Tax-Aware Migration Strategies
Advisors have three options when migrating a client to a different portfolio or changing their allocation -- each with its own tax-optimization strategy.
Minimize short-term capital gains and wash sales
When this strategy is selected, the client’s goal will be migrated in a tax-optimized way. For taxable accounts, we’ll seek to sell tax lots that are at a loss or have experienced long-term capital gains, but will continue to hold, when possible, tax lots with short-term gains until they either become long-term gains or become losses. For tax-advantaged accounts, we will migrate without regard to embedded capital gains. Regardless of account type, we will prioritize avoiding wash sales that could lead to permanently disallowed losses for securities held at Betterment.
For this strategy, it is important to remember that the account may have high
drift in the short run, but if rebalancing is on Betterment’s algorithms will
typically rebalance available losses or long-term gains as they arise (subject to
any customized drift settings or gains allowance on your client’s account), as
long as the security sales involved will not cause any disallowed losses.
Set Target Only
Selecting this migration strategy will disable automated rebalancing in client
taxable and tax coordinated goals assigned to the portfolio. While rebalancing
is off, the client’s goal will be transitioned to the new target portfolio by
buying underweight securities with cash deposits and dividend
reinvestments, while selling overweight securities to fund withdrawals. This
election will often result in high drift, especially if the portfolio or allocation
change involves a significant change in composition of the portfolio’s
holdings.
You can re-enable automated rebalancing from your client’s household page or by contacting us at support@bettermentadvisorsolutions.com. If you wish to further manage tax impact, you can also set a gains allowance for your client’s goal prior to re-enabling rebalancing. To learn more about how a gains allowance operates in client accounts, please review our smart transitions disclosure.
Rebalance with no tax-impact constraints
For this migration strategy, the client’s goal will be rebalanced as soon as possible to the target portfolio. Betterment will perform this rebalance in a tax-optimized way to the extent possible, but we will not delay selling shares even if doing so could lead to a more optimal tax outcome. Choosing this option could lead to the realization of wash sales for securities that have been recently sold. After trading is complete on the change, the account will typically be 100% in balance with the target portfolio.
For each of these migration strategy options, Betterment’s Tax-Impact
Preview feature is available in the individual client goal migration flow so that
the advisor may see an estimation of the effects of the selection. Note that
Tax-Impact Preview is not available for bulk portfolio updates.