NOT need to be in the Premium plan just because you have $100,000 or more invested. In fact, you can have any amount of money invested in the Digital plan, even in excess of $100,000. You just can’t invest in the Premium plan if you have less than $100,000.
What Are The Investments
Betterment uses exchange traded funds to build the portfolios.
ETFs are investment vehicles similar to mutual funds, but they trade on a major exchange similar to a stock. These investments have grown tremendously in popularity over the last 20 years in the investment community due to the low fees and high liquidity.
ETFs provide diverse positions. For instance, one fund could trade at $50 per share and have hundreds of underlying holdings. This allows investors to be diversified across many different asset classes such as stocks, bonds, real estate, and commodities.
Their portfolio strategy is to use ETFs to construct portfolios based on the modern portfolio theory and global asset allocation. The modern portfolio theory is a hypothesis that says investors can construct diversified portfolios along an efficient frontier that maximize their return for a given level of risk.
Created in the 1950s, the modern portfolio theory is generally accepted throughout the investing community today. Betterment also uses Nobel Prize winning research by Fama and French as the basis for their investing strategy and asset allocation.
In their research, Eugene Fama and Kenneth French found that equity returns are heavily correlated to the stock market, as well as the value, and size of the company. Betterment uses their own modeling to determine the tilt of their portfolios. This tilt is specifically toward value companies and small cap stocks aiming for higher expected returns.
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How To Sign Up For Betterment
Creating an investment account with Betterment is simple and can be completed in just a few minutes. You can get started in five easy steps:
Investing Through Your Employer
If youre on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is, you probably won’t even miss a contribution that small.
Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. When you’re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401 retirement account at work, you may already be investing in your future with allocations to mutual funds and even your own company’s stock.
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How Do I Withdraw Funds From My Account
Well walk you through how to withdraw from a taxable account or an IRA. You can withdraw your money from Betterment at any time, without additional fees.
We do not charge any trading fees or assess penalties for requested withdrawals or account closures. Its your money, and is always accessible to you.
From a web browser, after logging in to your account, go to “Transfer or Rollover” > “Withdraw.”
Withdrawals generally take about 4-5 business days to process funds will automatically be sold and sent to your linked bank account.
When you request a withdrawal, shares in your account are sold and this may have tax consequences. Betterment will always sell your shares in a way that minimizes taxes for you. Well sell shares that have lost value first , and then well sell shares that have gained value .
Full withdrawal terms and conditions are listed on page 21, section 20 of the Betterment Client Agreement.
Note that the process for withdrawing from your Betterment For Business 401 is different. Learn more about withdrawing from your 401.
How Could Betterment Be Better
Betterment uses Modern Portfolio Theory to guide its algorithms. Investors whod like a more nuanced approach or more direct control of their portfolios may want a human financial advisor.
Betterment could also add 529 plans for college savers. The platform also lacks direct indexing which some Robo-advisors use to maximize tax-loss harvesting.
Betterment also makes it difficult to transfer your assets out of Betterment and into another brokerage account. Youd have to request paperwork and then mail it in.
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