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Financial Planning

About Our Retirement Planning Advice

Take a deep dive into how we can help you plan for your future. We’ll offer instructions for setting up and making changes to your retirement plan.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: September 1, 2018


TABLE OF CONTENTS

Retirement Goal

Retirement Advice

Inputs


What is a Retirement Goal at Betterment?

To help you plan for retirement, Betterment recommends creating a retirement goal with any retirement accounts contained within it. You can learn more about Betterment’s investment goals, including our advice on retirement goals here.

When viewing your retirement goal on the Summary, Portfolio, and Advice tabs of your Betterment account, you will see the goal can contain any Betterment accounts used for retirement (including IRAs and 401(k) plans) as well as external retirement accounts you have synced or added manually. Learn more about why this is beneficial.

We provide advice on how to plan for retirement based on the retirement goal, including prioritization of account usage, understanding your risk, and assessing external accounts for high fees. See our methodology for retirement planning advice.

How do I know what type of retirement account I have?

Knowing the type of retirement plan you currently have is an important first step in rolling that plan over to a qualified Betterment Traditional IRA or Roth IRA. The Roth versions of any of these plans will need to be rolled into a Betterment Roth IRA.

Various plan types:

  • 401(k): Standard pre-tax contributions made by the employee and often includes some matching by the employer.
  • Roth 401(k) or “Designated Roth Account”: After-tax contributions made by the employee.
  • 403(b): Public schools, colleges, universities, charities, state governments, local governments and other tax-exempt entities under section 501(c)(3) of the IRS code are able to offer 403(b) plans.
  • 401(a): A 401(a) is similar to a 401(k) but are custom-designed plans often only offered to key employees of public sector institutions.  They can be rolled into an IRA after separation from service.
  • 457: Public schools, colleges, universities, charities, state governments, local governments and other tax-exempt entities under section 501(c)(3) of the IRS code are able to offer 457 plans.
  • Thrift Savings Plan (TSP): TSP’s are only offered by the federal government to government employees – this can include civilians and military personnel. Other than this plan being sponsored by the federal government rather than a private employer, the Thrift Savings Plan functions much like a 401(k).
  • Defined Benefit Plan or Pension: Contributions are calculated employee benefits using a formula. This formula will often include factors such as salary history and duration of employment. Employers have control over investments, risk, and investment portfolio features.
  • Defined Contribution Plan [401(k), 403(b) plans are also this type]: These often have multiple investment options – stocks, mutual funds and other options may be available in these plans. Employees typically decide if they will contribute and how much of a contribution made from salary deductions.
  • Profit-sharing (Keogh): These plans are used by self-employed individuals.  They can be rolled into an IRA if they are not being contributed to.
  • Money-purchase plan: These plans are set up by your employer.  They can be rolled over to an IRA after separation from service, or according to the plan document.

Please note that Traditional (pre-tax) funds will need to be rolled over into a Traditional IRA, and Roth (post-tax) funds will need to be rolled over into a Roth IRA. If you’re unsure if which kind(s) of funds your retirement plan has, please contact your current provider. You can also convert your Traditional IRA into a Roth IRA within Betterment if you wish to do so.

If you are rolling over a Traditional IRA, Roth IRA, Simple IRA or SEP IRA, please click here for instructions.

As always, you should always consult a tax advisor and IRS Publication 590 to determine what type of IRA is right for you and how each type of rollover will impact your personal financial situation. As Betterment is not a tax advisor, we will not be able to provide tax advice.

How do I move Betterment money to and from my Retirement goal?

To deposit or withdraw money from any of the accounts within your Retirement Goal, click here. You can either make a new deposit, transfer or roll over a retirement account, or withdraw from there.

Be aware, withdrawing from tax-advantaged accounts, like IRAs and 401(k)s, may result in tax penalties.

Can I add a joint account or trust to my Retirement goal?

Currently, joint accounts and trusts cannot be included within your primary retirement goal. We are constantly iterating on our product and hope to offer this ability soon.

How can I contribute to retirement accounts for my spouse or partner?

IRAs are titled in the name of an individual. If you’d like to make an IRA contribution for your spouse or partner at Betterment, you’ll need to have them open a Betterment IRA in their own Betterment account, with a separate email address as their username.  Through the new login, you may link your shared bank account once more and fund your spouse’s IRA through it, if applicable.

How much can I contribute to an IRA and what is the deadline?

The annual limits for 2018 IRA contributions are $5,500 for individuals under 50 years old, and $6,500 for those who are 50 and over. The limit is assessed across all of your accounts, so if you have reached the limit with one provider you are not allowed to contribute to another account somewhere else. You can max out your IRA contributions by creating a new deposit in your Traditional IRA or Roth IRA.

There are additional contribution limits to a Roth IRA, and deduction limits to a Traditional IRA, based on your income and other factors. You can review these here, or speak with your tax advisor.

For more information about important tax deadlines, click here.

How will the information I enter into Betterment for advice be used?

At Betterment, the security of your personal information and assets are our primary concern.  Like all information you give to Betterment, it will be secured and will not be sold, rented, or traded with any third party without your permission.  We will use the information to help you determine how much money you may require to retire, as well as make recommendations on how to invest your money for retirement.  You will always have access to update or clear this information as you would like.

You can read our full privacy policy here: https://www.betterment.com/security/privacypolicy/.

Retirement Goal Projections: After-tax vs Before-Tax

To help you understand your future retirement balance and spending ability, we let you project your retirement goal in two ways: before-tax and after-tax. Both options adjust for inflation, so you’re always looking at the forecasted “spending power” value of your money.

Before-tax: Helps you forecast your retirement account balance over time. You can compare this to other projections or use it to get an idea of how your balance can grow.

After-tax: Helps you forecast your retirement account balance over time once taxes are taken out. This can help you plan for how much money you’ll actually have to spend. For example, a $40,000 distribution from a traditional IRA will be taxed at ordinary income tax rates. Assuming a 25% ordinary income tax rate, you would have $30,000 to spend after you’ve paid your taxes.

To produce your after-tax projection, we take into account the following:

  • Your current balances and what type of account(s) they are in.
  • Your estimated tax bracket at the time of withdrawal.
  • An assumption that you’ll put your planned future contributions into traditional accounts.
  • Traditional accounts are generally associated with the highest tax rate each of us pays, so this conservative assumption helps to prevent you from saving too little due to taxes.
  • An assumption that you’ll pay long-term capital gains rates on the full balance of your taxable accounts. Again, this is a very conservative approach to estimating future after-tax value because in reality you only owe taxes on gains.

Can I have multiple scenarios in Betterment’s retirement planning advice?

At this time, Betterment’s retirement planning advice can only account for one future scenario. Learn more about the retirement planning methodology.

My recommended savings for retirement is not what I expected—why is that?

There are a number of assumptions for our retirement planning advice that you may want to review and/or modify. Your savings recommendation is based on the information about your existing investments and synced external accounts. Review these assumptions within your own account by navigating to your retirement goal’s plan and select “Edit Assumptions.”

Learn more about the assumptions for our retirement planning advice here.

Why is the retirement planning advice different after I sync external accounts?

Betterment gives you retirement planning advice based on both information you provide and extensive research that’s incorporated into our retirement planning methodology. After syncing your accounts, your advice may be different for several reasons:

  1. The manual account balances you inputted may not be exactly the same as your current account balances. They may have changed since you last updated the numbers manually.
  2. You may not have deleted any duplicate manual accounts after syncing your external accounts. You’ll want to delete any duplicate accounts that were previously linked manually. Simply select the menu to the right of each manual account in “External accounts” and click “Remove account.”
  3. Your newly synced account may not be included in your retirement plan. From “Home”, click Manage next to your External Accounts to associate a specific external account with a Goal.

Should I do anything in response to the overall risk assessment in my Retirement Goal?

Having retirement accounts in multiple places can make it harder to know where you stand with your overall investment risk, which is an important component of reaching your retirement savings goal successfully. The purpose of the risk assessment is to evaluate and highlight the overall risk of your retirement savings, including both your accounts held at Betterment and any external retirement accounts you have synced into the goal, so that you know where you stand.

You should review the allocation breakdown of the stocks and bonds we’re presenting for each external retirement account by clicking on “Portfolio Analysis” within your Retirement Goal. If an allocation seems incorrect, read more here.

My Retirement Goal risk rating seems incorrect. How can I tell?

We do our best to identify the holdings in your external accounts but the data we receive from other firms can sometimes be imperfect. If our assessment of your overall retirement goal risk seems incorrect or unintuitive, an appropriate next step is to review each external account you have synced to see if the investment holdings information (e.g., % of stocks, bonds, cash, etc.) we have received is accurately representing your true external account composition.

If you feel like one of your external accounts is not being represented properly, we can work with our aggregation partners to correct any data issues. Please email us at support@betterment.comto begin this process.

Market interest rates are at historic lows right now, how do you account for this?

All of our projections are based on expected returns for the assumed stock/bond allocation. Returns are modeled as an excess return above the risk free rate curve we assume. Our risk-free rate curve is a forward curve based on the existing Federal Reserve H15 rates. This means our projections assume near-zero risk-free rates currently, but steadily increase to 3% over the next couple years.

See more details about our Projection Methodology

How do I change the assumptions in Betterment’s retirement planning advice?

You can learn about all of the assumptions that go into Betterment’s retirement planning methodology here.

Many of the assumptions that we make can be modified by selecting your primary retirement goal from the menu and then “Plan”. Once you click “Edit Assumptions” you’ll be able to edit and review the following:

  • Social Security assumptions
  • Age you plan to retire
  • Assumed lifespan
  • Inflation rate
  • Rate of return for synced external accounts
  • Annual savings assumptions

For more accurate retirement planning advice, you can securely sync external accounts you’re using for retirement.

How do I change my Social Security assumptions?

To change your Social Security assumptions:

  1. Log into Betterment and navigate to your Retirement goal from the menu.
  2. Select the Retirement goal “Plan” and choose “Edit Assumptions.”
  3. Select “About your income”  and you will be able to change your Social Security assumptions.

For reference, you can download your Social Security data file from the Social Security Administration website, as well as see your earnings record.

How do I add other retirement income sources into Betterment’s retirement planning advice?

If you have other income sources expected in retirement, such as pension, rental or annuity income, Betterment can include them in addition to Social Security and portfolio withdrawals.

After starting your retirement planning, click “Edit Assumptions” and enter the annual, pre-tax amount under in the other income sources field under “About Your Income.”

You can always sync additional retirement savings accounts by visiting “External Accounts.”

How do I change my employer plan contributions for non-Betterment plans?

If you have a retirement plan at work, whether it’s a 401(k), 403(b) or other type, your employer typically withholds (or “defers”) your contributions from your salary and directs those amounts directly into the plan.

To change how much you contribute, you’ll need to determine how your employer controls these deferrals.  Some employer plans offer a self-service online deferral percentage change. Others require you to contact the plan administrator or HR department to make changes.  Changes could take 1-2 pay periods to take effect.

Plans also vary in how you can specify how much to defer.  Some are based on a percentage of your salary. For example, you can defer “6% of your pre-tax compensation”.  Others are dollar-based. Keep in mind that if you don’t save for part of the year, you may need to increase your contributions for the rest of the year to meet your targeted yearly contribution.  But don’t forget to revisit your contribution levels at the beginning of the year!

How does Betterment handle Substantially Equal Periodic Payments (SEPP)?

What are Substantially Equal Periodic Payments?

Substantially Equal Periodic Payments provide a way to withdraw money from your IRA prior to reaching age 59 ½ without paying the 10% early withdrawal penalty. In order to qualify, certain rules must be followed, including rules relating to the specific amount, frequency and duration of the payments. Although withdrawals will not be subject to the penalty, the recipient will still owe applicable ordinary income taxes (see important details below about tax filing considerations).  Making a change to a Substantially Equal Periodic Payment plan may result in a tax penalty.

Betterment is not a tax advisor, nor should any information herein be considered tax advice.  Please consult a tax professional.

What rules must be followed to qualify as Substantially Equal Periodic Payments?

Payment amounts must be calculated based on the recipient’s life expectancy or the joint life expectancies of the recipient and a designated beneficiary. At least one payment per year must be received, and payments must continue for at least (i) 5 years from the date of the first payment or (ii) until the recipient reaches age 59 ½, whichever is longer.

What are the methods for calculating the equal payments?

There are 3 IRS-approved methods for calculating the payment amount, and each has its benefits and drawbacks. You have the ability to calculate the payment amount yourself using the appropriate life expectancy tables which can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs). Betterment recommends consulting with a tax professional before any calculations are done.

  1. Required Minimum Distribution Method
    1. Typically, this will generate the smallest withdrawal amount
    2. Amount fluctuates each year based off annual recalculation
  2. Fixed Annuitization Method
    1. This will typically have a larger withdrawal amount than the Required Minimum Distribution Method
    2. Amount received is fixed
    3. Calculation is only done once
  3. Fixed Amortization Method
    1. This will typically have a larger withdrawal amount than the Required Minimum Distribution Method
    2. Most complex calculation, but calculated once
    3. Amount received is fixed

Can the calculation method be changed once payments begin?

You can only switch the calculation method once, and only from the fixed annuitization or amortization method to the required minimum distribution method. Also, if you have taken a payment in the current year, you typically will not be allowed to change the method until the following year.  Consult a tax advisor prior to making any changes to your SEPP calculation method.

Can the IRA owner withdraw a different amount than the calculated payment amount?

Generally, the only way to change the payment is by switching calculation methods as mentioned above. Any amount withdrawn from the IRA above (or below) the calculated amount will be considered a modification to the SEPP and will subject the entire distribution to the 10% early-withdrawal penalty, not just the excess. Typically, modifying payments in any way, including omitting or stopping payments, will make all current and prior payments subject to the 10% early-withdrawal penalty along with a retroactive interest on the penalty amount for prior year payments.

Can the IRA owner still contribute to the account once the SEPP is in place?

No, once payments have started via the SEPP method, contributions can no longer be made to the IRA. Also, you cannot transfer or rollover assets into the IRA. If you have multiple IRAs, you can still contribute to an IRA account that does not have SEPP payments in place.

If a person has multiple IRAs, do the Substantially Equal Periodic Payments apply to all IRAs or a specific IRA?

SEPPs apply solely to the specific IRA account for which the payments were established, and not any other IRAs held by such person. SEPPs can be calculated on multiple IRAs, but the calculation will be done on the account balances individually. This gives the recipient the ability to move balances between IRAs to get the equal payment number close to desired income.

What are the tax filing considerations?

Betterment will report your IRA distributions to the IRS on Form 1099-R. Importantly, this form will not specify if your distribution qualifies for an exception to the 10% early withdrawal penalty. You will need to claim the exception yourself by filing IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your tax return. You can find Form 5329 at irs.gov or within your tax preparation software. Consult a tax advisor if you have questions about your tax filing and meeting the requirements of Substantially Equal Periodic Payments.

How do I calculate my Modified Adjusted Gross Income (MAGI) for Roth IRA purposes?

Your Modified Adjusted Gross Income (MAGI) is used to determine how much, if any amount, you are able to contribute to a Roth IRA.

The calculation for your MAGI begins with your Adjusted Gross Income (AGI). From there, some modifications are made to your MAGI. Below are the most common modifications. For a step-by-step guide to calculating your MAGI, use Publication 590-A, Worksheet 2-1.

Start with Your AGI: Find your Adjusted Gross Income (AGI). This can be found on IRS Form 1040, Page 2, Line 38.

Subtract Roth Conversions: Subtract any Roth IRA conversions you did during the tax year. These are counted in your AGI, but do not count towards your MAGI, so they must be removed.

Add Back Common Deductions: Some deductions do not count for your MAGI. If you took these, you must add them back. The most common examples are: Traditional IRA contributions, student loan interest, and tuition.

The result is your MAGI.

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