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Betterment’s Progress On Employee Representation Nov 9, 2022 2:01:47 PM Here’s the latest on our efforts to nurture diversity, equity, inclusion, and belonging among our team. In 2020, we first shared our employee demographics and commitments to doing better and promised to make public reporting on our progress at regular intervals. A lot has happened at Betterment since then: Sarah Levy joined us as our new CEO, we raised our Series F to continue our mission of Making People’s Lives Better, acquired Makara to fast track a cryptocurrency offering, and grew our team to over 400. We’ve been focused on our Diversity, Equity, Inclusion and Belonging (DEIB) strategy to drive sustained change for our employees and our broader community. We want to highlight some of the tangible outcomes we've created through community, hiring, retention, and training efforts. We're grateful for the dedication from all of those at Betterment who have made these outcomes possible, and recognize that our work is ongoing, and always will be. Betterment’s Employee Demographic Data We used 2020 as a call-to-action and reviewed our People strategy to make a significant impact on the diversity of our workforce. We implemented a multi-pronged approach focusing on: Recruiting and retention Goal setting and measurement Community-building and engagement, enhanced by creating and supporting ERGs (Employee Resource Groups) Full Time Employees 2020 Full Time Employees 2021 Leadership 2020 Leadership 2021 Recruiting and Retention A deliberate expansion of our candidate sourcing was a critical component of our strategy. We expanded our reach for potential candidates through various sources that are known for diversity hiring and were able to make significant progress, increasing representation of People of Color by 8 percentage points company-wide, with gains in our Black, Latinx, and Two or More Races populations. We also increased representation of women by 3 percentage points. Our Leadership Team is 33% women and 23% People of Color. We attribute much of our progress to our hiring outreach as well as our conscious efforts on inclusion and belonging. In 2021, 52% of our hires were People of Color, 46% were women, and 1% were non-binary. Our internal programming and ERG initiatives (more on these later) have also helped to build community and increase retention. Goal Setting and Measurement A strategic initiative we implemented at the start of 2021 was to incorporate DEIB progress into our company goals, performance metrics and bonus targets. Our bonus targets prioritized employee education and engagement in our DEIB curriculum to build cross-company awareness as well as for personal development. Bonus achievement required meaningful DEIB engagement at all levels of the organization: 100% of all employees participating in our DEIB core education 100% of the Executive Team and 65% of all other employees participating in at least one DEIB event or initiative per quarter A semi-annual qualitative assessment on representation efforts that is reviewed by the Executive Team and shared with the entire company In 2021, we achieved 100% of our bonus targets and we have set the same DEIB bonus weighting for 2022. To support our desire to drive both engagement and education, we refreshed our approach to DEIB education and made it a core pillar of our Talent Development offerings. We provided four streams of programming: All employees, including new hires, completed our online learning course: Inclusion and Belonging in the Workplace. Our Executive Team, People team, and all people managers attended bespoke trainings focused on building psychological safety and inclusive leadership provided by Merging Path & Collective DEI Lab. All employees were encouraged to attend our DEIB Learning Hours, featuring keynote speakers. Employees took advantage of counseling, support and facilitation resources to reflect on bias in the workplace, personal safety, how to overcome barriers and ways to foster support and allyship. Community Building and Engagement A big focus of 2021 was to build community and engagement via our Employee Resource Strategy Groups (“ERSGs”). We believe that the ERSGs are a great vehicle to support inclusion and for employees to develop a sense of belonging here at Betterment. A few facets of the program that contributed to its success included electing leadership for each of our 8 groups; pairing ERSGs with Executive Champions; and providing mentorship and support to build out roadmaps, goals, and budgets for the year. Each ERSG met monthly to build community, produced quarterly events to raise awareness and celebrate recognition months, and flexed their leadership skills working with our CEO, Exec Champs, and the People team. We are pleased with the engagement and the development opportunities the ERSGs have afforded our employees: “AoB provided a safe space to embrace our identities, celebrate our cultures, bring awareness to issues in our communities, and empower us to speak up and share our perspective and experiences with the company - something I used to shy away from or dismiss. It was powerful to connect with peers in this way, and to see people across the organization listen, support, and participate in the unique and diverse cultures we shared.” - Pamela Do, Senior Manager Talent Development who served on the leadership team for Asians of Betterment   “Being the President of Black at Betterment was one of my greatest opportunities at Betterment. At a time when the rest of the world was really opening their eyes to the daily experiences of BIPOC—and we ourselves were being pushed to our limits—Black at Betterment was able to provide community, solace, and celebration of our collective and individual identity. Being able to advocate for Black employees and knowing we had voices, empathy, and understanding in the rooms where change happens is something I am constantly grateful for.” – Dan Bound-Black, Black at Betterment, President ‘21   “This experience was a wonderful way to create and strengthen relationships with a diverse group of employees across the Betterment organization. I found it to be a valuable exercise in helping grow and nurture a team of leaders that was facing many of the typical challenges one would expect on any team trying to get things done. I am grateful to the entire team for welcoming me into their conversations and both taking my feedback seriously and also pushing back when they disagreed. I believe they helped me grow as a leader and equipped me to help ensure Betterment continues on its journey to becoming a more inclusive organization." - Mike Reust, President of Betterment who served as Exec Champ to Black at Betterment Conclusion We’re proud of the progress we’ve made over the past 18 months to scale our diversity and inclusion efforts and increase representation of People of Color and women at Betterment. Our journey is a testament to the commitment and focus across the team and our community. We’re looking forward to building on the strong foundation we’ve laid so far to continue to make Betterment a place where everyone can do their best work and where all identities are reflected and appreciated. If this sounds like a place where you’d like to work, check out our careers page!

Asset Location Methodology Nov 1, 2022 12:00:00 AM Intelligently applying asset location to a globally diversified portfolio is a complex, mathematically rigorous, and continuous undertaking. TABLE OF CONTENTS Summary Part I: Introduction to Asset Location Part II: After-Tax Return—Deep Dive Part III: Asset Location Myths Part IV: TCP Methodology Part V: Monte Carlo on the Amazon—Betterment’s Testing Framework Part VI: Results Part VII: Special Considerations Addendum Summary Asset location is widely regarded as the closest thing there is to a "free lunch" in the wealth management industry.1 When investments are held in at least two types of accounts (out of three possible types: taxable, tax-deferred and tax-exempt), asset location provides the ability to deliver additional after-tax return potential, while maintaining the same level of risk. Generally speaking, this benefit is achieved by placing the least tax-efficient assets in the accounts taxed most favorably, and the most tax-efficient assets in the accounts taxed least favorably, all while maintaining the desired asset allocation in the aggregate. Part I: Introduction to Asset Location Maximizing after-tax return on investments can be complex. Still, most investors know that contributing to tax-advantaged (or "qualified") accounts is a relatively straightforward way to pay less tax on their retirement savings. Millions of Americans wind up with some combination of IRAs and 401(k) accounts, both available in two types: traditional or Roth. Many will only save in a taxable account once they have maxed out their contribution limits for the qualified accounts. But while tax considerations are paramount when choosing which account to fund, less thought is given to the tax impact of which investments to then purchase across all accounts. The tax profiles of the three account types (taxable, traditional, and Roth) have implications for what to invest in, once the account has been funded. Choosing wisely can significantly improve the after-tax value of one’s savings, when more than one account is in the mix. Almost universally, such investors can benefit from a properly executed asset location strategy. The idea behind asset location is fairly straightforward. Certain investments generate their returns in a more tax-efficient manner than others. Certain accounts shelter investment returns from tax better than others. Placing, or "locating" less tax-efficient investments in tax-sheltered accounts should increase the after-tax value of the overall portfolio. Allocate First, Locate Second Let’s start with what asset location isn’t. All investors must select a mix of stocks and bonds, finding an appropriate balance of risk and expected return, in line with their goals. One common goal is retirement, in which case, the mix of assets should be tailored to match the investor’s time horizon. This initial determination is known as "asset allocation," and it comes first. When investing in multiple accounts, it is common for investors to simply recreate their desired asset allocation in each account. If each account, no matter the size, holds the same assets in the same proportions, adding up all the holdings will also match the desired asset allocation. If all these funds, however scattered, are invested towards the same goal, this is the right result. The aggregate portfolio is the one that matters, and it should track the asset allocation selected for the common goal. Portfolio Managed Separately in Each Account Enter asset location, which can only be applied once a desired asset allocation is selected. Each asset’s after-tax return is considered in the context of every available account. The assets are then arranged (unequally) across all coordinated accounts to maximize the after-tax performance of the overall portfolio. Same Portfolio Overall—With Asset Location To help conceptualize asset location, consider a team of runners. Some runners compete better on a track than a cross-country dirt path, as compared to their more versatile teammates. Similarly, certain asset classes benefit more than others from the tax-efficient "terrain" of a qualified account. Asset allocation determines the composition of the team, and the overall portfolio’s after-tax return is a team effort. Asset location then seeks to match up asset and environment in a way that maximizes the overall result over time, while keeping the composition of the team intact. TCP vs. TDF The primary appeal of a target-date fund (TDF) is the "set it and forget it" simplicity with which it allows investors to select and maintain a diversified asset allocation, by purchasing only one fund. That simplicity comes at a price—because each TDF is a single, indivisible security, it cannot unevenly distribute its underlying assets across multiple accounts, and thus cannot deliver the additional after-tax returns of asset location. In particular, participants who are locked into 401(k) plans without automated management may find that a cheap TDF is still their best "hands off" option (plus, a TDF’s ability to satisfy the Qualified Default Investment Alternative (QDIA) requirement under ERISA ensures its baseline survival under current law). Participants in a Betterment at Work plan can already enable Betterment’s Tax-Coordinated Portfolio feature (“TCP”) to manage a single portfolio across their 401(k), IRAs and taxable accounts they individually have with Betterment, designed to squeeze additional after-tax returns from their aggregate long-term savings. Automated asset location (when integrated with automated asset allocation) replicates what makes a TDF so appealing, but effectively amounts to a "TDF 2.0"—a continuously managed portfolio, but one that can straddle multiple accounts for tax benefits. Next, we dive into the complex dynamics that need to be considered when seeking to optimize the after-tax return of a diversified portfolio. Part II: After-Tax Return—Deep Dive A good starting point for a discussion of investment taxation is the concept of "tax drag." Tax drag is the portion of the return that is lost to tax on an annual basis. In particular, funds pay dividends, which are taxed in the year they are received. However, there is no annual tax in qualified accounts, also sometimes known as "tax-sheltered accounts." Therefore, placing assets that pay a substantial amount of dividends into a qualified account, rather than a taxable account, "shelters" those dividends, and reduces tax drag. Reducing the tax drag of the overall portfolio is one way that asset location improves the portfolio’s after-tax return. Importantly, investments are also subject to tax at liquidation, both in the taxable account, and in a traditional IRA (where tax is deferred). However, "tax drag", as that term is commonly used, does not include liquidation tax. So while the concept of "tax drag" is intuitive, and thus a good place to start, it cannot be the sole focus when looking to minimize taxes. What is "Tax Efficiency" A closely related term is "tax efficiency" and this is one that most discussions of asset location will inevitably focus on. A tax-efficient asset is one that has minimal "tax drag." Prioritizing assets on the basis of tax efficiency allows for asset location decisions to be made following a simple, rule-based approach. Both "tax drag" and "tax efficiency" are concepts pertaining to taxation of returns in a taxable account. Therefore, we first consider that account, where the rules are most elaborate. With an understanding of these rules, we can layer on the impact of the two types of qualified accounts. Returns in a Taxable Account There are two types of investment income, and two types of applicable tax rates. Two types of investment tax rates. All investment income in a taxable brokerage account is subject to one of two rate categories (with material exceptions noted). For simplicity, and to keep the analysis universal, this section only addresses federal tax (state tax is considered when testing for performance). Ordinary rate: For most, this rate mirrors the marginal tax bracket applicable to earned income (primarily wages reported on a W-2). For all but the lowest earners, that bracket will range from 25% to 39.6%. Preferential rate: This more favorable rate ranges from 15% to 20% for most investors. For especially high earners, both rates are subject to an additional tax of 3.8%, making the highest possible ordinary and preferential rates 43.4% and 23.8%, respectively. Two types of investment returns. Investments generate returns in two ways: by appreciating in value, and by making cash distributions. Capital gains: When an investment is sold, the difference between the proceeds and the tax basis (generally, the purchase price) is taxed as capital gains. If held for longer than a year, this gain is treated as long-term capital gains (LTCG) and taxed at the preferential rate. If held for a year or less, the gain is treated as short-term capital gains (STCG), and taxed at the ordinary rate. Barring unforeseen circumstances, passive investors should be able to avoid STCG entirely. Betterment’s automated account management seeks to avoid STCG when possible,4 and the rest of this paper assumes only LTCG on liquidation of assets. Dividends: Bonds pay interest, which is taxed at the ordinary rate, whereas stocks pay dividends, which are taxed at the preferential rate (both subject to the exceptions below). An exchange-traded fund (ETF) pools the cash generated by its underlying investments, and makes payments that are called dividends, even if some or all of the source was interest. These dividends inherit the tax treatment of the source payments. This means that, generally, a dividend paid by a bond ETF is taxed at the ordinary rate, and a dividend paid by a stock ETF is taxed at the preferential rate. Qualified Dividend Income (QDI): There is an exception to the general rule for stock dividends. Stock dividends enjoy preferential rates only if they meet the requirements of qualified dividend income (QDI). Key among those requirements is that the company issuing the dividend must be a U.S. corporation (or a qualified foreign corporation). A fund pools dividends from many companies, only some of which may qualify for QDI. To account for this, the fund assigns itself a QDI percentage each year, which the custodian uses to determine the portion of the fund’s dividends that are eligible for the preferential rate. For stock funds tracking a U.S. index, the QDI percentage is typically 100%. However, funds tracking a foreign stock index will have a lower QDI percentage, sometimes substantially. For example, VWO, Vanguard’s Emerging Markets Stock ETF, had a QDI percentage of 38% in 2015, which means that 38% of its dividends for the year were taxed at the preferential rate, and 62% were taxed at the ordinary rate. Tax-exempt interest: There is also an exception to the general rule for bonds. Certain bonds pay interest that is exempt from federal tax. Primarily, these are municipal bonds, issued by state and local governments. This means that an ETF which holds municipal bonds will pay a dividend that is subject to 0% federal tax—even better than the preferential rate. The table below summarizes these interactions. Note that this section does not consider tax treatment for those in a marginal tax bracket of 15% and below. These taxpayers are addressed in "Special Considerations."   Dividends (taxed annually) Capital Gains (taxed when sold) Ordinary Rate Most bonds Non-QDI stocks (foreign) Any security held for a year or less (STCG) Preferential Rate QDI stocks (domestic and some foreign) Any security held for more than a year (LTCG) No Tax Municipal bonds Any security transferred upon death or donated to charity The impact of rates is obvious: The higher the rate, the higher the tax drag. Equally important is timing. The key difference between dividends and capital gains is that the former are taxed annually, contributing to tax drag, whereas tax on the latter is deferred. Tax deferral is a powerful driver of after-tax return, for the simple reason that the savings, though temporary, can be reinvested in the meantime, and compounded. The longer the deferral, the more valuable it is. Putting this all together, we arrive at the foundational piece of conventional wisdom, where the most basic approach to asset location begins and ends: Bond funds are expected to generate their return entirely through dividends, taxed at the ordinary rate. This return benefits neither from the preferential rate, nor from tax deferral, making bonds the classic tax-inefficient asset class. These go in your qualified account. Stock funds are expected to generate their return primarily through capital gains. This return benefits both from the preferential rate, and from tax deferral. Stocks are therefore the more tax-efficient asset class. These go in your taxable account. Tax-Efficient Status: It’s Complicated Reality gets messy rather quickly, however. Over the long term, stocks are expected to grow faster than bonds, causing the portfolio to drift from the desired asset allocation. Rebalancing may periodically realize some capital gains, so we cannot expect full tax deferral on these returns (although if cash flows exist, investing them intelligently can reduce the need to rebalance via selling). Furthermore, stocks do generate some return via dividends. The expected dividend yield varies with more granularity. Small cap stocks pay relatively little (these are growth companies that tend to reinvest any profits back into the business) whereas large cap stocks pay more (as these are mature companies that tend to distribute profits). Depending on the interest rate environment, stock dividends can exceed those paid by bonds. International stocks pay dividends too, and complicating things further, some of those dividends will not qualify as QDI, and will be taxed at the ordinary rate, like bond dividends (especially emerging markets stock dividends). Returns in a Tax-Deferred Account (TDA) Compared to a taxable account, a TDA is governed by deceptively simple rules. However, earning the same return in a TDA involves trade-offs which are not intuitive. Applying a different time horizon to the same asset can swing our preference between a taxable account and a TDA.Understanding these dynamics is crucial to appreciating why an optimal asset location methodology cannot ignore liquidation tax, time horizon, and the actual composition of each asset’s expected return.Although growth in a traditional IRA or traditional 401(k) is not taxed annually, it is subject to a liquidation tax. All the complexity of a taxable account described above is reduced to two rules. First, all tax is deferred until distributions are made from the account, which should begin only in retirement. Second, all distributions are taxed at the same rate, no matter the source of the return. The rate applied to all distributions is the higher ordinary rate, except that the additional 3.8% tax will not apply to those whose tax bracket in retirement would otherwise be high enough.2 First, we consider income that would be taxed annually at the ordinary rate (i.e. bond dividends and non-QDI stock dividends). The benefit of shifting these returns to a TDA is clear. In a TDA, these returns will eventually be taxed at the same rate, assuming the same tax bracket in retirement. But that tax will not be applied until the end, and compounding due to deferral can only have a positive impact on the after-tax return, as compared to the same income paid in a taxable account.3 In particular, the risk is that LTCG (which we expect plenty of from stock funds) will be taxed like ordinary income. Under the basic assumption that in a taxable account, capital gains tax is already deferred until liquidation, favoring a TDA for an asset whose only source of return is LTCG is plainly harmful. There is no benefit from deferral, which you would have gotten anyway, and only harm from a higher tax rate. This logic supports the conventional wisdom that stocks belong in the taxable account. First, as already discussed, stocks do generate some return via dividends, and that portion of the return will benefit from tax deferral. This is obviously true for non-QDI dividends, already taxed as ordinary income, but QDI can benefit too. If the deferral period is long enough, the value of compounding will offset the hit from the higher rate at liquidation. Second, it is not accurate to assume that all capital gains tax will be deferred until liquidation in a taxable account. Rebalancing may realize some capital gains "prematurely" and this portion of the return could also benefit from tax deferral. Placing stocks in a TDA is a trade-off—one that must weigh the potential harm from negative rate arbitrage against the benefit of tax deferral. Valuing the latter means making assumptions about dividend yield and turnover. On top of that, the longer the investment period, the more tax deferral is worth. Kitces demonstrates that a dividend yield representing 25% of total return (at 100% QDI), and an annual turnover of 10%, could swing the calculus in favor of holding the stocks in a TDA, assuming a 30-year horizon.4 For foreign stocks with less than perfect QDI, we would expect the tipping point to come sooner. Returns in a Tax-Exempt Account (TEA) Investments in a Roth IRA or Roth 401(k) grow tax free, and are also not taxed upon liquidation. Since it eliminates all possible tax, a TEA presents a particularly valuable opportunity for maximizing after-tax return. The trade-off here is managing opportunity cost—every asset does better in a TEA, so how best to use its precious capacity? Clearly, a TEA is the most favorably taxed account. Conventional wisdom thus suggests that if a TEA is available, we use it to first place the least tax-efficient assets. But that approach is wrong. Everything Counts in Large Amounts—Why Expected Return Matters The powerful yet simple advantage of a TEA helps illustrate the limitation of focusing exclusively on tax efficiency when making location choices. Returns in a TEA escape all tax, whatever the rate or timing would have been, which means that an asset’s expected after-tax return equals its expected total return. When both a taxable account and a TEA are available, it may be worth putting a high-growth, low-dividend stock fund into the TEA, instead of a bond fund, even though the stock fund is vastly more tax-efficient. Similar reasoning can apply to placement in a TDA as well, as long as the tax-efficient asset has a large enough expected return, and presents some opportunity for tax deferral (i.e., some portion of the return comes from dividends). Part III: Asset Location Myths Urban Legend 1: Asset location is a one-time process. Just set it and forget it. While an initial location may add some value, doing it properly is a continuous process, and will require adjustments in response to changing conditions. Note that overlaying asset location is not a deviation from a passive investing philosophy, because optimizing for location does not mean changing the overall asset allocation (the same goes for tax loss harvesting). Other things that will change, all of which should factor into an optimal methodology: expected returns (both the risk-free rate, and the excess return), dividend yields, QDI percentages, and most importantly, relative account balances. Contributions, rollovers, and conversions can increase qualified assets relative to taxable assets, continuously providing more room for additional optimization. Urban Legend 2: Taking advantage of asset location means you should contribute more to a particular qualified account than you otherwise would. Definitely not! Asset location should play no role in deciding which accounts to fund. It optimizes around account balances as it finds them, and is not concerned with which accounts should be funded in the first place. Just because the presence of a TEA makes asset location more valuable, does not mean you should contribute to a TEA, as opposed to a TDA. That decision is primarily a bet on how your tax rate today will compare to your tax rate in retirement. To hedge, some may find it optimal to make contributions to both a TDA and TEA (this is called "tax diversification"). While these decisions are out of scope for this paper, Betterment’s retirement planning tools can help clients with these choices. Urban Legend 3: Asset location has very little value if one of your accounts is relatively small. It depends. Asset location will not do much for investors with a very small taxable balance and a relatively large balance in only one type of qualified account, because most of the overall assets are already sheltered. However, a large taxable balance and a small qualified account balance (especially a TEA balance) presents a better opportunity. Under these circumstances, there may be room for only the least tax-efficient, highest-return assets in the qualified account. Sheltering a small portion of the overall portfolio can deliver a disproportionate amount of value. Urban Legend 4: Asset location has no value if you are investing in both types of qualified accounts, but not in a taxable account. A TEA offers significant advantages over a TDA. Zero tax is better than a tax deferred until liquidation. While tax efficiency (i.e. annual tax drag) plays no role in these location decisions, expected returns and liquidation tax do. The assets we expect to grow the most should be placed in a TEA, and doing so will plainly increase the overall after-tax return. There is an additional benefit as well. Required minimum distributions (RMDs) apply to TDAs but not TEAs. Shifting expected growth into the TEA, at the expense of the TDA, will mean lower RMDs, giving the investor more flexibility to control taxable income down the road. In other words, a lower balance in the TDA can mean lower tax rates in retirement, if higher RMDs would have pushed the retiree into a higher bracket. This potential benefit is not captured in our results. Urban Legend 5: Bonds always go in the IRA. Possibly, but not necessarily. This commonly asserted rule is a simplification, and will not be optimal under all circumstances. It is discussed at more length below. Existing Approaches to Asset Location: Advantages and Limitations Optimizing for After-Tax Return While Maintaining Separate Portfolios One approach to increasing after-tax return on retirement savings is to maintain a separate, standalone portfolio in each account with roughly the same level of risk-adjusted return, but tailoring each portfolio somewhat to take advantage of the tax profile of the account. Effectively, this means that each account separately maintains the desired exposure to stocks, while substituting certain asset classes for others. Generally speaking, managing a fully diversified portfolio in each account means that there is no way to avoid placing some assets with the highest expected return in the taxable account. This approach does include a valuable tactic, which is to differentiate the high-quality bonds component of the allocation, depending on the account they are held in. The allocation to the component is the same in each account, but in a taxable account, it is represented by municipal bonds which are exempt from federal tax , and in a qualified account, by taxable investment grade bonds . This variation is effective because it takes advantage of the fact that these two asset classes have very similar characteristics (expected returns, covariance and risk exposures) allowing them to play roughly the same role from an asset allocation perspective. Municipal bonds, however, are highly tax-efficient, and are very compelling in a taxable account. Taxable investment grade bonds have significant tax drag, and work best in a qualified account. Betterment has applied this substitution since 2014. The Basic Priority List Gobind Daryanani and Chris Cordaro sought to balance considerations around tax efficiency and expected return, and illustrated that when both are very low, location decisions with respect to those assets have very limited impact.5 That study inspired Michael Kitces, who leverages its insights into a more sophisticated approach to building a priority list.6 To visually capture the relationship between the two considerations, Kitces bends the one-dimensional list into a "smile." Asset Location Priority List Assets with a high expected return that are also very tax-efficient go in the taxable account. Assets with a high expected return that are also very tax-inefficient go in the qualified accounts, starting with the TEA. The "smile" guides us in filling the accounts from both ends simultaneously, and by the time we get to the middle, whatever decisions we make with respect to those assets just "don’t matter" much. However, Kitces augments the graph in short order, recognizing that the basic "smile" does not capture a third key consideration—the impact of liquidation tax. Because capital gains will eventually be realized in a taxable account, but not in a TEA, even a highly tax-efficient asset might be better off in a TEA, if its expected return is high enough. The next iteration of the "smile" illustrates this preference. Asset Location Priority List with Limited High Return Inefficient Assets Part IV: TCP Methodology There is no one-size-fits-all asset location for every set of inputs. Some circumstances apply to all investors, but shift through time—the expected return of each asset class (which combines separate assumptions for the risk-free rate and the excess return), as well as dividend yields, QDI percentages, and tax laws. Other circumstances are personal—which accounts the client has, the relative balance of each account, and the client’s time horizon. Solving for multiple variables while respecting defined constraints is a problem that can be effectively solved by linear optimization. This method is used to maximize some value, which is represented by a formula called an "objective function." What we seek to maximize is the after-tax value of the overall portfolio at the end of the time horizon. We get this number by adding together the expected after-tax value of every asset in the portfolio, but because each asset can be held in more than one account, each portion must be considered separately, by applying the tax rules of that account. We must therefore derive an account-specific expected after-tax return for each asset. Deriving Account-Specific After-Tax Return To define the expected after-tax return of an asset, we first need its total return (i.e., before any tax is applied). The total return is the sum of the risk-free rate (same for every asset) and the excess return (unique to every asset). Betterment derives excess returns using the Black-Litterman model as a starting point. This common industry method involves analyzing the global portfolio of investable assets and their proportions, and using them to generate forward-looking expected returns for each asset class. Next, we must reduce each total return into an after-tax return.7 The immediate problem is that for each asset class, the after-tax return can be different, depending on the account, and for how long it is held. In a TEA, the answer is simple—the after-tax return equals the total return—no calculation necessary. In a TDA, we project growth of the asset by compounding the total return annually. At liquidation, we apply the ordinary rate to all of the growth.8 We use what is left of the growth after taxes to derive an annualized return, which is our after-tax return. In a taxable account, we need to consider the dividend and capital gain component of the total return separately, with respect to both rate and timing. We project growth of the asset by taxing the dividend component annually at the ordinary rate (or the preferential rate, to the extent that it qualifies as QDI) and adding back the after-tax dividend (i.e., we reinvest it). Capital gains are deferred, and the LTCG is fully taxed at the preferential rate at the end of the period. We then derive the annualized return based on the after-tax value of the asset.9 Note that for both the TDA and taxable calculations, time horizon matters. More time means more value from deferral, so the same total return can result in a higher annualized after-tax return. Additionally, the risk-free rate component of the total return will also depend on the time horizon, which affects all three accounts. Because we are accounting for the possibility of a TEA, as well, we actually have three distinct after-tax returns, and thus each asset effectively becomes three assets, for any given time horizon (which is specific to each Betterment customer). The Objective Function To see how this comes together, we first consider an extremely simplified example. Let’s assume we have a taxable account, both a traditional and Roth account, with $50,000 in each one, and a 30-year horizon. Our allocation calls for only two assets: 70% equities (stocks) and 30% fixed income (bonds). With a total portfolio value of $150,000, we need $105,000 of stocks and $45,000 of bonds. 1. These are constants whose value we already know (as derived above). req,tax is the after-tax return of stocks in the taxable account, over 30 years req,trad is the after-tax return of stocks in the traditional account, over 30 years req,roth is the after-tax return of stocks in the Roth account, over 30 years rfi,tax is the after-tax return of bonds in the taxable account, over 30 years rfi,trad is the after-tax return of bonds in the traditional account, over 30 years rfi,roth is the after-tax return of bonds in the Roth account, over 30 years 2. These are the values we are trying to solve for (called "decision variables"). xeq,tax is the amount of stocks we will place in the taxable account xeq,trad is the amount of stocks we will place in the traditional account xeq,roth is the amount of stocks we will place in the Roth account xfi,tax is the amount of bonds we will place in the taxable account xfi,trad is the amount of bonds we will place in the traditional account xfi,roth is the amount of bonds we will place in the Roth account 3. These are the constraints which must be respected. All positions for each asset must add up to what we have allocated to the asset overall. All positions in each account must add up to the available balance in each account. xeq,tax + xeq,trad + xeq,roth = 105,000 xfi,tax + xfi,trad + xfi,roth = 45,000 xeq,tax + xfi,tax = 50,000 xeq,trad + xfi,trad = 50,000 xeq,roth + xfi,roth = 50,000 4. This is the objective function, which uses the constants and decision variables to express the after-tax value of the entire portfolio, represented by the sum of six terms (the after-tax value of each asset in each of the three accounts). maxx req,taxxeq,tax + req,tradxeq,trad + req,rothxeq,roth + rfi,taxxfi,tax + rfi,tradxfi,trad + rfi,rothxfi,roth Linear optimization turns all of the above into a complex geometric representation, and mathematically closes in on the optimal solution. It assigns values for all decision variables in a way that maximizes the value of the objective function, while respecting the constraints. Accordingly, each decision variable is a precise instruction for how much of which asset to put in each account. If a variable comes out as zero, then that particular account will contain none of that particular asset. An actual Betterment portfolio can potentially have twelve asset classes,15 depending on the allocation. That means TCP must effectively handle up to 36 "assets," each with its own after-tax return. However, the full complexity behind TCP goes well beyond increasing assets from two to twelve. Updated constants and constraints will trigger another part of the optimization, which determines what TCP is allowed to sell, in order to move an already coordinated portfolio toward the newly optimal asset location, while minimizing taxes. Reshuffling assets in a TDA or TEA is "free" in the sense that no capital gains will be realized.10 In the taxable account, however, TCP will attempt to move as close as possible towards the optimal asset location without realizing capital gains. Expected returns will periodically be updated, either because the risk-free rate has been adjusted, or because new excess returns have been derived via Black-Litterman. Future cash flows may be even more material. Additional funds in one or more of the accounts could significantly alter the constraints which define the size of each account, and the target dollar allocation to each asset class. Such events (including dividend payments, subject to a de minimis threshold) will trigger a recalculation, and potentially a reshuffling of the assets. Cash flows, in particular, can be a challenge for those managing their asset location manually. Inflows to just one account (or to multiple accounts in unequal proportions) create a tension between optimizing asset location and maintaining asset allocation, which is hard to resolve without mathematical precision. To maintain the overall asset allocation, each position in the portfolio must be increased pro-rata. However, some of the additional assets we need to buy "belong" in other accounts from an asset location perspective, even though new cash is not available in those accounts. If the taxable account can only be partially reshuffled due to built-in gains, we must choose either to move farther away from the target allocation, or the target location.11 With linear optimization, our preferences can be expressed through additional constraints, weaving these considerations into the overall problem. When solving for new cash flows, TCP penalizes allocation drift higher than it does location drift. Against this background, it is important to note that expected returns (the key input into TCP, and portfolio management generally) are educated guesses at best. No matter how airtight the math, reasonable people will disagree on the "correct" way to derive them, and the future may not cooperate, especially in the short-term. There is no guarantee that any particular asset location will add the most value, or even any value at all. But given decades, the likelihood of this outcome grows. Part V: Monte Carlo—Betterment’s Testing Framework To test the output of the linear optimization method, we turned to a Monte Carlo testing framework,12 built entirely in-house by Betterment’s experts. The forward-looking simulations model the behavior of the TCP strategy down to the individual lot level. We simulate the paths of these lots, accounting for dividend reinvestment, rebalancing, and taxation. The simulations applied Betterment’s rebalancing methodology, which corrects drift from the target asset allocation in excess of 3% once the account balance meets or exceeds the required threshold, but stops short of realizing STCG, when possible. Betterment’s management fees were assessed in all accounts, and ongoing taxes were paid annually from the taxable account. All taxable sales first realized available losses before touching LTCG. The simulations assume no additional cash flows other than dividends. This is not because we do not expect them to happen. Rather, it is because making assumptions around these very personal circumstances does nothing to isolate the benefit of TCP specifically. Asset location is driven by the relative sizes of the accounts, and cash flows will change these ratios, but the timing and amount is highly specific to the individual.19 Avoiding the need to make specific assumptions here helps keep the analysis more universal. We used equal starting balances for the same reason.13 For every set of assumptions, we ran each market scenario while managing each account as a standalone (uncoordinated) Betterment portfolio as the benchmark.14 We then ran the same market scenarios with TCP enabled. In both cases, we calculated the after-tax value of the aggregate portfolio after full liquidation at the end of the period.15 Then, for each market scenario, we calculated the after-tax annualized internal rates of return (IRR) and subtracted the benchmark IRR from the TCP IRR. That delta represents the incremental tax alpha of TCP for that scenario. The median of those deltas across all market scenarios is the estimated tax alpha we present below for each set of assumptions. Part VI: Results More Bonds, More Alpha A higher allocation to bonds leads to a dramatically higher benefit across the board. This makes sense—the heavier your allocation to tax-inefficient assets, the more asset location can do for you. To be extremely clear: this is not a reason to select a lower allocation to stocks! Over the long-term, we expect a higher stock allocation to return more (because it’s riskier), both before, and after tax. These are measurements of the additional return due to TCP, which say nothing about the absolute return of the asset allocation itself. Conversely, a very high allocation to stocks shows a smaller (though still real) benefit. However, younger customers invested this aggressively should gradually reduce risk as they get closer to retirement (to something more like 50% stocks). Looking to a 70% stock allocation is therefore an imperfect but reasonable way to generalize the value of the strategy over a 30-year period. More Roth, More Alpha Another pattern is that the presence of a Roth makes the strategy more valuable. This also makes sense—a taxable account and a TEA are on opposite ends of the "favorably taxed" spectrum, and having both presents the biggest opportunity for TCP’s "account arbitrage." But again, this benefit should not be interpreted as a reason to contribute to a TEA over a TDA, or to shift the balance between the two via a Roth conversion. These decisions are driven by other considerations. TCP’s job is to optimize the relative balances as it finds them. Enabling TCP On Existing Taxable Accounts TCP should be enabled before the taxable account is funded, meaning that the initial location can be optimized without the need to sell potentially appreciated assets. A Betterment customer with an existing taxable account who enables TCP should not expect the full incremental benefit, to the extent that assets with built-in capital gains need to be sold to achieve the optimal location. This is because TCP conservatively prioritizes avoiding a certain tax today, over potentially reducing tax in the future. However, the optimization is performed every time there is a deposit (or dividend) to any account. With future cash flows, the portfolio will move closer to whatever the optimal location is determined to be at the time of the deposit. Part VII: Special Considerations Low Bracket Taxpayers: Beware Taxation of investment income is substantially different for those who qualify for a marginal tax bracket of 15% or below. To illustrate, we have modified the chart from Part II to apply to such low bracket taxpayers.   Dividends Capital Gains Ordinary Rate N/A Any security held for a year or less (STCG) Preferential Rate N/A N/A No Tax Qualified dividends from any security are not taxed Any security held for a year or more is not taxed (LTCG) TCP is not designed for these investors. Optimizing around this tax profile would reverse many assumptions behind TCP’s methodology. Municipal bonds no longer have an advantage over other bond funds. The arbitrage opportunity between the ordinary and preferential rate is gone. In fact, there’s barely tax of any kind. It is quite likely that such investors would not benefit much from TCP, and may even reduce their overall after-tax return. If the low tax bracket is temporary, TCP over the long-term may still make sense. Also note that some combinations of account balances can, in certain circumstances, still add tax alpha for investors in low tax brackets. One example is when an investor only has traditional and Roth IRA accounts, and no taxable accounts being tax coordinated. Low bracket investors should very carefully consider whether TCP is suitable for them. As a general rule, we do not recommend it. Potential Problems with Coordinating Accounts Meant for Different Time Horizons We began with the premise that asset location is sensible only with respect to accounts that are generally intended for the same purpose. This is crucial, because unevenly distributing assets will result in asset allocations in each account that are not tailored towards the overall goal (or any goal at all). This is fine, as long as we expect that all coordinated accounts will be available for withdrawals at roughly the same time (e.g. at retirement). Only the aggregate portfolio matters in getting there. However, uneven distributions are less diversified. Temporary drawdowns (e.g., the 2008 financial crisis) can mean that a single account may drop substantially more than the overall coordinated portfolio. If that account is intended for a short-term goal, it may not have a chance to recover by the time you need the money. Likewise, if you do not plan on depleting an account during your retirement, and instead plan on leaving it to be inherited for future generations, arguably this account has a longer time horizon than the others and should thus be invested more aggressively. In either case, we do not recommend managing accounts with materially different time horizons as a single portfolio. For a similar reason, you should avoid applying asset location to an account that you expect will be long-term, but one that you may look to for emergency withdrawals. For example, a Safety Net Goal should never be managed by TCP. Large Upcoming Transfers/Withdrawals If you know you will be making large transfers in or out of your tax-coordinated accounts, you may want to delay enabling our tax coordination tool until after those transfers have occurred. This is because large changes in the balances of the underlying accounts can necessitate rebalancing, and thus may cause taxes. With incoming deposits, we can intelligently rebalance your accounts by purchasing asset classes that are underweight. But when large withdrawals or transfers out are made, despite Betterment’s intelligent management of executing trades, some taxes can be unavoidable when rebalancing to your overall target allocation. The only exception to this rule is if the large deposit will be in your taxable account instead of your IRAs. In that case, you should enable tax-coordination before depositing money into the taxable account. This is so our system knows to tax-coordinate you immediately. The goal of tax coordination is to reduce the drag taxes have on your investments, not cause additional taxes. So if you know an upcoming withdrawal or outbound transfer could cause rebalancing, and thus taxes, it would be prudent to delay enabling tax coordination until you have completed those transfers. Mitigating Behavioral Challenges Through Design There is a broader issue that stems from locating assets with different volatility profiles at the account level, but it is behavioral. Uncoordinated portfolios with the same allocation move together. Asset location, on the other hand, will cause one account to dip more than another, testing an investor’s stomach for volatility. Those who enable TCP across their accounts should be prepared for such differentiated movements. Rationally, we should ignore this—after all, the overall allocation is the same—but that is easier said than done. How TCP Interacts with Tax Loss Harvesting+ TCP and TLH work in tandem, seeking to minimize tax impact. As described in more detail below, the precise interaction between the two strategies is highly dependent on personal circumstances. While it is possible that enabling a TCP may reduce harvest opportunities, both TLH and TCP derive their benefit without disturbing the desired asset allocation. Operational Interaction TLH+ was designed around a "tertiary ticker" system, which ensures that no purchase in an IRA or 401(k) managed by Betterment will interfere with a harvested loss in a Betterment taxable account. A sale in a taxable account, and a subsequent repurchase of the same asset class in a qualified account would be incidental for accounts managed as separate portfolios. Under TCP, however, we expect this to occasionally happen by design. When "relocating" assets, either during initial setup, or as part of ongoing optimization, TCP will sell an asset class in one account, and immediately repurchase it in another. The tertiary ticker system allows this reshuffling to happen seamlessly, while attempting to protect any tax losses that are realized in the process. Conceptualizing Blended Performance TCP will affect the composition of the taxable account in ways that are hard to predict, because its decisions will be driven by changes in relative balances among the accounts. Meanwhile, the weight of specific asset classes in the taxable account is a material predictor of the potential value of TLH (more volatile assets should offer more harvesting opportunities). The precise interaction between the two strategies is far more dependent on personal circumstances, such as today’s account balance ratios and future cash flow patterns, than on generally applicable inputs like asset class return profiles and tax rules. These dynamics are best understood as a hierarchy. Asset allocation comes first, and determines what mix of asset classes we should stick to overall. Asset location comes second, and continuously generates tax alpha across all coordinated accounts, within the constraints of the overall portfolio. Tax loss harvesting comes third, and looks for opportunities to generate tax alpha from the taxable account only, within the constraints of the asset mix dictated by asset location for that account. TLH is usually most effective in the first several years after an initial deposit to a taxable account. Over decades, however, we expect it to generate value only from subsequent deposits and dividend reinvestments. Eventually, even a substantial dip is unlikely to bring the market price below the purchase price of the older tax lots. Meanwhile, TCP aims to deliver tax alpha over the entire balance of all three accounts for the entire holding period. *** Betterment does not represent in any manner that TCP will result in any particular tax consequence or that specific benefits will be obtained for any individual investor. The TCP service is not intended as tax advice. Please consult your personal tax advisor with any questions as to whether TCP is a suitable strategy for you in light of your individual tax circumstances. Please see our Tax-Coordinated Portfolio Disclosures for more information. Addendum As of May 2020, for customers who indicate that they’re planning on using a Health Savings Account (HSA) for long-term savings, we allow the inclusion of their HSA in their Tax-Coordinated Portfolio. If an HSA is included in a Tax-Coordinated Portfolio, we treat it essentially the same as an additional Roth account. This is because funds within an HSA grow income tax-free, and withdrawals can be made income tax-free for medical purposes. With this assumption, we also implicitly assume that the HSA will be fully used to cover long-term medical care spending. The tax alpha numbers presented above have not been updated to reflect the inclusion of HSAs, but remain our best-effort point-in-time estimate of the value of TCP at the launch of the feature. As the inclusion of HSAs allows even further tax-advantaged contributions, we contend that the inclusion of HSAs is most likely to additionally benefit customers who enable TCP. 1"Boost Your After-Tax Investment Returns." Susan B. Garland. Kiplinger.com, April 2014. 2But see "How IRA Withdrawals In The Crossover Zone Can Trigger The 3.8% Medicare Surtax," Michael Kitces, July 23, 2014. 3It is worth emphasizing that asset location optimizes around account balances as it finds them, and has nothing to say about which account to fund in the first place. Asset location considers which account is best for holding a specified dollar amount of a particular asset. However, contributions to a TDA are tax-deductible, whereas getting a dollar into a taxable account requires more than a dollar of income. 4Pg. 5, The Kitces Report. January/February 2014. 5Daryanani, Gobind, and Chris Cordaro. 2005. "Asset Location: A Generic Framework for Maximizing After-Tax Wealth." Journal of Financial Planning (18) 1: 44–54. 6The Kitces Report, March/April 2014. 7While the significance of ordinary versus preferential tax treatment of income has been made clear, the impact of an individual’s specific tax bracket has not yet been addressed. Does it matter which ordinary rate, and which preferential rate is applicable, when locating assets? After all, calculating the after-tax return of each asset means applying a specific rate. It is certainly true that different rates should result in different after-tax returns. However, we found that while the specific rate used to derive the after-tax return can and does affect the level of resulting returns for different asset classes, it makes a negligible difference on resulting location decisions. The one exception is when considering using very low rates as inputs (the implication of which is discussed under "Special Considerations"). This should feel intuitive: Because the optimization is driven primarily by the relative size of the after-tax returns of different asset classes, moving between brackets moves all rates in the same direction, generally maintaining these relationships monotonically. The specific rates do matter a lot when it comes to estimating the benefit of the asset location chosen, so rate assumptions are laid out in the "Results" section. In other words, if one taxpayer is in a moderate tax bracket, and another in a high bracket, their optimal asset location will be very similar and often identical, but the high bracket investor may benefit more from the same location. 8In reality, the ordinary rate is applied to the entire value of the TDA, both the principal (i.e., the deductible contributions) and the growth. However, this will happen to the principal whether we use asset location or not. Therefore, we are measuring here only that which we can optimize. 9TCP today does not account for the potential benefit of a foreign tax credit (FTC). The FTC is intended to mitigate the potential for double taxation with respect to income that has already been taxed in a foreign country. The scope of the benefit is hard to quantify and its applicability depends on personal circumstances. All else being equal, we would expect that incorporating the FTC may somewhat increase the after-tax return of certain asset classes in a taxable account—in particular developed and emerging markets stocks. If maximizing your available FTC is important to your tax planning, you should carefully consider whether TCP is the optimal strategy for you. 10Standard market bid-ask spread costs will still apply. These are relatively low, as Betterment considers liquidity as a factor in its investment selection process. Betterment customers do not pay for trades. 11Additionally, in the interest of making interaction with the tool maximally responsive, certain computationally demanding aspects of the methodology were simplified for purposes of the tool only. This could result in a deviation from the target asset location imposed by the TCP service in an actual Betterment account. 12Another way to test performance is with a backtest on actual market data. One advantage of this approach is that it tests the strategy on what actually happened. Conversely, a forward projection allows us to test thousands of scenarios instead of one, and the future is unlikely to look like the past. Another limitation of a backtest in this context—sufficiently granular data for the entire Betterment portfolio is only available for the last 15 years. Because asset location is fundamentally a long-term strategy, we felt it was important to test it over 30 years, which was only possible with Monte Carlo. Additionally, Monte Carlo actually allows us to test tweaks to the algorithm with some confidence, whereas adjusting the algorithm based on how it would have performed in the past is effectively a type of "data snooping". 13That said, the strategy is expected to change the relative balances dramatically over the course of the period, due to unequal allocations. We expect a Roth balance in particular to eventually outpace the others, since the optimization will favor assets with the highest expected return for the TEA. This is exactly what we want to happen. 14For the uncoordinated taxable portfolio, we assume an allocation to municipal bonds (MUB) for the high-quality bonds component, but use investment grade taxable bonds (AGG) in the uncoordinated portfolio for the qualified accounts. While TCP makes use of this substitution, Betterment has offered it since 2014, and we want to isolate the additional tax alpha of TCP specifically, without conflating the benefits. 15Full liquidation of a taxable or TDA portfolio that has been growing for 30 years will realize income that is guaranteed to push the taxpayer into a higher tax bracket. We assume this does not happen, because in reality, a taxpayer in retirement will make withdrawals gradually. The strategies around timing and sequencing decumulation from multiple account types in a tax-efficient manner are out of scope for this paper. Additional References Berkin. A. "A Scenario Based Approach to After-Tax Asset Allocation." 2013. Journal of Financial Planning. Jaconetti, Colleen M., CPA, CFP®. Asset Location for Taxable Investors, 2007. https://personal.vanguard.com/pdf/s556.pdf. Poterba, James, John Shoven, and Clemens Sialm. "Asset Location for Retirement Savers." November 2000. https://faculty.mccombs.utexas.edu/Clemens.Sialm/PSSChap10.pdf. Reed, Chris. "Rethinking Asset Location - Between Tax-Deferred, Tax-Exempt and Taxable Accounts." Accessed 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2317970. Reichenstein, William, and William Meyer. "The Asset Location Decision Revisited." 2013. Journal of Financial Planning 26 (11): 48–55. Reichenstein, William. 2007. "Calculating After-Tax Asset Allocation is Key to Determining Risk, Returns, and Asset Location." Journal of Financial Planning (20) 7: 44–53.

Socially Responsible Investing Portfolios Methodology Oct 27, 2022 12:00:00 AM See the methodology for our Socially Responsible Investing (SRI) portfolios. Table of Contents Introduction How do we define SRI? The Challenges of SRI Portfolio Construction How is Betterment’s Broad Impact portfolio constructed? How is Betterment’s Climate Impact portfolio constructed? How is Betterment’s Social Impact portfolio constructed? Conclusion Introduction Betterment first made a values-driven portfolio available to our customers in 2017, under the Socially Responsible Investing (SRI) label, and has maintained SRI as the umbrella term for the category in subsequent expansions and updates to that offering. Betterment’s portfolios represent a diversified, relatively low-cost solution that will be continually improved upon as costs decline, more data emerges, and as a result, the availability of SRI funds broadens (in this paper, “funds” refer to ETFs, and “SRI funds” refer to either ETFs screened for some form of ESG criteria or ETFs with an SRI-focused shareholder engagement strategy). Within Betterment’s SRI options, we offer a Broad Impact portfolio and two additional, more focused SRI portfolio options, a Social Impact SRI portfolio (focused on social governance criteria) and a Climate Impact SRI portfolio (focused on climate-conscious investments). How do we define SRI? Our approach to SRI has three fundamental dimensions: Reducing exposure to companies involved in unsustainable activities and environmental, social, or governmental controversies. Increasing investments in companies that work to address solutions for core environmental and social challenges in measurable ways. Allocating to investments that use shareholder engagement tools, such as shareholder proposals and proxy voting, to incentivize socially responsible corporate behavior. We first define our SRI approach using a set of industry criteria known as “ESG”, which stands for Environmental, Social and Governance, and then expand upon the ESG-investing framework with complementary shareholder engagement tools. SRI is the traditional name for the broad concept of values-driven investing (many experts now favor “sustainable investing” as the name for the entire category). ESG refers specifically to the quantifiable dimensions of a company’s standing along each of its three components. In our SRI portfolios, we use ESG factors to define and score the degree to which our portfolios incorporate socially responsible ETFs. We also complement our ESG factor-scored socially responsible ETFs with engagement-based socially responsible ETFs, where a fund manager uses shareholder engagement tools to express a socially responsible preference. Using ESG Factors In An SRI Approach A significant and obvious aspect of improving a portfolio’s ESG score is reducing exposure to companies that engage in unsustainable activities in your investment portfolio. Companies can be considered undesirable because their businesses do not align with specific values—e.g. selling tobacco, military weapons, or civilian firearms. Other companies may be undesirable because they have been involved in recent and ongoing ESG controversies and have yet to make amends in a meaningful way. SRI is about more than just adjusting your portfolio to minimize companies with a poor social impact. Based on the framework of MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years, a socially responsible investment approach also emphasizes the inclusion of companies that have a high overall ESG score, which represents an aggregation of scores for multiple thematic issues across E, S, and G pillars as shown in Table 1 below. Table 1. A Broad Set of Criteria Across E, S and G pillars 3 Pillars 10 Themes 35 Key ESG Issues Environment Climate Change Carbon Emissions Product Carbon Footprint Financing Environmental Impact Climate Change Vulnerability Natural Resources Water Stress Biodiversity & Land Use Raw Material Sourcing Pollution & Waste Toxic Emissions & Waste Electronic Waste Packaging Material & Waste Environmental Opportunities Opportunities in Clean Technology Opportunities in Renewable Energy Opportunities in Green Building Social Human Capital Labor Management Human Capital Development Health & Safety Supply Chain Labor Standards Product Liability Product Safety & Quality Privacy & Data Security Chemical Safety Responsible Investment Consumer Financial Protection Health & Demographic Risk Stakeholder Opposition Controversial Sourcing Community Relations Social Opportunities Access to Communications Access to Health Care Access to Finance Opportunities in Nutrition & Health Governance Corporate Governance Board Ownership Pay Accounting Corporate Behavior Business Ethics Tax Transparency Source: MSCI Ratings Methodology Shareholder Engagement The most direct ways a shareholder can influence a company’s decision making is through shareholder proposals and proxy voting. Publicly traded companies have annual meetings where they report on the business’ activities to shareholders. As a part of these meetings, shareholders can vote on a number of topics such as share ownership, the composition of the board of directors, and executive level compensation. Investors receive information on the topics to be voted on prior to the meeting in the form of a proxy statement, and can vote on these topics through a proxy card. A shareholder proposal is an explicit recommendation from an investor for the company to take a specific course of action. Shareholders can also propose their own nominees to the company’s board of directors. Once a shareholder proposal is submitted, the proposal or nominee is included in the company’s proxy information and is voted on at the next annual shareholders meeting. ETF shareholders themselves do not vote in the proxy voting process of underlying companies, but rather the ETF fund issuer participates in the proxy voting process on behalf of their shareholders. As investors signal increasing interest in ESG engagement, more ETF fund issuers have emerged that play a more active role engaging with underlying companies through proxy voting to advocate for more socially responsible corporate practices. These issuers use engagement-based strategies, such as shareholder proposals and director nominees, to engage with companies to bring about ESG change and allow investors in the ETF to express a socially responsible preference. The Challenges of SRI Portfolio Construction For Betterment, three limitations had a large influence on our overall approach to building an SRI portfolio: 1. Poor quality data underlying ESG scoring. Because SRI is still gaining traction, data for constructing ESG scores are at a nascent stage of development. There are no uniform standards for data quality yet. In order to standardize the process of assessing companies’ social responsibility practices, Betterment uses ESG factor scores from MSCI, who collects data from multiple sources, company disclosures, and over 1,600 media sources monitored daily. They also employ a robust monitoring and data quality review process. See the MSCI ESG Fund Ratings Executive Summary for more detail. 2. Many existing SRI offerings in the market have serious shortcomings. Many SRI offerings today sacrifice sufficient diversification appropriate for investors who seek market returns, allocate based on competing ESG issues and themes that reduce a portfolio’s effectiveness, and do not provide investors an avenue to use collective action to bring about ESG change. Betterment’s SRI portfolios do not sacrifice global diversification and all three portfolios include a partial allocation to an engagement-based socially responsible ETF using shareholder advocacy as a means to bring about ESG-change in corporate behavior. These approaches allow Betterment investors to take a diversified approach to sustainable investing and use their investments to bring about ESG-change. Engagement-based socially responsible ETFs have expressive value in that they allow investors to signal their interest in ESG issues to companies and the market more broadly, even if particular shareholder campaigns are unsuccessful. The Broad Impact portfolio seeks to balance each of the three dimensions of ESG without diluting different dimensions of social responsibility. With our Social Impact portfolio, we sharpen the focus on social equity with partial allocations to gender and racial diversity focused funds. With our Climate Impact portfolio, we sharpen the focus on controlling carbon emissions and fostering green solutions. 3. Integrating values into an ETF portfolio may not always meet every investor’s expectations, though it offers unique advantage For investors who prioritize an absolute exclusion of specific types of companies above all else, the ESG Scoring approach will inevitably fall short of expectations. For example, many of the largest ESG funds focused on US Large Cap stocks include some energy companies that engage in oil and natural gas exploration, like Hess. While Hess might rate relatively poorly along the “E” pillar of ESG, it could still rate highly in terms of the “S” and the “G.” Furthermore, maintaining our core principle of global diversification, to ensure both domestic and international bond exposure, we’re still allocating to some funds without an ESG mandate, until satisfactory solutions are available within those asset classes. We expect that increased asset flows across the industry into such funds would continue to drive down expense ratios and increase liquidity. Since the original offering, which was the predecessor to what is now our Broad Impact portfolio, we’ve been able to expand the ESG exposure to now also cover Developed Market stocks, Emerging Market stocks, and US High Quality Bonds. We also now include ESG exposure to an engagement-based fund. Sufficient options also exist for us to branch out in two different areas of focus—Climate Impact, and Social Impact. 4. Most available SRI-oriented ETFs present liquidity limitations. In an effort to control the overall cost for SRI investors, a large portion of our research focused on low-cost exchange-traded funds (ETFs) oriented toward SRI. While SRI-oriented ETFs indeed have relatively low expense ratios compared to SRI mutual funds, our analysis revealed insufficient liquidity in many ETFs currently on the market. Without sufficient liquidity, every execution becomes more expensive, creating a drag on returns. Median daily dollar volume is one way of estimating liquidity. Higher volume on a given asset means that you can quickly buy (sell) more of that asset in the market without driving the price up (down).The degree to which you can drive the price up or down with your buying or selling must be treated as a cost that can drag down on your returns. In balancing cost and value for the Broad Impact portfolio, the options were limited to funds that focus on US stocks , Developed Market stocks, Emerging Market stocks, US Investment Grade Corporate Bonds, and US High Quality bonds. How is Betterment’s Broad Impact portfolio constructed? In 2017, we launched our original SRI portfolio offering, which we’ve been steadily improving over the years. In 2020, we released two additional Impact portfolios and improved our original SRI portfolio, the improved iteration now called our “Broad Impact” portfolio to distinguish it from the new specific focus options, Climate Impact and Social Impact, and the legacy SRI portfolio for those investors who elected not to upgrade their historical version of the SRI portfolio (“legacy SRI portfolio”). For more information about the differences between our Broad Impact portfolio and the legacy SRI portfolio, please see our disclosures. As we’ve done since 2017, we continue to iterate on our SRI offerings, even if not all the fund products for an ideal portfolio are currently available. Figure 2 shows that we have increased the allocation to ESG focused funds each year since we launched our initial offering. Today all primary stock ETFs used in our Broad Impact, Climate Impact, and Social Impact portfolios have an ESG focus. 100% Stock Allocation in the Broad Impact Portfolio Over Time Figure 2. Calculations by Betterment. Portfolios from 2017-2019 represent Betterment’s original SRI portfolio. The 2020 portfolio represents a 100% stock allocation of Betterment’s Broad Impact portfolio. As additional SRI portfolios were introduced in 2020, Betterment’s SRI portfolio became known as the Broad Impact portfolio. As your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to SRI funds decreases. Additionally, a 100% stock allocation of the Broad Impact portfolio in a taxable goal with tax loss harvesting enabled may not be comprised of all SRI funds because of the lack of suitable secondary and tertiary SRI tickers in the developed and emerging market stock asset classes. Betterment has built a Broad Impact portfolio, which focuses on ETFs that rate highly on a scale that considers all three ESG pillars, and includes an allocation to an engagement-based SRI ETF. Broad ESG investing solutions are currently the most liquid, highlighting their popularity amongst investors. Due to this, we will first examine how we created Betterment’s Broad Impact portfolio. In order to maintain geographic and asset class diversification and to meet our requirements for lower cost and higher liquidity in all SRI portfolios, we continue to allocate to some funds that do not have SRI mandates, particularly in bond asset classes. How does the Broad Impact portfolio compare to Betterment’s Core portfolio? Based on the primary ticker holdings, the following are the main differences between Betterment’s Broad Impact portfolio and Core portfolio: Replacement of market cap-based US stock exposure and value style US stock exposure in the Core portfolio, with SRI-focused US stock market funds, ESGU and VOTE, in the Broad Impact portfolio. Replacement of market cap-based developed market stock fund exposure in the Core portfolio, with SRI-focused emerging market stock fund, ESGD, in the Broad Impact portfolio. Replacement of market cap-based emerging market stock fund exposure in the Core portfolio, with SRI-focused emerging market stock fund, ESGE, in the Broad Impact portfolio. Replacement of market cap-based US high quality bond fund exposure in the Core portfolio, with SRI-focused US high quality bond funds, EAGG and SUSC, in the Broad Impact portfolio. ESGU, ESGV, SUSA, ESGD, ESGE, SUSC, and EAGG each track a benchmark index that screens out companies involved in specific activities and selectively includes companies that score relatively highly across a broad set of ESG metrics. ESGU, ESGD, ESGE, SUSC, and EAGG exclude tobacco companies, thermal coal companies, oil sands companies, certain weapons companies (such as those producing landmines and bioweapons), and companies undergoing severe business controversies. The benchmark index for ESGV explicitly filters out companies involved in adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power. SUSA benchmark index screens out tobacco companies and companies that have run into recent ESG controversies. VOTE tracks a benchmark index that invests in 500 of the largest companies in the U.S. weighted according to their size, or market capitalization. This is different from the other indexes tracked by SRI funds in the Broad Impact portfolio, because the index does not take into account a company’s ESG factors when weighting different companies. Rather than invest more in good companies and less in bad companies, VOTE invests in the broader market and focuses on improving these companies’ social and environmental impact through shareholder engagement. Some of our allocations to bonds continue to be expressed using non-SRI focused ETFs since either the corresponding SRI alternatives do not exist or may lack sufficient liquidity. These non-SRI funds continue to be part of the portfolios for diversification purposes. As of September 2022, the Broad Impact portfolio’s asset weighted expense ratio, while relatively low-cost, has a range of 0.12-0.18%. This is dependent on the risk level (% allocation to stocks vs bonds) that you are invested in. The Broad Impact portfolio’s asset weighted expense ratio is higher than the Betterment Core portfolio strategy which has a range of 0.05-0.13%. SRI portfolios are also able to support our core tax products, Tax-loss Harvesting+ (TLH) and Tax-coordinated portfolios (TCP). In the Broad Impact portfolio, because of limited fund availability in the developed and emerging market SRI spaces, we use non-SRI market cap-based funds, like VWO, SPEM, VEA, and IEFA as secondary and tertiary funds for ESGE and ESGD when TLH is enabled. How socially responsible is the Broad Impact portfolio? As mentioned earlier, we first use the ESG data and analytics from MSCI to quantify how SRI-oriented our portfolios are. For each company that they cover, MSCI calculates a large number of ESG metrics across multiple environmental (E), social (S), and governance (G) pillars and themes (recall Table 1 above). All these metrics are first aggregated at the company level to calculate individual company scores. At the fund level, an overall MSCI ESG Quality score is calculated based on an aggregation of the relevant company scores. As defined by MSCI, this fund level ESG Quality score reflects “the ability of the underlying holdings to manage key medium- to long-term risks and opportunities arising from environmental, social, and governance factors”. These fund scores can be better understood given the MSCI ESG Quality Score scale shown below. See MSCI's ESG Fund Ratings for more detail. Table 2. The MSCI ESG Quality Score Scale The ESG Quality Score measures the ability of underlying holdings to manage key medium- to long-term risks and opportunities arising from environmental, social, and governance factors. Fund ESG Letter Rating Leader/ Laggard Fund ESG Quality Score (0-10 score) AAA Leader - Funds that invest in companies leading its industry in managing the most significant ESG risks and opportunities 8.6-10.0 AA 7.1-8.6 A Average- Funds that invest in companies with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers 5.7-7.1 BBB 4.3-5.7 BB 2.9-4.3 B Laggard- Funds that invest in companies lagging its industry based on its high exposure and failure to manage significant ESG risks 1.4-2.9 CCC 0.0-1.4 Source: MSCI *Appearance of overlap in the score ranges is due to rounding imprecisions. The 0-to-10 scale is divided into seven equal parts, each corresponding to a letter rating. Based on data from MSCI, which the organization has made publicly available for funds to drive greater ESG transparency, and sourced by fund courtesy of etf.com, Betterment’s 100% stock Broad Impact portfolio has a weighted MSCI ESG Quality score that is approximately 19% greater than Betterment’s 100% stock Core portfolio. MSCI ESG Quality Scores U.S. Stocks Betterment Core Portfolio: 8.2 Betterment Broad Impact Portfolio: 9.3 Emerging Markets Stocks Betterment Core Portfolio: 5.2 Betterment Broad Impact Portfolio: 8.6 Developed Markets Stocks Betterment Core Portfolio: 8.7 Betterment Broad Impact Portfolio: 9.7 US High Quality Bonds Betterment Core Portfolio: 6.6 Betterment Broad Impact Portfolio: 9.5 Sources: MSCI ESG Quality Scores courtesy of etf.com, values accurate as of September 30, 2022 and are subject to change. In order to present the most broadly applicable comparison, scores are with respect to each portfolio’s primary tickers exposure, and exclude any secondary or tertiary tickers that may be purchased in connection with tax loss harvesting. Another way we can measure how socially responsible a fund is by monitoring their shareholder engagement with companies on environmental, social and governance issues. Engagement-based socially responsible ETFs use shareholder proposals and proxy voting strategies to advocate for ESG change. We can review the votes of particular shareholder campaigns and evaluate whether those campaigns are successful. That review however does not capture the impact that the presence of engagement-based socially responsible ETFs may have on corporate behavior simply by existing in the market. Engagement-based socially responsible ETFs have expressive value in that they allow investors to signal their interest in ESG issues to companies and the market more broadly. These aspects of sustainable investing are more challenging to measure in a catch-all metric, however that does not diminish their importance. A Note On ESG Risks And Opportunities An ESG risk captures the negative externalities that a company in a given industry generates that may become unanticipated costs for that company in the medium- to long-term. An ESG opportunity for a given industry is considered to be material if companies will capitalize over a medium- to long-term time horizon. See MSCI ESG Ratings Methodology (June 2022 ) for more detail. For a company to score well on a key ESG issue (see Table 1 above), both the exposure to and management of ESG risks are taken into account. The extent to which an ESG risk exposure is managed needs to be commensurate with the level of the exposure. If a company has high exposure to an ESG risk, it must also have strong ESG risk management in order to score well on the relevant ESG key issue. A company that has limited exposure to the same ESG risk, only needs to have moderate risk management practices in order to score as highly. The converse is true as well. If a company that is highly exposed to an ESG risk also has poor risk management, it will score more poorly in terms of ESG quality than a company with the same risk management practices, but lower risk exposure. For example, water stress is a key ESG issue. Electric utility companies are highly dependent on water with each company more or less exposed depending on the location of its plants. Plants located in the desert are highly exposed to water stress risk while those located in areas with more plentiful water supplies present lower risk. If a company is operating in a location where water is scarce, it needs to take much more extensive measures to manage this risk than a company that has access to abundant water supply. Should we expect any difference in an SRI portfolio’s performance? One might expect that a socially responsible portfolio could lead to lower returns in the long term compared to another, similar portfolio. The notion behind this reasoning is that somehow there is a premium to be paid for investing based on your social ideals and values. A white paper written in partnership between Rockefeller Asset Management and NYU Stern Center for Sustainable Business, studied 1000+ research papers published from 2015-2020 which analyzed the relationship between ESG investing and performance. The primary takeaway from this research was that they found “positive correlations between ESG performance and operational efficiencies, stock performance, and lower cost of capital.” When ESG factors are considered, there seems to be improved performance potential over longer time periods and potential to also provide downside protection during periods of crisis. Dividend Yields Could Be Lower Dividend yields calculated over the past year (ending September 30, 2022) indicate that income returns coming from Broad Impact portfolios have been lower than those of Core portfolios. Oil and gas companies like BP, Chevron, and Exxon, for example, currently have relatively high dividend yields and excluding them from a given portfolio can cause its income return to be lower. Of course, future dividend yields are random variables and past data may not provide accurate forecasts. Nevertheless, lower dividend yields can be a factor in driving total returns for SRI portfolios to be lower than those of Core portfolios. Comparison of Dividend Yields Source: Bloomberg, Calculations by Betterment for one year period ending September 30, 2022. Dividend yields for each portfolio are calculated using the dividend yields of the primary ETFs used for taxable allocations of Betterment’s portfolios as of September 2022. How is Betterment’s Climate Impact portfolio constructed? Betterment offers a Climate Impact portfolio for investors that want to invest in an SRI strategy more focused on being climate-conscious rather than focusing on all ESG dimensions equally. The Climate Impact portfolio was designed to give investors exposure to climate-conscious investments, without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio, as we seek to incorporate broad based climate-focused ETFs with sufficient liquidity relative to their size in the portfolio. How does the Climate Impact portfolio more positively affect climate change? The Climate Impact portfolio is allocated to iShares MSCI ACWI Low Carbon Target ETF (CRBN), an ETF which seeks to track the global stock market, but with a bias towards companies with a lower carbon footprint. By investing in CRBN, investors are actively supporting companies with a lower carbon footprint, because CRBN overweights these stocks relative to their high-carbon emitting peers. One way we can measure the carbon impact a fund has is by looking at its weighted average carbon intensity, which measures the weighted average of tons of CO2 emissions per million dollars in sales, based on the fund's underlying holdings. Based on weighted average carbon intensity data from MSCI (courtesy of etf.com), Betterment’s 100% stock Climate Impact portfolio has carbon emissions per unit sales more than 50% lower than Betterment’s 100% stock Core portfolio as of September 30, 2022. International Developed and Emerging Markets stocks in the Climate Impact portfolio are also allocated to fossil fuel reserve free funds, EFAX and EEMX. U.S. stocks in the Climate Impact portfolio are allocated to a fossil fuel reserve free fund, SPYX, and an engagement-based ESG fund, VOTE. Rather than ranking and weighting funds based on a certain climate metric like CRBN, fossil fuel reserve free funds instead exclude companies that own fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in fossil fuel reserve free funds investors are actively divesting from companies with some of the most negative impact on climate change, including oil producers, refineries, and coal miners such as Chevron, ExxonMobile, BP, and Peabody Energy. Another way that the Climate Impact portfolio promotes a positive environmental impact is by investing in bonds that fund green projects. The Climate Impact portfolio invests in iShares Global Green Bond ETF (BGRN), which tracks the global market of investment-grade bonds linked to environmentally beneficial projects, as determined by MSCI. These bonds are called “green bonds”. The green bonds held by BGRN fund projects in a number of environmental categories defined by MSCI including alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. How does the Climate Impact portfolio compare to Betterment’s Core portfolio? When compared to the Betterment Core portfolio allocation, there are three main changes. First, in both taxable and tax-deferred portfolios,our Core portfolio’s Total Stock exposure is replaced with an allocation to a broad global low-carbon stock ETF (CRBN) in the Climate Impact portfolio. Currently, there are not any viable alternative tickers for the global low-carbon stock asset class so this component of the portfolio cannot be tax-loss harvested. Second, we allocate Core portfolio’s International Stock exposure, and a portion of our Core portfolio’s US Total Stock Market exposure to three broad region-specific stock ETFs that screen out companies that hold fossil-fuel reserves in the Climate Impact portfolio. US Total Stock Market exposure is replaced with an allocation to SPYX, International Developed Stock Market exposure is replaced by EFAX, and Emerging Markets Stock Market exposure is replaced by EEMX. In the Climate Impact portfolio, SPYX, EFAX, and EEMX will use ESG secondary tickers ESGU, ESGD, and ESGE respectively for tax loss harvesting. Third, we also allocate a portion of our Core portfolio’s US Total Stock Market exposure to a fund focused on engaging with companies to improve their corporate decision-making on sustainability and social issues, VOTE. Currently, there are not any comparable alternative tickers for VOTE so this component of the portfolio will not be tax-loss harvested. Lastly, for both taxable and tax-deferred portfolios we replace both our Core portfolio’s US High Quality Bond and International Developed Market Bond exposure with an allocation to a global green bond ETF (BGRN) in the Climate Impact portfolio. Some of our allocations to bonds continue to be expressed using non-climate focused ETFs since either the corresponding alternatives do not exist or may lack sufficient liquidity. These non-climate-conscious funds continue to be part of the portfolios for diversification purposes. As of September 2022, the Climate Impact portfolio’s asset weighted expense ratio, while relatively low-cost, has a range of 0.13-0.20%. This is dependent on the risk level (% allocation to stocks vs bonds) that you are invested in. The Climate Impact portfolio’s asset weighted expense ratio is higher than the Betterment Core portfolio strategy which has a range of 0.05-0.13%. How do performance expectations compare to the Core portfolio? When some first consider ESG investing, they assume that they must pay a heavy premium in order to have their investments aligned with their values. However, as previously noted above, the data suggests that the performance between sustainable funds versus traditional funds is not significantly different, although there can be differences over shorter periods. How is Betterment’s Social Impact portfolio constructed? Betterment offers a Social Impact portfolio for investors that want to invest in a strategy more focused on the social pillar of ESG investing (the S in ESG). The Social Impact portfolio was designed to give investors exposure to investments which promote social equity, without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio discussed above, as we seek to incorporate broad based ETFs that focus on social equity with sufficient liquidity relative to their size in the portfolio. How does the Social Impact portfolio promote social equity? The Social Impact portfolio shares many of the same holdings as Betterment’s Broad Impact portfolio, which means the portfolio holds funds which rank strongly with respect to broad ESG factors. The Social Impact portfolio looks to further promote the social pillar of ESG investing, by also allocating to two ETFs that specifically focus on diversity and inclusion -- Impact Shares NAACP Minority Empowerment ETF (NACP) and SPDR SSGA Gender Diversity Index ETF (SHE). NACP is a US stock ETF offered by Impact Shares that tracks the Morningstar Minority Empowerment Index. The National Association for the Advancement of Colored People (NAACP) has developed a methodology for scoring companies based on a number of minority empowerment criteria. These scores are used to create the Morningstar Minority Empowerment Index, an index which seeks to maximize the minority empowerment score while maintaining market-like risk and strong diversification. The end result is an index which provides greater exposure to US companies with strong diversity policies that empower employees irrespective of race or nationality. By investing in NACP, investors are allocating more of their money to companies with a track record of social equity as defined by the NAACP. SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. In order to achieve this objective, companies are ranked within each sector according to their ratio of women in senior leadership positions. Only companies that rank highly within each sector are eligible for inclusion in the fund. By investing in SHE, investors are allocating more of their money to companies that have demonstrated greater gender diversity within senior leadership than other firms in their sector. For more information about these social impact ETFs, including any associated risks, please see our disclosures. How does the Social Impact portfolio compare to Betterment’s Core portfolio? The Social Impact portfolio builds off of the ESG exposure from funds used in the Broad Impact portfolio and makes the following additional changes. First, we replace a portion of our US Total Stock Market exposure with an allocation to a US Stock ETF, NACP, which provides exposure to US companies with strong racial and ethnic diversity policies in place. Second, another portion of our US Total Stock Market exposure is allocated to a US Stock ETF, SHE, which provides exposure to companies with a relatively high proportion of women in high-level positions. As with the Broad Impact and Climate Impact portfolios, we allocate the remainder of our Core portfolio’s US Total Stock Market exposure to a fund focused on engaging with companies to improve their corporate decision-making on sustainability and social issues, VOTE. Currently, there are not any viable alternative tickers for NACP, SHE, or VOTE, so these components of the portfolio will not be tax-loss harvested. As of September 2022, the Social Impact portfolio’s asset weighted expense ratio, while relatively low-cost, has a range of 0.13-0.20%. This is dependent on the risk level (% allocation to stocks vs bonds) that you are invested in. The Social Impact portfolio’s asset weighted expense ratio is higher than the Betterment Core portfolio strategy which has a range of 0.05-0.13%. How do performance expectations compare to the Core portfolio? When some first consider ESG investing, they assume that they must pay a heavy premium in order to have their investments aligned with their values. However, as previously noted above, the data suggests that the performance between sustainable funds versus traditional funds is not significantly different, although there can be differences over shorter periods. Conclusion Despite the various limitations that all SRI implementations face today, Betterment will continue to support its customers in further aligning their values to their investments. Betterment may add additional socially responsible funds to the SRI portfolios and replace other ETFs as more socially responsible products become available. How does the legacy SRI portfolio compare to the current SRI portfolios? There are certain differences between the legacy SRI portfolio and the current SRI portfolios. If you invested in the legacy SRI portfolio prior to October 2020 and chose not to update to one of the SRI portfolios, your legacy SRI portfolio does not include the above described enhancements to the Broad Impact portfolio. The legacy SRI portfolio may have different portfolio weights, meaning as we introduce new asset classes and adjust the percentage any one particular asset class contributes to a current SRI portfolio, the percentage an asset class contributes to the legacy SRI portfolio will deviate from the makeup of the current SRI portfolios and Betterment Core portfolio. The legacy SRI portfolio may also have different funds, ETFs, as compared to both the current versions of the SRI portfolios and the Betterment Core portfolio. Lastly, the legacy SRI portfolio may also have higher exposure to broad market ETFs that do not currently use social responsibility screens or engagement based tools and retain exposure to companies and industries based on previous socially responsible benchmark measures that have since been changed. Future updates to the Broad, Climate, and Social Impact portfolios will not be reflected in the legacy SRI portfolio.

Goldman Sachs Smart Beta Portfolio Methodology Oct 26, 2022 12:00:00 AM The Goldman Sachs Smart Beta portfolio is meant for investors who seek to outperform a market-cap portfolio strategy in the long term, despite periods of underperformance. Our Smart Beta portfolio sourced from Goldman Sachs Asset Management helps meet the preference of our customers who are willing to take on additional risks to potentially outperform a market capitalization strategy. The Goldman Sachs Smart Beta portfolio strategy reflects the same underlying principles that have always guided the core Betterment portfolio strategy—investing in a globally diversified portfolio of stocks and bonds. The difference is that the Goldman Sachs Smart Beta portfolio strategy seeks higher returns by moving away from market capitalization weightings in and across equity asset classes. What is a smart beta portfolio strategy? Portfolio strategies are often described as either passive or active. Most index funds and exchange-traded funds (ETFs) are categorized as “passive” because they track the returns of the underlying market based on asset class. By contrast, many mutual funds or hedge fund strategies are considered “active” because an advisor or fund manager is actively buying and selling specific securities to attempt to beat their benchmark index. The result is a dichotomy in which a portfolio gets labeled as passive or active, and investors infer possible performance and risk based on that label. In reality, portfolio strategies reside within a plane where passive and active are just two cardinal directions. Smart beta funds, like the ones we’ve selected for this portfolio, seek to achieve their performance by falling somewhere in between extreme passive and active, using a set of characteristics, called “factors,” with an objective of outperformance while managing risk. The portfolio strategy also incorporates other passive funds to achieve appropriate diversification. This alternative approach is also the reason for the name “smart beta.” An analyst comparing conventional portfolio strategies usually operates by assessing beta, which measures the sensitivity of the security to the overall market. In developing a smart beta approach, the performance of the overall market is seen as just one of many factors that affects returns. By identifying a range of factors that may drive return potential, we seek the potential to outperform the market in the long term while managing reasonable risk. When we develop and select new portfolio strategies at Betterment, we operate using five core principles of investing: Personalized planning A balance of cost and value Diversification Tax optimization Behavioral discipline The Goldman Sachs Smart Beta portfolio strategy aligns with all five of these principles, but the strategy configures cost, value, and diversification in a different way than Betterment’s Core portfolio. In order to pursue higher overall return potential, the smart beta strategy adds additional systematic risk factors that are summarized in the next section. Additionally, the strategy seeks to achieve global diversification across stocks and bonds while overweighting specific exposures to securities which may not be included in Betterment’s Core portfolio, such as real estate investment trusts (REITs). Meanwhile, with the smart beta portfolio, we’re able to continue delivering all of Betterment’s tax-efficiency features, such as tax loss harvesting and Tax Coordination. Investing in smart beta strategies has traditionally been more expensive than a pure market cap-weighted portfolio. While the Goldman Sachs Smart Beta portfolio strategy has a far lower cost than the industry average, it is slightly more expensive than the core Betterment portfolio strategy. Because a smart beta portfolio incorporates the use of additional systematic risk factors, we typically only recommend this portfolio for investors who have a high risk tolerance and plan to save for the long term. Which “factors” drive the Goldman Sachs Smart Beta portfolio strategy? Factors are the variables that drive performance and risk in a smart beta portfolio strategy. If you think of risk as the currency you spend to achieve potential returns, factors are what determine the underlying value of that currency. We can dissect a portfolio’s return into a linear combination of factors. In academic literature and practitioner research (Research Affiliates, AQR), factors have been shown to drive historical returns. These analyses form the backbone of our advice for using the smart beta portfolio strategy. Factors reflect economically intuitive reasons and behavioral biases of investors in aggregate, all of which have been well studied in academic literature. Most of the equity ETFs used in this portfolio are Goldman Sachs ActiveBetaTM, which are Goldman Sach’s factor-based smart beta equity funds. The factors used in these funds are equal weighted and include the following: Good Value When a company has solid earnings (after-tax net income), but has a relatively low price (i.e., there’s a relatively low demand by the universe of investors), its stock is considered to have good value. Allocating to stocks based on this factor gives investors exposure to companies that have high growth potential but have been overlooked by other investors. High Quality High-quality companies demonstrate sustainable profitability over time. By investing based on this factor, the portfolio includes exposure to companies with strong fundamentals (e.g., strong and stable revenue and earnings) and potential for consistent returns. Low Volatility Stocks with low volatility tend to avoid extreme swings up or down in price. What may seem counterintuitive is that these stocks also tend to have higher returns than high volatility stocks. This is recognized as a persistent anomaly among academic researchers because the higher the volatility of the asset, the higher its return should be (according to standard financial theory). Low-volatility stocks are often overlooked by investors, as they usually don’t increase in value substantially when the overall market is trending higher. In contrast, investors seem to have a systematic preference for high-volatility stocks based on the data and, as a result, the demand increases these stocks’ prices and therefore reduces their future returns. Strong Momentum Stocks with strong momentum have recently been trending strongly upward in price. It is well documented that stocks tend to trend for some time, and investing in these types of stocks allows you to take advantage of these trends. It’s important to define the momentum factor with precision since securities can also exhibit reversion to the mean—meaning that “what goes up must come down.” How can these factors lead to future outperformance? In specific terms, the factors that drive the smart beta portfolio strategy—while having varying performance year-to-year relative to their market cap benchmark—have potential to outperform their respective benchmarks when combined. You can see an example of this in the chart of yearly factor returns for US large cap stocks below. You’ll see that the ranking of the four factor indexes varies over time, rotating outperformance over the S&P 500 Index in nearly all of the years. Performance Ranking of Smart Beta Indices vs. S&P 500 Why invest in a smart beta portfolio? As we’ve explained above, we generally only advise using Betterment’s choice smart beta strategy if you’re looking for a more tactical strategy that seeks to outperform a market-cap portfolio strategy in the long term despite potential periods of underperformance. For investors who fall into such a scenario, our analysis, supported by academic and practitioner literature, shows that the four factors above may provide higher return potential than a portfolio that uses market weighting as its only factor. While each factor weighted in the smart beta portfolio strategy has specific associated risks, some of these risks have low or negative correlation, which allow for the portfolio design to offset constituent risks and control the overall portfolio risk. Of course, these risks and correlations are based on historical analysis, and no advisor could guarantee their outlook for the future. An investor who elects the Goldman Sachs Smart Beta portfolio strategy should understand that the potential losses of this strategy can be greater than those of market benchmarks. In the year of the dot-com collapse of 2000, for example, when the S&P 500 dropped by 10%, the S&P 500 Momentum Index lost 21%. Given the systematic risks involved, we believe the evidence that shows that smart beta factors may lead to higher expected return potential relative to market cap benchmarks, and thus, we are proud to offer the portfolio for customers with long investing horizons.

Betterment's Recommended Allocation Methodology Oct 25, 2022 10:00:00 AM Betterment helps you meet your goals by providing allocation advice. Our allocation methodology and the assumptions behind it are worth exploring. When you sign up with Betterment, you can set up investment goals you wish to save towards. You can set up countless investment goals. While creating a new investment goal, we will ask you for the anticipated time horizon of that goal, and to select one of the following goal types. Major Purchase Education Retirement Retirement Income General Investing Safety Net Betterment also allows users to create cash goals through the Cash Reserve offering, and crypto goals through the Betterment Crypto Investing offering. These goal types are outside the scope of this allocation advice methodology. For all investing goals (except for Safety Nets) the anticipated time horizon and the goal type you select inform Betterment when you plan to use the money, and how you plan to withdraw the funds (i.e. full immediate liquidation for a major purchase, or partial periodic liquidations for retirement). Safety Nets, by definition, do not have an anticipated time horizon (when you set up your goal, Betterment will assume a time horizon for Safety Nets to help inform saving and deposit advice, but you can edit this, and it does not impact our recommended investment allocation). This is because we cannot predict when an unexpected emergency expense will arise, or how much it will cost. For all goals (except for Safety Nets) Betterment will recommend an investment allocation based on the time horizon and goal type you select. Betterment develops the recommended investment allocation by projecting a range of market outcomes and averaging the best-performing risk level across the 5th-50th percentiles. For Safety Nets, Betterment’s recommended investment allocation is formed by determining the safest allocation that seeks to match or just beat inflation. Below are the ranges of recommended investment allocations for each goal type. Goal Type Most Aggressive Recommended Allocation Most Conservative Recommended Allocation Major Purchase 90% stocks (33+ years) 0% stocks (time horizon reached) Education 90% stocks (33+ years) 0% stocks (time horizon reached) Retirement 90% stocks (20+ years until retirement age) 56% stocks (retirement age reached) Retirement Income 56% stocks (24+ years remaining life expectancy) 30% stocks (9 years or less remaining life expectancy) General Investing 90% stocks (20+ years) 56% stocks (time horizon reached) Safety Net Safest allocation that seeks to match or just beat inflation Safest allocation that seeks to match or just beat inflation As you can see from the table above, in general, the longer a goal’s time horizon, the more aggressive Betterment’s recommended allocation. And the shorter a goal’s time horizon, the more conservative Betterment’s recommended allocation. This results in what we call a “glidepath” which is how our recommended allocation for a given goal type adjusts over time.  Below are the full glidepaths when applicable to the goal types Betterment offers. Major Purchase/Education Goals Retirement/Retirement Income Goals Figure above shows a hypothetical example of a client who lives until they’re 90 years old. It does not represent actual client performance and is not indicative of future results. Actual results may vary based on a variety of factors, including but not limited to client changes inside the account and market fluctuation. General Investing Goals Betterment offers an “auto-adjust” feature that will automatically adjust your goal’s allocation to control risk for applicable goal types, becoming more conservative as you near the end of your goals’ investing timeline. We make incremental changes to your risk level, creating a smooth  glidepath. Since Betterment adjusts the recommended allocation and portfolio weights of the glidepath based on your specific goals and time horizons, you’ll notice that “Major Purchase” goals take a more conservative path compared to a Retirement or General Investing glidepath. It takes a near zero risk for very short time horizons because we expect you to fully liquidate your investment at the intended date. With Retirement goals, we expect you to take distributions over time so we will recommend remaining at a higher risk allocation even as you reach the target date.  Auto-adjust is available in investing goals with an associated time horizon (excluding Safety Net goals and the BlackRock Target Income portfolio) for the Betterment Core portfolio, SRI portfolios, Innovation Technology portfolio, and Goldman Sachs Smart Beta portfolio. If you would like Betterment to automatically adjust your investments according to these glidepaths, you have the option to enable Betterment’s auto-adjust feature when you accept Betterment’s recommended allocation. This feature uses cash flow rebalancing and sell/buy rebalancing to help keep your goal’s allocation inline with our recommended allocation. Adjusting for Risk Tolerance The above investment allocation recommendations and glidepaths are based on what we call “risk capacity” or the extent to which a client’s goal can sustain a financial setback based on its anticipated time horizon and liquidation strategy. Clients have the option to agree with this recommendation or to deviate from it. Betterment uses an interactive slider that allows clients to toggle between different investment allocations (how much is allocated to stocks versus bonds) until they find the allocation that has the expected range of growth outcomes they are willing to experience for that goal given their tolerance for risk. Betterment’s slider contains 5 categories of risk tolerance: Very Conservative: This risk setting is associated with an allocation that is more than 7 percentage points below our recommended allocation to stocks. That’s ok, as long as you’re aware that you may sacrifice potential returns in order to limit your possibility of experiencing losses. You may need to save more in order to reach your goals. This setting is appropriate for those who have a lower tolerance for risk. Conservative: This risk setting is associated with an allocation that is between 4-7 percentage points below our recommended allocation to stocks. That’s ok, as long as you’re aware that you may sacrifice potential returns in order to limit your possibility of experiencing losses. You may need to save more inorder to reach your goals. This setting is appropriate for those who have a lower tolerance for risk. Moderate: This risk setting is associated with an allocation that is within 3 percentage points of our recommended allocation to stocks. Aggressive: This risk setting is associated with an allocation that is between 4-7 percentage points above our recommended allocation to stocks. This gives the benefit of potentially higher returns in the long-term but exposes you to higher potential losses in the short-term. This setting is appropriate for those who have a higher tolerance for risk. Very Aggressive: This risk setting is associated with an allocation that is more than 7 percentage points above our recommended allocation to stocks. This gives the benefit of potentially higher returns in the long-term but exposes you to higher potential losses in the short-term. This setting is appropriate for those who have a higher tolerance for risk.

Crypto Investing 101 Oct 24, 2022 4:40:00 PM Three questions to ask yourself before you invest in crypto. If you’re taking your first steps into the world of cryptocurrency investing, we recommend asking three questions to gain your footing. Don’t worry, we have some answers to get you moving when you’re ready. And remember, to invest in crypto you don’t have to be an expert. We’re here to be your guide so you can make the best decision for you. Question 1: What is crypto? A simple question with a not so simple answer. To date, there are over 17,000 types of crypto in existence.1 Bitcoin and Ethereum may be household names but the world of crypto extends far beyond their influence. In order to understand crypto, it helps to understand its underlying technology: blockchain. Blockchain is a technology that, in the context of crypto, provides recordkeeping through five foundational features: Immutable: The data can’t be changed. Decentralized: Controlled by a large network of computers instead of a central authority. Distributed: Many parties hold public copies of the ledger. Cryptographically Secure: Makes tampering or changing the data basically impossible. Permissionless: Open to anyone to participate. If you don’t remember any of the five features above, here’s the big idea: The internet enabled the digital flow of information. Blockchain technology enables the digital flow of almost anything of value. What does that mean? It means we can create systems to record ownership without the need for third parties. And we can transfer ownership—using blockchain—between each other without a third party. This creates potential for new economic and business models, which is why there are more than 17,000 types of crypto. Crypto use cases span from art (for example, you can bid on a bored looking ape for only a few hundred thousand dollars) to banking (making financial services available to marginalized groups) to gaming (better grab that plot of land in the metaverse before Snoop Dogg does). All of this is made possible because crypto, built on blockchains, creates new ways to transact in a growing digital economy. Question 2: Why should I invest in crypto? If you want to invest in crypto, reflecting on why can help guide your investments. Crypto is an emerging asset class and is transforming the financial industry. However, you should be careful to understand the risks of cryptocurrency, which can be highly speculative and volatile and can experience sharp drawdowns. Like all investing, this is personal and not without risk, and we encourage you to invest in crypto only when you are comfortable bearing the risk of loss. One of the things that excites us about crypto is the diversity of the ecosystem that is being created. Crypto is far more than simply a digital currency used to buy NFT art or “digital gold” as we see in the headlines. The use cases are creating global investment opportunities available to anyone who chooses to participate. Keep in mind, across the thousands of crypto projects, you do have to look out for scams and fraud. For example, Squid Game may have been a TV show worth binge watching but ended up being a crypto worth almost nothing. But that’s not to say that crypto can’t be used for good. (Fun Fact: Did you know that you can donate crypto to charity? GiveWell, one of Betterment’s partner charities, accepts many different types of crypto!) Here are a few common reasons people invest in crypto: Make Money Crypto investing comes with risks. There can be extreme price fluctuations compared to traditional asset classes. With that said, there is the potential for crypto to rapidly increase in value both over short and long periods of time. Based on Betterment’s research, this is the #1 reason people invest in crypto. And that’s perfectly fine—we invest to create wealth for ourselves and loved ones. Decentralization Many of the projects that create crypto tokens are considered decentralized, which means they aim to remove the control banks and large institutions have on financial services and other business models such as advertising. When applied to traditional finance, this sector of crypto is called Decentralized Finance, or DeFi. Blockchain technology, including digital wallets and smart contracts, can be used to replace banks and other third parties. In theory, this can put users in control, reduce fees, and speed up transactions. (You can send crypto almost instantly to another digital wallet.) Oh, and did we mention that crypto transactions can occur 24/7/365? Another benefit of its decentralized nature. Invest in the Future As we’ve mentioned, crypto spans a broad spectrum of our lives, and it's changing the future, even if we don’t know how yet. By now, you’ve likely heard the term metaverse being casually used, whether by Facebook’s (sorry, we mean Meta’s) CEO Mark Zuckerberg or by a family member at a holiday dinner. It’s everywhere we look. And one way or another, many investors believe the metaverse will be part of our future. Similarly, the concept of Web 3.0, which is a broader evolution of the internet, offers investors many forward thinking investments to consider. The best part? It’s generally accessible to anyone, not just angel investors and venture capitalists. Stepping back, a more general reason for investing in crypto, especially if you are completely new to it, is diversifying your broader investment portfolio. If done correctly, including a small amount of crypto in your overall portfolio may help prevent you from being overly exposed to concentrated risks. Depending on what crypto investments you select, you’ll gain exposure to advancements in the metaverse, decentralized finance, and Web 3.0 technologies, among others. Question 3: How should I invest in crypto? There are many ways to invest in crypto but we’ll boil this down to two categories for you to choose from: Do-It-Yourself Crypto and Managed Crypto Portfolios. Do-It-Yourself Crypto DIY crypto investing involves navigating digital wallets, selecting crypto exchanges, and safekeeping keys (so important!). Before you do any of that, don’t forget you need to research which of the 17,000-plus cryptos you want to invest in while navigating the crypto ecosystem yourself 24/7/365. Particularly because cryptocurrency is so varied and prone to speculation, DIY crypto involves significant upfront research to understand which crypto is the right fit for you. Managed Crypto Portfolios Crypto managed portfolios function similarly to managed equity portfolios. The technology and investment experts that manage the crypto portfolio do much of the heavy lifting (the nitty gritty research of which cryptocurrencies may be appropriate for you based on your financial situation and preferences, the rebalancing and reallocation, and the managing of your account, including wallets/keys) while you can focus on the bigger picture like creating the life you want through your investments. There is still risk with this method of investing in that the underlying cryptocurrencies may experience losses, but it can help you invest in crypto based on your needs and interests, creating a personalized crypto investing experience. Plus, you’ll save time and not have to stress about remembering your digital wallet’s password for fear of losing your Bitcoin forever. Are you ready to invest in crypto? Before you step into crypto investing, make sure you know what you are investing in and why it’s important to you, and try to understand the risks involved. Remember, you don’t have to be an expert. If you reserve the term DIY for weekend trips to the Home Depot, not crypto investing, consider a managed crypto investing portfolio.

What’s The Best Crypto to Buy Now? (Hint: There’s Not One) Oct 24, 2022 4:34:00 PM Here are three reasons why you shouldn't try to find the “best” cryptocurrency to buy now. (And what you can do instead.) If you decide to go on a Google search hunt for the best cryptocurrency to buy this year, you may find yourself down a rabbit hole in an unfamiliar and uncomfortable part of the internet. (Don’t worry, we’ve all been there at some point.) And if you don’t end up there, you may find yourself on one of the many generic investing websites, all offering you similar “top cryptocurrencies to buy in 2022” lists. You’ll find the usual suspects here, mostly based on market capitalization or even personal preference of the writer. It’s common for these lists to include Bitcoin, Ether, Solana, Cardano, Binance Coin, Polkadot, and Avalanche. All fair examples but no need to do a Google search at this point.  Instead of attempting to discover the next best cryptocurrency or token, we favor a different mental model. Ask yourself this question: What’s the best area of crypto to invest in, not now, but over the next three years? (Or whatever time horizon you are investing within.) You’ll see that trying to find the needle in the haystack—and it’s an incredibly large haystack—is probably not the best route to take. Rather, we recommend a more long-term, wide-reaching approach to selecting your investments. Three Reasons Not to Find the "Best" Crypto To sum it up, here are three reasons why you shouldn't try to find the “best” cryptocurrency to buy now. (And what you can do instead.) 1. You’re probably not a professional crypto investor. (And that’s perfectly OK.) If you are like nearly everyone, you’re not a professional crypto investor. Absolutely fine. Similar to any other asset class, non-professional crypto investors are at a disadvantage when it comes to technical resources, market data, and general industry knowledge. At Betterment, we have people whose job it is to research individual crypto assets and analyze the pros and cons of including them on our platform.  So instead of pretending to be a crypto day trader in search of a new token that’ll take you to the moon, we recommend staying on planet earth. One way to do this is to learn about broad sectors in crypto and decide for yourself which areas you think may have the most growth potential. Among other things, we’re talking about the metaverse, decentralized finance, and Web 3.0. You could take it a step further and read up on NFTs but you may just be tempted to right-click-save on a picture of an ape that for some strange reason you can’t stop staring at—avoid the temptation, for now. Read up on crypto sectors, and if you’re feeling up to it, try explaining them to your friends or family to see if you grasp the important notes. This approach will give you a wider understanding of the crypto industry and pairs well with our next two recommendations.  2. You don’t have enough time. (Join the club!) Making wise investment decisions takes time. One of the best investors to ever live, Warren Buffet, reads 80% of his day. We’re going to guess you can’t spend 80% of your day reading about crypto. So how do you make up for this? As we said, educate yourself about crypto industry sectors instead of searching for individual assets. But don’t stop once you can explain what the metaverse is and why it could change the future. Yes, you are short on time, but if you have done the work to understand sectors in crypto and are interested in investing, you have two very important questions to ask yourself: How much do I want to allocate into crypto? And what is my time horizon? These are very personal questions. And with the little time you do have, ones worth thinking about. Knowing the amount you are comfortable investing and when you need to withdraw the funds will help you better understand the risks and make a decision that lets you sleep at night. We like sleep. 3. You’re increasing your risk. (Not a good thing.) Investing in one cryptocurrency is not quite comparable to putting all of your eggs in one basket. It’s more like having one egg. One cryptocurrency, like one egg, can be fragile, or in financial language, volatile and prone to losses. It lacks any diversification within the crypto asset class. Diversification is a complex subject, but generally speaking, the goal of diversification is to invest in uncorrelated assets to reduce the risk of losses in a portfolio while enhancing its expected return. Moral of the story: we recommend diversification. Consider how your crypto investments fit into your larger diversified portfolio of uncorrelated assets. Within crypto, you can consider spreading your investments across multiple assets and even multiple sectors within crypto. One way of thinking about it is since predicting the future is near impossible, diversification sets you up for various outcomes. We built diversified crypto portfolios to give you the choice to invest across the crypto asset class.

How To Keep Your Financial Data Safe Oct 21, 2022 12:44:00 PM Cybersecurity threats are now the norm. Here's how we work with customers to protect their financial data. When it comes to protecting your financial information, the biggest threats are the most obvious: spam calls, phishing emails, and questionable messages. Scammers are constantly developing new, more devious ways to steal your personal information.  With software, they guess millions of passwords per second. They scrape your social media accounts for personal information to manipulate you or your friends. But most of all, they’re counting on you to let your guard down. Here are four ways we can work together to protect your financial data. Caution is your first line of defense If a phone call, email, or message seems fishy, it probably is. Would your bank really ask for your account number over the phone? What comes up when you Google the number? The IRS says they don’t email or text message people, and they’ll never ask for your personal information—so is that really them in your inbox? Why does that link have random characters instead of a URL you recognize? Is that the correct spelling of that company’s name? Don’t ever share personal information unless you’re sure who you’re sharing it with. And make sure that other people don’t have access to your passwords or login information, and you’re not reusing passwords on multiple sites. Two-factor authentication helps secure your account using a passcode that rotates over time, or one that you receive via text or a phone call.   Encryption is essential Any time you access a website or use an app, your device communicates with a server. With the right expertise, someone could hijack these communications and steal your information. Encryption prevents this. Encryption takes these sensitive communications and jumbles them up. The only way to un-jumble them? A key that only your device and the server share. It works like this: When you access Betterment, your connection is encrypted. But if you’re ever visiting a third-party site and don’t see the padlock in the browser bar, your connection is not secure. Don’t share any information on those sites! Hashing hides your information—even from us! We don’t need to know your password. That’s a secret only you should know. So, we use a technique called “hashing” to let you use it without telling us what it is.  Like encryption, hashing uses an algorithm to turn information (like your password) into an unreadable sequence. But unlike encryption, hashing is irreversible. There’s no key to decipher it. We can’t translate the hashing to read your password. However, every time you enter your password, the hashing algorithm produces the same sequence. So we don’t know your password; we just know if it was entered correctly. App-specific passwords let you securely sync accounts Odds are, between all your investments, savings, payment cards, budgeting apps, and financial assets, you use more than one financial institution. That’s OK. But if you’re trying to get a more complete picture of your financial portfolio and see what you have to work with, it helps to have a single, central account that can see the others.  Today’s technology makes it easier than ever to sync external accounts. But if you’re not careful, connecting them can make your financial data more vulnerable. To provide a middle ground between complete access and maximum security, Betterment uses app-specific passwords to sync your external accounts.  Let’s say you want to sync your Mint account with Betterment, for example. Mint can generate a separate password that gives Betterment read-only access to your Mint account. You’re not sharing your login credentials, and it won’t give you or anyone else the ability to change your Mint account from within Betterment. But you can still see the information you need to make informed decisions about your money.

How To Plan For Retirement Oct 21, 2022 11:56:00 AM It depends on the lifestyle you want, the investment accounts available, and the income you expect to receive. Most people want to retire some day. But retirement planning looks a little different for everyone. There’s more than one way to get there. And some people want to live more extravagantly—or frugally—than others.  Your retirement plan should be based on the life you want to live and the financial options you have available. And the sooner you sort out the details, the better. Even if retirement seems far away, working out the details now will set you up to retire when and how you want to. In this guide, we’ll cover: How much you should save for retirement Choosing retirement accounts Supplemental income to consider Self-employed retirement options How much should you save for retirement? How much you need to save ultimately depends on what you want retirement to look like. Some people see themselves traveling the world when they retire. Or living closer to their families. Maybe there’s a hobby you’ve wished you could spend more time and money on. Perhaps for you, retirement looks like the life you have now—just without the job.  For many people, that’s a good place to start. Take the amount you spend right now and ask yourself: do you want to spend more or less than that each year of retirement? How long do you want your money to last? Answering these questions will give you a target amount you’ll need to reach and help you think about managing your income in retirement.  Don’t forget to think about where you’ll want to live, too. Cost of living varies widely, and it has a big effect on how long your money will last. Move somewhere with a lower cost of living, and you need less to retire. Want to live it up in New York City, Seattle, or San Francisco? Plan to save significantly more.  And finally: when do you want to retire? This will give you a target date to save it by (in investing, that’s called a time horizon). It’ll also inform how much you need to retire. Retiring early reduces your time horizon, and increases the number of expected years you need to save for.  Choosing retirement accounts Once you know how much you need to save, it’s time to think about where that money will go. Earning interest and taking advantage of tax benefits can help you reach your goal faster, and that’s why choosing the right investment accounts is a key part of retirement planning. While there are many kinds of investment accounts in general, people usually use five main types to save for retirement: Traditional 401(k) Roth 401(k) Traditional IRA (Individual Retirement Account) Roth IRA (Individual Retirement Account) Traditional 401(k) A Traditional 401(k) is an employer-sponsored retirement plan. These have two valuable advantages: Your employer may match a percentage of your contributions Your contributions are tax deductible You can only invest in a 401(k) if your employer offers one. If they do, and they match a percentage of your contributions, this is almost always an account you’ll want to take advantage of. The contribution match is free money. You don’t want to leave that on the table. And since your contributions are tax deductible, you’ll pay less income tax while you’re saving for retirement. Roth 401(k) A Roth 401(k) works just like a Traditional one, but with one key difference: the tax advantages come later. You make contributions, your employer (sometimes) matches a percentage of them, and you pay taxes like normal. But when you withdraw your funds during retirement, you don’t pay taxes. This means any interest you earned on your account is tax-free. With both Roth and Traditional 401(k)s, you can contribute a maximum of $22,500 in 2023, or $30,000 if you’re age 50 or over.  Traditional IRA (Individual Retirement Account) As with a 401(k), an IRA gives you tax advantages. Depending on your income, contributions may lower your pre-tax income, so you pay less income tax leading up to retirement. The biggest difference? Your employer doesn’t match your contributions. The annual contribution limits are also significantly lower: just $6,500 for 2023, or $7,500 if you’re age 50 or over.  Roth IRA (Individual Retirement Account) A Roth IRA works similarly, but as with a Roth 401(k), the tax benefits come when you retire. Your contributions still count toward your taxable income right now, but when you withdraw in retirement, all your interest is tax-free. So, should you use a Roth or Traditional account? One option is to use both Traditional and Roth accounts for tax diversification during retirement. Another strategy is to compare your current tax bracket to your expected tax bracket during retirement, and try to optimize around that. Also keep in mind that your income may fluctuate throughout your career. So you may choose to do Roth now, but after a significant promotion you might switch to Traditional. Health Savings Account (HSA) An HSA is another solid choice. Contributions to an HSA are tax deductible, and if you use the funds on medical expenses, your distributions are tax-free. After age 65, you can withdraw your funds just like a traditional 401(k) or IRA, even for non-medical expenses.  You can only contribute to a Health Savings Accounts if you’re enrolled in a high-deductible health plan (HDHP). In 2023, you can contribute up to $3,850 to an HSA if your HDHP covers only you, and up to $7,750 if your HDHP covers your family. What other income can you expect? Put enough into a retirement account, and your distributions will likely cover your expenses during retirement. But if you can count on other sources of income, you may not need to save as much. For many people, a common source of income during retirement is social security. As long as you or your spouse have made enough social security contributions throughout your career, you should receive social security benefits. Retire a little early, and you’ll still get some benefits (but it may be less). This can amount to thousands of dollars per month. You can estimate the benefits you’ll receive using the Social Security Administration’s Retirement Estimator. Retirement accounts for the self-employed Self-employed people have a few additional options to consider. One Participant 401(k) Plan or Solo 401(k) A Solo 401(k) is similar to a regular 401(k). However, with a Solo 401(k), you’re both the employer and the employee. You can combine the employee contribution limit and the employer contribution limit. As long as you don’t have any employees and you’re your own company, this is a pretty solid option. However, a Solo 401(k) typically requires more advance planning and ongoing paperwork than other account types. If your circumstances change, you may be able to roll over your Solo 401(k) plan or consolidate your IRAs into a more appropriate retirement savings account. Simplified Employee Pension (SEP IRA) With a SEP IRA, the business sets up an IRA for each employee. Only the employer can contribute, and the contribution rate must be the same for each qualifying employee. Savings Incentive Match Plan for Employees (SIMPLE IRA) A SIMPLE IRA is ideal for small business owners who have 100 employees or less. Both the employer and the employee can contribute. You can also contribute to a Traditional IRA or Roth IRA—although how much you can contribute depends on how much you’ve put into other retirement accounts.

What To Do With An Inheritance Or Major Windfall Oct 21, 2022 11:50:00 AM You may feel the urge to splurge, but don’t waste this opportunity to move closer to your financial goals. It’s hard to be rational when thousands of dollars appear in your bank account, or you’re staring at a massive check. You might be excitedly thinking about what to buy with a tax refund. Or mourning the loss of a loved one who left you an inheritance. Whether you were expecting this windfall or not, it’s important to slow down and think about the best way to use it. Many people might let their impulses get the better of them. But used wisely, every windfall is a chance to give your financial plan a boost. In this guide, we’ll cover: Why it’s so easy to waste a windfall Why taxes should always come first What to do with the rest of your windfall Why it’s so easy to waste a windfall We tend to treat windfalls like inheritances differently than we treat other money. Many of us naturally think of it like a “bonus,” so saving may not even cross our mind. And even if you’ve worked hard to develop healthy spending habits, a sudden windfall can undo your effort. Here’s how it might happen: An inheritance makes your cash balance spike. You spend a little on early splurges, and start to slack on saving habits. This behavior snowballs, and a few months or years later, you face two consequences: you’ve completely spent the inheritance, and you’ve lost the good fiscal habits you had before. You may also fall into the trap of overextending your finances after using an inheritance for a big purchase. Say you use the inheritance for a down payment on a bigger house. Along with a bigger house comes higher property taxes, home maintenance costs, homeowner’s insurance, and monthly utilities. New furniture, too. Your monthly expenses can expand quickly while your income stays the same. The moment you find yourself with a lot of extra money, you should also think about taxes. Why taxes should always come first You don’t want to spend money you don’t have. If you burn through your windfall without setting aside money for taxes, that’s exactly what you could be doing. You’re not going to pay taxes on a tax refund, but if you receive an inheritance, win the lottery, sell a property, or find yourself in another unique situation, you could owe some hefty taxes. The best thing to do is consult a certified public accountant (CPA) or tax advisor to determine if you owe taxes on your windfall. What to do with the rest of your windfall Once taxes are taken care of, look at your windfall as an opportunity to accelerate your financial goals. Remember, if you created a financial plan, you already thought about the purchases and milestones that will be most meaningful to you. Sure, plans can change, but many of your responsibilities and long-term goals will stay the same. Still stuck? Here are some high-impact financial goals you can make serious progress on in the event of a windfall. Pay down your debt Left unchecked, high-interest debt can often outpace your financial gains. Credit card debt is especially dangerous. And while your student loan debt may have low interest rates, paying it off early could save you thousands of dollars. Paying off debt doesn’t have to mean you can’t work toward other financial goals—the important thing is to consider how fast your debt will accrue interest, and make paying it off one of your top priorities. Depending on the size of your windfall, you could snap your fingers and make your debt disappear. Boost your retirement fund It’s not always fun to plan years into the future, but putting some of your windfall to work in your retirement fund could make life a lot easier down the road. Put enough into retirement savings, and you may even be able to adjust your retirement plan. Maybe you could think about retiring earlier, or giving yourself more money to spend each year of retirement. Refinance your mortgage Paying off your primary mortgage isn’t usually a top priority, but refinancing can be a smart move. If you’re paying mortgage insurance and your equity has gone up enough, refinancing might mean you can stop. And locking in a lower interest rate can save tens of thousands of dollars over the life of your mortgage. Taking this step means your goal of home ownership may interfere less with your other financial goals. Revisit your safety net Any time your cost of living or responsibilities change, your emergency fund needs to keep up. Whatever stage of life you’re in, you want to be confident you have the finances to stay afloat in a crisis. If you suddenly lost your job or couldn’t work, do you have enough set aside to maintain your current lifestyle for at least a few months? Start estate planning Wherever you’re at in life, it’s important to consider what would happen if you suddenly died or became incapacitated. What would happen to you, your loved ones, and your assets? Would your finances make it into the right hands? Would they be used in the right ways? When you find yourself with a major windfall, it’s a good time to create or reevaluate your estate plan. Take time to double-check that you’ve set beneficiaries for all of your investment accounts. If you haven’t already, create a will and appoint a power of attorney. If you have children, you may want to set up a trust. Estate planning isn’t fun, but it can start paying immediate dividends in the form of peace of mind.

The Role Of Life Insurance In A Financial Plan Oct 21, 2022 11:44:00 AM Life insurance helps loved ones cover expenses and progress toward financial goals after you’re gone. When you’re making a financial plan, life insurance probably isn’t the first thing that comes to mind. But if you pass away, life insurance helps take care of your loved ones when you can’t. It helps your beneficiaries stay on track to pay off your mortgage, pursue secondary education, retire on time, and reach the other financial goals you’ve made together. It protects them from the sudden loss of income they could experience. Life insurance won’t help you reach your goals, but it ensures that your loved ones still can when you’re gone. In this guide, we’ll cover: Life insurance basics How to decide if you need life insurance How to apply for life insurance Life insurance basics Whatever policy you buy, life insurance has five main components: Policyholder: The person or entity who owns the life insurance policy. Usually, this is the person whose life is insured, but it’s also possible to take out a policy on someone else. The policyholder is responsible for paying the monthly or annual insurance premiums. Insured: Also known as the life assured, this is the person whose life the policy covers. The cost of life insurance heavily depends on who it covers. Beneficiary: The person, people or institution(s) that receive money if the insured dies. There can be more than one beneficiary named on the policy. Premium: This is what you pay monthly or annually to keep a policy active (or “in-force”). Stop paying premiums, and you could lose coverage. Death benefit: This is what the insurance company pays the beneficiaries if the insured person passes away. As soon as the policy is in force, the beneficiaries are usually eligible for the death benefit. In some circumstances, insurance companies aren’t obligated to pay the death benefit. This includes when: The insured outlives the policy term The policy lapses or gets canceled The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application Term life insurance vs. permanent life insurance Term life policies last for a set period of time. When the term is up, the policy expires. This is usually the most affordable type of life insurance. And since it’s not permanent, you can let it expire once you reach your financial goals and have other means of providing for your loved ones. You’re not stuck paying for protection you no longer need. In fact, the premiums are so low that you can even abandon your policy later without losing much money. Permanent life insurance policies don’t have an expiration date. They last for as long as the policyholder pays the premiums. Since they’re permanent, these policies also have a cash-value component that can be borrowed against. These policies have higher premiums than term policies. Permanent life insurance policies include whole, variable, universal and variable universal life. So, should you sign up for life insurance? If you have financial dependents, and you don’t have enough money set aside to provide for them in the event of your passing, then life insurance should be considered. Here are some cases where buying life insurance might not be beneficial: You have neither a spouse nor dependents You don’t have any debt You can self-insure (you have enough saved to cover debts and expenses) Unless that describes you, getting life insurance should probably be on your To-Do list. How much coverage do you need, though? That depends. If you’re married, you might want to leave a financial cushion for your spouse. You also might want to make sure that they can continue to pay off the loans you co-signed. For example, your spouse could lose your house if they are unable to keep up with the mortgage payments. Consider choosing a policy that will cover any debts your spouse may owe and the loss of your income. A common rule of thumb for an amount is 10x the insured's income. If you have kids, consider getting a policy big enough to cover all childcare costs, including everything you pay now and what you may pay in the future, such as college tuition. You may wish to leave enough behind for your spouse to cover your kids’ education expenses. Your death benefit should usually cover the entire amount of all these expenses, minus any assets you already have that your family can use to make up some of the financial shortfall. This could be as little as $250,000 or as much as several million dollars. How to apply for life insurance Applying for life insurance usually takes four to eight weeks, but you can often complete the process in just seven steps: Compare quotes from multiple companies Choose a policy Fill out an application Take a medical exam Complete a phone interview Wait for approval Sign your policy And just like that, you have life insurance—and your dependents have a little more peace of mind. Life insurance is about preparing for the unexpected. As you set financial goals and plan for the future, it’s important to consider what your family’s finances would look like without you. This is your fail-safe. In the worst case scenario, life insurance could prevent financial loss from adding to your loved ones’ grief.

What Is A Fiduciary, And Do I Need One for My Investments? Oct 21, 2022 11:32:00 AM When it comes to getting help managing your financial life, transparency is the name of the game. When you seek out financial advice, it’s reasonable to assume your advisor would put your best interests ahead of their own. But the truth is, if the investment advisor isn’t a fiduciary, they aren’t actually required to do so. So in this guide, we’ll: Define what exactly a fiduciary is and how they differ from other financial advisors Consider when it can be important to work with a fiduciary Learn how to be a proactive investment shopper What is a fiduciary, and what is the fiduciary duty? A fiduciary is a professional or institution that has the power to act on behalf of another party, and is required to do what is in the best interest of the other party to preserve good faith and trust. An investment advisor with a fiduciary duty to its clients is obligated to follow both a duty of care and a duty of loyalty to their clients. The duty of care requires a fiduciary to act in the client’s best interest. Under the duty of loyalty, the fiduciary must also attempt to eliminate or disclose all potential conflicts of interest.  Not all advisors are held to the same standards when providing advice, so it’s important to know who is required to act as a fiduciary. Financial advisors not acting as fiduciaries operate under a looser guideline called the suitability standard. Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but they neither have to put the clients’ best interests first nor disclose or avoid conflicts of interest so long as the transaction is considered suitable. What are examples of conflicts of interest? When in doubt, just follow the money. How do your financial advisors get paid? Are they incentivised to take actions that might not be in your best interest? Commissions are one of the most common conflicts of interest. At large brokerages, it’s still not uncommon for investment professionals to primarily rely on commissions to make money. With commission-based pay, your advisor might receive a cut each time you trade, plus a percentage each time they steer your money into certain investment companies’ financial products. They can be motivated to recommend you invest in funds that pay them high commissions (and cost you a higher fee), even if there’s a comparable and cheaper fund that benefits your financial strategy as a client.  When is it important to work with a fiduciary? When looking for an advisor to trade on your behalf and make investment decisions for you, you should strongly consider choosing a fiduciary advisor. This should help ensure that you receive suitable recommendations that will also be in your best interest. If you want to entrust an advisor with your financials and give them discretion, you may want to make sure they’re legally required to put your interests ahead of their own. On the other hand, if you’re simply seeking help trading securities in your portfolio, or you don’t want to give an advisor discretion over your accounts, you may not need a fiduciary advisor. How to be a proactive investment shopper Hiring a fiduciary advisor to manage your portfolio is one of the best ways to try and ensure you are receiving unbiased advice. We highly recommend verifying that your professional is getting paid to meet your needs, not the needs of a broker, fund, or external portfolio strategy. Ask the tough questions: “I’d love to learn how you’re paid in this arrangement. How do you make money?” “How do you protect your clients from your own biases? Can you tell me about potential conflicts of interest in this arrangement?” “What’s the philosophy behind the advice you give? What are the aspects of investment management that you focus on most?” “What would you say is your point of differentiation from other advisors?” Some of these questions may be answered in a Form CRS, which is a relationship summary that advisors and brokers are required to give their clients or customers as of summer 2020. You should also know the costs of your current investments and compare them with other options in the marketplace as time goes on. If alternatives seem more attractive, ask your advisor why they haven’t suggested making a switch. And if the explanation you get seems inadequate, consider whether you should continue working with your investment professional. Why is Betterment a fiduciary? A common point of confusion is whether or not robo-advisors can be fiduciaries. So let’s clear up any ambiguities: Yes, they certainly can be. Betterment is a Registered Investment Advisor (RIA) with the SEC and is held to the fiduciary standard as required under the Investment Advisers Act. Acting as a fiduciary aligns with Betterment’s mission because we are committed to helping you build a better life, where you can save more for the future and can make the most of your money through our cash management products and our investing and retirement products. I, as well as the rest of Betterment’s dedicated team of human advisors, are also Certified Financial Planners® (CFP®, for short). We’re held to the fiduciary standard, too. This way, you can be sure that the financial advice you receive from Betterment, whether online or from our team of human advisors, is in your best interest.

What You Should Know About Financial Markets Oct 21, 2022 10:05:00 AM Let time work in your favor. Let the market worry about itself. Financial markets are unpredictable. No matter how much research you do and how closely you follow the news, trying to “time the market” usually means withdrawing too early and investing too late. In this guide, we’ll explain: Why a long-term strategy is often the best approach The problems with trying to time the market How to accurately evaluate portfolio performance How to make adjustments when you need to Why a long-term strategy is often the best approach Watch the market closely, and you’ll see it constantly fluctuate. The markets can be sky high one day, then come crashing down the next. Zoom in close enough on any ten-year period, and you’ll see countless short-term gains and losses that can be large in magnitude. Zoom out far enough, and you’ll see a gradual upward trend. It’s easy to get sucked into market speculation. Those short-term wins feel good, and look highly appealing. But you’re not trying to win the lottery here—you’re investing. You’re trying to reach financial goals. At Betterment, we believe the smartest way to do that is by diversifying your portfolio, making regular deposits, and holding your assets for longer. Accurately predicting where the market is going in the short-term is extremely difficult, but investing regularly over the long-term is an activity you can control that can lead to far more reliable performance over time. The power of compounding is real. By regularly investing in a well-diversified portfolio, you’re probably not going to suddenly win big. But you’re unlikely to lose it all, either. And by the time you’re ready to start withdrawing funds, you’ll have a lot more to work with. The basics of diversification Diversification is all about reducing risk. Every financial asset, industry, and market is influenced by different factors that change its performance. Invest too heavily in one area, and your portfolio becomes more vulnerable to its specific risks. Put all your money in an oil company, and a single oil spill, regulation, lawsuit, or change in demand could devastate your portfolio. There’s no failsafe. The less you lean on any one asset, economic sector, or geographical region, the more stable your portfolio will likely be. Diversification sets your portfolio up for long-term success with steadier, more stable performance. The problems with trying to time the market There are two big reasons not to try and time the market: It’s difficult to consistently beat a well-diversified portfolio Taxes Many investors miss more in gains than they avoid in losses by trying to time a dip. Even the best active investors frequently make “the wrong call.” They withdraw too early or go all-in too late. There are too many factors outside of your control. Too much information you don’t have. To beat a well-diversified portfolio, you have to buy and sell at the perfect time. Again. And again. And again. No matter how much market research you do, you’re simply unlikely to win that battle in the long run. Especially when you consider short-term capital gains taxes. Any time you sell an asset you’ve held for less than a year and make a profit, you have to pay short-term capital gains taxes. Just like that, you might have to shave up to 37% off of your profits. With a passive approach that focuses on the long game, you hold onto assets for much longer, so you’re far less likely to have short-term capital gains (and the taxes that come with them). Considering the short-term tax implications, you don’t just have to consistently beat a well-diversified, buy-and-hold portfolio. In order to outperform it by timing the market, you have to blow it out of the water. And that’s why you may want to rethink the way you evaluate portfolio performance. How to evaluate portfolio performance Want to know how well your portfolio is doing? You need to use the right benchmarks and consider after-tax adjustments. US investors often compare their portfolio performance to the S&P 500 or the Dow Jones Industrial Average. But that’s helpful if you’re only invested in the US stock market. If you’re holding a well-diversified portfolio holding stocks and bonds across geographical regions, the Vanguard LifeStrategy Funds or iShares Core Allocation ETFs may be a better comparison. Just make sure you compare apples to apples. If you have a portfolio that’s 80% stocks, don’t compare it to a portfolio with 100% stocks. The other key to evaluating your performance is tax adjustments. How much actually goes in your pocket? If you’re going to lose 30% or more of your profits to short-term capital gains taxes, that’s a large drain on your overall return that may impact how soon you can achieve your financial goals. How to adjust your investments during highs and lows At Betterment, we believe investors get better results when they don’t react to market changes. On a long enough timeline, market highs and lows won’t matter as much. But sometimes, you really do need to make adjustments. The best way to change your portfolio? Start small. Huge, sweeping changes are much more likely to hurt your performance. If stock investments feel too risky, you can even start putting your deposits into US Short-Term Treasuries instead, which are extremely low risk, highly liquid, and mature in about six months. This is called a “dry powder” fund. Make sure your adjustments fit your goal. If your goal is still years or decades away, your investments should probably be weighted more heavily toward diversified stocks. As you get closer to the end date, you can shift to bonds and other low-risk assets. Since it’s extremely hard to time the market, we believe it’s best to ride out the market highs and lows. We also make it easy to adjust your portfolio to fit your level of risk tolerance. It’s like turning a dial up or down, shifting your investments more toward stocks or bonds. You’re in control. And if “don’t worry” doesn’t put you at ease, you can make sure your risk reflects your comfort level.

How To Manage Debt And Invest At The Same Time Oct 21, 2022 9:30:00 AM With the right strategy, it's possible to make progress on both goals. Managing debt and investing is a tricky balancing act. You can’t do everything at once, but paying off debt and building wealth are both vital to your financial future. In this guide, we’ll explain how to manage debt and invest in six steps: Account for your spending Make minimum debt payments Contribute to an employer-matched retirement plan (if you can) Focus on high-interest debt Build a Safety Net Fund Invest for the long-term First, let’s talk about your debt, your goals, and your repayment strategy. Planning around your debt Debt can completely derail your financial goals. It eats through your savings and can offset the gains you make through investing. Repaying major debt like student loans can feel like climbing a mountain. But not all debt is the same. High-interest credit card debt will quickly outpace your investment earnings. Ignore it, and it will consume your finances.  Debt with lower interest rates, like some student loans or your mortgage, can be much less of a priority. If you put off investing in favor of attacking this debt, you may not have time to reach your goals. It is possible to pay debt and invest at the same time—the key is to create a strategy based on your debt and your financial goals.  At Betterment, we recommend focusing on the debt with the highest interest first. The more time you give this debt to grow, the harder it becomes to pay off.  Now let's walk through Betterment’s six steps to manage your debt and invest. Step 1: Account for your spending Your finances are finite. You have a limited amount of money to pay down debt, invest, and cover your expenses. The first step is to learn what comes in and goes out each month. How much do you have to work with after rent, food, utilities, and other fixed expenses? Are there expensive habits you can eliminate to free up more money? Don’t plan to make changes you can’t stick to. The goal here is to establish a monthly budget, so you have enough to cover your bills and know how much you can save or put towards debt. We also recommend keeping enough in your checking account to act as a small buffer—three to five weeks of living expenses is generally a good rule of thumb—as even the best laid plans (or budgets) are derailed at times.  Step 2: Make minimum payments You really don’t want to miss your minimum payments. Fees and penalties make your debt hit harder, and they’re usually avoidable. Think of your minimum debt payments as fixed expenses. After your regular living expenses, minimum debt payments should be a top priority. Step 3: Contribute to an employer-matched retirement plan If your employer offers to match contributions to a 401(k), that’s free money! Don’t leave it on the table. A 401(k) also comes with valuable tax benefits. Even if it under performs, the match program allows your contributions to grow faster. It’s like your employer is giving your financial goals a boost. And that’s why this is almost always one of the smartest investment moves you can make. Step 4: Focus on high-interest debt When it comes down to it, high-interest debt is your biggest enemy. It’s a festering financial wound that grows faster than any interest you’re likely to earn. Left unchecked, credit card debt can easily cost you thousands of dollars in interest or more. And that’s money you could’ve invested, applied to other debt, or saved. Step 5: Build a Safety Net Fund Without a financial safety net, you’re one unexpected medical bill, car accident, or surprise expense away from even more debt. Generally we encourage you to pay off your high interest debt before fully funding a three to six month emergency fund. However, some people, particularly those who are worried about income loss, prefer building a large cushion of cash for emergencies first over paying down extra debt Step 6: Invest for the long-term Once you’ve paid down your high-interest debt, you can begin investing for the long-term. With a diversified portfolio, your investments can outpace your lower-interest debt. So you can work toward financial goals while making minimum payments. Using automatic deposits, you can create an investment plan and stick to it over time, treating your investments as part of your fixed budget. Your safety net will give you some financial breathing room, and before you know it, you’ll be making progress toward retirement, a downpayment on a house, college for your kids, or whatever your goal is.

What’s an IRA and How Does It Work? Oct 21, 2022 12:00:00 AM Learn more about this investment account with tax advantages that help you prepare for retirement. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have to accrue interest before you reach retirement age. But an IRA isn’t the only kind of investment account for retirement planning. And there are multiple types of IRAs available. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. If your employer offers a 401(k), it may be a better option than investing in an IRA. While anyone can open an IRA, employers typically match a portion of your contribution to a 401(k) account, helping your investment grow faster. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but not everyone has this option. Anyone can start an IRA, but a 401(k) is what’s known as an employer-sponsored retirement plan. It’s only available through an employer. Other differences between these two types of accounts are that: Employers often match a percentage of your contributions to a 401(k) 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an Individual Retirement Account, you determine exactly when and how to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) almost always has to come from your paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Learning how to time your IRA contributions can significantly increase your earnings over time. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2023 is $6,500 if you’re under 50, or $7,500 if you’re 50 or older. For a 401(k), the contribution limit for 2023 is $22,500 if you’re under 50, or $30,000 if you’re 50 or older. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common periodic question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an Individual Retirement Account is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you gain more returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. Calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center.

Tax Impact Using Our Cost Basis Accounting Method Oct 21, 2022 12:00:00 AM Selecting tax lots efficiently can address and reduce the tax impact of your investments. Selecting tax lots efficiently can address and reduce the tax impact of your investments. When choosing which tax lots of a security to sell, our method factors in both cost basis as well as duration held. When you make a withdrawal for a certain dollar amount from an investment account, your broker converts that amount into shares, and sells that number of shares. Assuming you are not liquidating your entire portfolio, there's a choice to be made as to which of the available shares are sold. Every broker has a default method for choosing those shares, and that method can have massive implications for how the sale is taxed. Betterment's default method seeks to reduce your tax impact when you need to sell shares. Basis reporting 101 The way investment cost basis is reported to the IRS was changed as a result of legislation that followed the financial crisis in 2008. In the simplest terms, your cost basis is what you paid for a security. It’s a key attribute of a “tax lot”—a new one of which is created every time you buy into a security. For example, if you buy $450 of Vanguard Total Stock Market ETF (VTI), and it’s trading at $100, your purchase is recorded as a tax lot of 4.5 shares, with a cost basis of $450 (along with date of purchase.) The cost basis is then used to determine how much gain you’ve realized when you sell a security, and the date is used to determine whether that gain is short or long term. However, there is more than one way to report cost basis, and it’s worthwhile for the individual investor to know what method your broker is using—as it will impact your taxes. Brokers report your cost basis on Form 1099-B, which Betterment makes available electronically to customers each tax season. Tax outcomes through advanced accounting When you buy the same security at different prices over a period of time, and then choose to sell some (but not all) of your position, your tax result will depend on which of the shares in your possession you are deemed to be selling. The default method stipulated by the IRS and typically used by brokers is FIFO (“first in, first out”). With this method, the oldest shares are always sold first. This method is the easiest for brokers to manage, since it allows them to go through your transactions at the end of the year and only then make determinations on which shares you sold (which they must then report to the IRS.) FIFO may get somewhat better results than picking lots at random because it avoids triggering short-term gains if you hold a sufficient number of older shares. As long as shares held for more than 12 months are available, those will be sold first. Since short-term tax rates are typically higher than long-term rates, this method can avoid the worst tax outcomes. However, FIFO's weakness is that it completely ignores whether selling a particular lot will generate a gain or loss. In fact, it's likely to inadvertently favor gains over losses; the longer you've held a share, the more likely it's up overall from when you bought it, whereas a recent purchase might be down from a temporary market dip.  Fortunately, the IRS allows brokers to offer investors a different default method in place of FIFO, which selects specific shares by applying a set of rules to whatever lots are available whenever they sell.  While Betterment was initially built to use FIFO as the default method, we’ve upgraded our algorithms to support a more sophisticated method of basis reporting, which aims to result in better tax treatment for securities sales in the majority of circumstances. Most importantly, we’ve structured it to replace FIFO as the new default—Betterment customers don’t need to do a thing to benefit from it. Betterment’s TaxMin method When a sale is initiated in a taxable account for part of a particular position, a choice needs to be made about which specific tax lots of that holding will be sold. Our algorithms select which specific tax lots to sell, following a set of rules which we call TaxMin. This method is more granular in its approach, and will aim to improve the tax impact for most transactions, as compared to FIFO. How does the TaxMin method work? Realizing taxable losses instead of gains and allowing short-term gains to mature into long-term gains (which are generally taxed at a lower rate) generally results in a lower tax liability in the long run. Accordingly, TaxMin also considers the cost basis of the lot, with the goal of realizing losses before any gains, regardless of when the shares were bought. Lots are evaluated to be sold in the following order: Short-term losses Long-term losses Long-term gains Short-term gains Generally, we sell shares in a way that is intended to prioritize generating short-term capital losses, then long-term capital losses, followed by long-term capital gains and then lastly, short-term capital gains. The algorithm looks through each category before moving to the next, but within each category, lots with the highest cost basis are targeted first. In the case of a gain, the higher the basis, the smaller the gain, which results in a lower tax burden. In the case of a loss, the opposite is true: the higher the basis, the bigger the loss (which can be beneficial, since losses can be used to offset gains). 1 A simple example If you owned the following lots of the same security, one share each, and wanted to sell one share on July 1, 2021 at the price of $105 per share, you would realize $10 of long term capital gains if you used FIFO. With TaxMin, the same trade would instead realize a $16 short term loss. If you had to sell two shares, FIFO would get you a net $5 long term gain, while TaxMin would result in a $31 short term loss. To be clear, you pay taxes on gains, while losses can help reduce your bill. Purchase Price ($) Purchase Date Gain or Loss ($) FIFO Selling order TaxMin Selling order $95 1/1/20 +10 1 4 $110 6/1/20 -5 2 3 $120 1/1/21 -15 3 2 $100 2/1/21 +5 4 5 $121 3/1/21 -16 5 1 What can you expect? TaxMin automatically works to reduce the tax impact of your investment transactions in a variety of circumstances. Depending on the transaction, the tax-efficiency of various tax-lot selection approaches may vary based on the individual’s specific circumstances (including, but not limited to, tax bracket and presence of other gains or losses.) Note that Betterment is not a tax advisor and your actual tax outcome will depend on your specific tax circumstances—consult a tax advisor for licensed advice specific to your financial situation. Footnote 1 Note that when a customer makes a change resulting in the sale of the entirety of a particular holding in a taxable account (such as a full withdrawal or certain portfolio strategy changes), tax minimization may not apply because all lots will be sold in the transaction.

Three Keys to Managing Joint Finances With Your Partner Oct 21, 2022 12:00:00 AM Talking about money with your partner can be a difficult conversation. The key is to have open communication, sooner rather than later. Money has wrecked its fair share of relationships. Maybe you’ve even seen one of yours go up in flames because of it. But it doesn’t have to. And while every partnership is different, we’ve seen an emphasis on three areas help our clients avoid the worst of money fights: Communication Prioritization Logistics Whether you’re married or not, and whether you join your accounts or keep them separate, they can help soften one of love’s thorniest topics. Open (and keep open) those lines of communication When you choose to share your life with someone special, you bring all sorts of baggage with you. Among the bags you might want to start unpacking first is your relationship with money. It could be complicated, and there’s probably all sorts of emotions wrapped up in it—especially with debt—but transparency can help avoid unpleasant surprises down the road. So to start with, try sizing up the financial state of your union by crunching a few numbers for each of you: Net worth (assets − liabilities) This can be the most emotionally-charged of numbers, and it’s no surprise why. It’s right there in the name: net worth. We tend to bundle up our concept of our own self-worth with our finances, and when those finances don’t look pretty, feelings of shame or embarrassment may follow. So it’s important to support each other during this exercise. Help your partner feel safe enough to share these sensitive details in the first place. When you’re both ready, add up all your assets (cash, investments, home equity, etc.), then subtract your total liabilities—namely debt (credit cards, student loans, mortgage, etc.)—to get a good sense of your separate and combined balance sheets. If you’re a Betterment customer, connecting your external financial accounts to Betterment can be a handy shortcut for this number-crunching.  Cash flow (income − expenses) Now comes the time to size up how much money is coming in and going out each month, with the difference being what you currently have available to save for all your goals (more on those later). For simplicity’s sake, it can be easier to start with your take-home pay, which may already factor in payroll taxes and expenses such as health care insurance. If you already contribute to a 401(k), which automatically comes out of your paycheck, be sure to count this toward your tallied savings when the time comes!   Toss in a survey of your respective credit scores, which could affect future goals such as home ownership, and you’ve started to lay the foundation for a healthier money partnership. And by no means is this a one-time exercise. For some couples, it helps to schedule a monthly financial check-in. Why monthly? Some people don’t like talking about finances at all. A monthly check-in gives you a safe space to start the conversation. Others think and talk about money all the time, which can be draining on a partner. Unless it’s urgent, you can make a note and wait to bring it up until the next check-in. A recurring monthly check-in solves both these problems and provides a forum to talk about upcoming big expenses and important money tasks, among other things. To make things fun, you can build your check-ins around something you already enjoy, like a weekend morning coffee date.  Prioritize as partners With key details like your net worth and cash flow in place, next comes the process of visualizing what you—as individuals and as a couple—want your money to do for you and your family. Couples don’t always see eye-to-eye on this, so now's the time to hash out any differences of opinion. If you have financial liabilities, know that it’s possible to manage debt and save at the same time; it all comes down to prioritizing. In general, we recommend putting your dollars to work in this order: Assuming your employer offers a 401(k) and matching contribution, contribute just enough to your 401(k) to get the full match so you’re not leaving any money on the table. Address short-term, high-priority goals such as: High-interest debt Emergency fund (3-6 months’ worth of living expenses) Save more for retirement in tax-advantaged investment accounts such as a 401(k) and IRA. How much more? Sign up for Betterment and we can help you figure that out. Save for other big money goals such as home ownership, education, vacations, etc.  The devil is in the details with #4, of course. And you may not be able to save as much as you need to for every single goal at this time. Just know that if you start at the top and set specific goals—”I’ll contribute X amount of dollars each month to pay off my high-interest debt in X number of years,” for example—you’ll eventually free up cash flow to put toward priorities that fall further down on your list. And if you’re looking to free up extra dollars to save, consider tracking your expenses with a budgeting tool.  Tend to the logistical paperwork With your planning well underway, next comes execution. How exactly will you set up your financial accounts? If you’re married, will you file taxes jointly or separately? And how will you update (or set up for the first time) your estate plan? These are three big questions best to start considering now. Set up your accounts for success There’s the process of jointly managing finances with your significant other, then there's the actual act of opening joint accounts. These are accounts you both share legal ownership of.  Whether or not you decide to keep all or some of your accounts separate is a highly-personal decision. One way to address it is the “yours, mine, ours” approach, also known as the “three-pot” approach. To keep some financial autonomy, you and your partner might each maintain credit cards and checking accounts in your own names to cover personal expenses or debt repayments. The bulk of your monthly income, however, would go into a joint account to cover your monthly bills and shared expenses. Head on over to our Help Center for more information on how to manage money with a partner at Betterment. If you’re married, weigh the pros and cons of filing taxes jointly In most cases, the financial benefits of you and your spouse filing one joint tax return will outweigh each of you filing separately, but it‘s important to know and understand your options. When you choose to file separately, you limit or altogether forgo several tax breaks and deductions including but not limited to: Child and Dependent Care Tax Credit Earned Income Tax Credit The American Opportunity Credit and Lifetime Learning Credit for higher education expenses The student loan interest deduction Traditional IRA deductions Roth IRA contributions That being said, you might consider filing separately if you find yourself in one of these scenarios: You and your spouse both have taxable income and at least one of you (ideally the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI). You participate in income-driven repayment plans for student loans. Filing separately may mean lower monthly loan payments in this scenario. You want to separate your tax liability from your spouse’s. If you know or suspect that your spouse is omitting income or overstating deductions and/or credits, you may want to file separately. You and/or your spouse live in a community property state. Special rules apply in these states for allocating income and deductions between each spouse’s tax return. We’re not a tax advisor, and since everyone’s situation is different, none of this should be considered tax advice for you specifically. If you have questions about your specific circumstances, you should seek the advice of a trusted tax professional. Update (or establish) your estate plan An estate plan can define what will happen with the people and things you’re responsible for if you die or become incapacitated. Who will make medical or financial decisions on your behalf? Who will be your child’s new guardian? How will your finances be divided? Who gets the house? If you haven’t yet created one, now may be the time. And if you have, it’s important to keep it up-to-date based on your latest life circumstance. Don’t forget to update your beneficiaries on any accounts that may pass outside the estate. That’s because beneficiary designation forms—not your will—determine who inherits your retirement savings and life insurance benefits. You can review, add, and update beneficiary listings on your Betterment accounts online.

Cash Reserve Has A Variable APY: What That Means For You Oct 21, 2022 12:00:00 AM Interest rates change over time, but at Betterment, we are always working hard to give you competitive rates so you can make the most of your money. Note: mention of Cash Reserve is inclusive of money held in cash goals. Our objectives are aligned with yours: we want to grow your money. Cash Reserve is an account that is different from the savings accounts that you might find at traditional banks. We’re not tied to one specific bank, so we have the opportunity to obtain attractive rates in the marketplace. We use our size and scale to access a network of program banks, and then we use our technology and efficiency to pass rates directly on to you. Is that rate guaranteed? No, it’s variable, and that’s by design. The Federal Funds Rate influences interest rates across all banks. As rates change, so will the Cash Reserve rate. You can feel confident that Betterment is always working to offer you competitive interest rates, no matter what the current rate environment may be. See what the current variable interest rate is for Cash Reserve. Similar to how we select the ETFs in each asset class for your portfolio, we work with a number of program banks to provide you competitive rates. What causes interest rates to change? No matter where you bank, the prevailing interest rate environment will have an impact on your interest rate. The amount banks are willing to pay on deposits is heavily influenced by the Federal Reserve, which sets the rate at which banks can loan money to each other. This is known as the Federal Funds Rate. It’s the rising tide that raises all rates, and the receding tide that can also bring them all down. The Federal Reserve sets a target range for the Federal Funds Rate, rather than aiming for a specific number. Because of this, the Federal Funds Rate can change by a small amount from day to day. However, larger changes to the Federal Funds Rate can occur when the Federal Reserve changes its target range or when the Federal Reserve changes policies. The interest rate you receive on Cash Reserve typically will change as a result of these more significant shifts in the Federal Funds Rate. What will future rates look like? If the Federal Reserve lowers its target range, the interest rate on Cash Reserve will generally change by a similar amount. You can expect this to impact rates at other banks as well.

How Tax Impact Preview Works Oct 21, 2022 12:00:00 AM Betterment continues to make investing more transparent and tax-efficient, and empowers you to make smarter financial decisions. Selling securities has tax implications. Typically, these announce themselves the following year, when you get your tax statement.  Betterment’s Tax Impact Preview feature provides a real-time tax estimate for a withdrawal or allocation change before you confirm the transaction. Tax Impact Preview potentially lowers your tax bill by showing you key information to make an informed decision. Tax Impact Preview is available to all Betterment customers at no additional cost. How It Works When you initiate a sale of securities (a withdrawal or allocation change), our algorithms first determine which ETFs to sell (rebalancing you in the process, by first selling the overweight components of your portfolio). Within each ETF, our lot selection algorithm, which we call TaxMin, is designed to select the most tax-efficient lots, selling losses first, and short-term gains last. To use Tax Impact Preview, select the “Estimate tax impact” button when you initiate an allocation change or withdrawal, which will give you detailed estimates of expected gains and/or losses, breaking them down by short and long-term. If your transaction results in a net gain, we estimate the maximum tax you might owe. Please note that Tax Impact Preview is not available for all account types, like crypto. Why Estimated? The tax owed is an estimate because the precise tax owed depends on many circumstances specific to you, including your tax bracket and the presence of past and future capital gains or losses for the year across all of your investment accounts. We use the highest applicable rates, to give you an upper-bound estimate. The gains and losses are also estimates as these depend on the exact price that the various ETFs will sell at. If the estimate is done after market close, the prices are sure to move a bit by the time the market opens. Even during the day, a few minutes will pass between the preview and the trades, and prices will shift some, so the estimates will no longer be 100% accurate. Finally, while we are able to factor in wash sale implications from prior purchases in your Betterment account, the estimates could change substantially due to future purchases, and we do not factor in activity in non-Betterment accounts. That is why every number we show you, while useful, is an estimate. Tax Impact Preview is not tax advice, and you should consult a tax professional on how these estimates apply to your individual situation. Why You Should Avoid Short-Term Capital Gains Smart investors take every opportunity to defer a gain from short-term to long-term—it can make a substantive difference in the return from that investment. To demonstrate, let’s assume a long-term rate of 20% and a short-term rate of 40%. A $10,000 investment with a 10% return—or $1,000—will result in a $400 tax if you sell less than a year (365 days or less) after you invested. But if you wait more than a year  (366 days or more) to sell, the tax will be only $200.That’s the difference between a 6% and 8% after-tax return.  Market timing is usually not a good idea, and most of us know this. Betterment’s Tax Impact Preview is intended to put a real dollar cost on knee-jerk reactions to market volatility (such as withdrawals or allocation changes) to help investors reconsider the critical moment when they are about to deviate from their long-term plan.

Financing An Education: A Guide For Students And Parents Oct 20, 2022 3:41:00 PM There’s more than one way to finance your education. Learn more about two common ways: 529 plans and student loans. Whether you’re looking at university or trade school, education is expensive. And if you’re like most people, you probably don’t have that kind of cash on hand. Some manage to work their way through college, but depending on the school, even a full-time job will barely put a dent in your expenses. So how should you pay for school? The answer depends on how much time you have, where you live, and where you want to go. If you have money to set aside for school, a 529 plan might be your best bet. Student loans are always an option, too—you just have to be careful. In this guide, we’ll cover: Investing in a 529 plan Financing responsibly with student loans What’s a 529 plan and how do you choose one? A 529 plan is a specialized investment account with tax benefits. It works similarly to a Roth IRA or Roth 401(k). You put money into the account and pay taxes up front, and if you withdraw for education expenses, you usually don’t have to pay taxes on anything you earned. While IRAs and 401(k)s help you plan for retirement, 529 plans help you plan for education expenses. Oh, and every state has its own plan. There are two types of 529 plans: Prepaid tuition plans With a prepaid tuition plan, you pay for tuition credits upfront, using today’s tuition rates. Fewer and fewer states offer these plans, but since tuition costs are always increasing, they can be a good option. Who knows how much tuition will cost in the coming years! The downside is that this money can only be used for tuition, and there are plenty of other education expenses. Education savings plans An education savings plan is more like a traditional investment account. You invest in funds, stocks, bonds, and other financial assets, and your account has the potential to grow through compound interest. You can also use this money on more than just tuition. Depending on your state, you could use your account for education fees, living expenses, technology, school supplies, or even student loan payments. Use it on anything else, and there’s a 10% penalty. 529 plan limitations Every 529 plan needs a specific beneficiary. It could be yourself, your child, a grandkid, a friend—whoever. Their age doesn’t matter. The only limitations are what the funds can be used for and how much you can contribute. Everything you put into a 529 plan is considered “a gift” to the beneficiary. And there are limits to how much you can gift to a person each year before being subject to gift tax rules. But you also have a lifetime limit in the millions of dollars. After that, there’s a gift tax. Gift tax rules are complex, so we recommend consulting a tax professional. Every state is different 529 plans can vary widely from state-to-state. And since you can choose plans from other states, it’s worth shopping around. While some plans let you apply your account to in-state or out-of-state education, others don’t. If you’re looking at a plan you can only use in-state, make sure you’re comfortable with the available schools. Some states offer a match program, where they’ll match a percentage of 529 plan contributions from low- and middle-income families. This could substantially boost your savings. Your state might also offer a full or partial tax break on your contributions—but that usually only applies if you live in state. And of course, each 529 plan is an investment account, so you’ll also want to review the investment choices and consider the cost of fees. For every plan, the account’s total worth can only be equal to the “expected amount” of future education expenses for each beneficiary. But that’s going to vary widely from state to state. The exact limit depends on which 529 plan you choose, but it’s typically a few hundred thousand dollars for each beneficiary. If you’re wanting to save for a private college or grad program, that may not be enough. And if your state’s limit is lower than what you think you’ll need, that may offset the benefit of a state tax break or match program. And according to Federal law, you can use up to $10,000 from a 529 plan to pay for “enrollment or attendance at an eligible elementary or secondary school.” It also lets you apply $10,000 toward student loans. But some states don’t follow these federal laws. If they don’t, and you use your funds like this anyway, you’ll have to pay a 10% penalty. Bottom line: Do your research, and make sure you’re familiar with the specifics of your 529 plan. How to choose a 529 plan The best 529 plan for you depends on: Where you live Where you or your beneficiary will go to school How much you want to save What you want to spend this money on But if you’re wondering how to tell which plan is likely to make the most of your money, it really comes down to just three things: tax benefits, fees, and investment choices. Be sure to look at all plan details and compare these factors before choosing one. Student loan basics Student loans have a bad reputation. And it’s understandable. About 43 million Americans owe an average of $39 thousand in student loans. The average student needs to borrow about $30,000 to earn their bachelor’s degree. But when it comes down to it, if you don’t have money to contribute to a 529 plan or investment account (or your account doesn’t have enough money), your options are: Work your way through college Take out student loans Even with a job, you may need to take student loans. Used wisely (and sparingly), student loans don’t have to consume your finances or derail your other goals. But as with 529 plans, you can’t assume every loan is the same. Types of student loans There are two main types of student loans to consider: Federal Private Federal student loans often (but not always) have the lowest interest rates, don’t require credit checks, and come with benefits like pathways to loan forgiveness. You don’t need a cosigner to get most federal loans, and nearly all students with a highschool diploma or GED are eligible for them. However, there’s a cap on how much money you can take out in federal loans, and some types of federal loans require you to demonstrate financial need. Financial institutions like banks can also provide private student loans. These typically require a good credit score, and you can take out as much as you need (as long as you’re approved for it). Another big difference: with private loans, you typically start making payments immediately and have a fixed repayment schedule set by your lender. With federal loans, you may not have to pay while you’re in school, you get a six-month grace period after you graduate, and you can choose from four repayment plans. Federal loan repayment options Federal loans give you flexibility with repayment. If you’re struggling to make monthly payments, you can choose one of four Income-Driven Repayment (IDR) plans that may work better for your situation. Each of these plans allows for payments based on your income, usually 10-20% of it with a few exceptions, which makes individual payments more manageable. Unfortunately, this usually also means you’ll be making payments for longer. Check out the Federal Student Loan website for more detailed information on each plan. If you want to pay off your loans faster, you can also select a Graduated Repayment Plan, which increases your payments periodically, ensuring you pay off your loans in 10 years. There’s also another way to ditch your federal loan payments ahead of schedule: loan forgiveness. Student loan forgiveness With federal loans, there are two pathways to loan forgiveness: Public service Income-Driven Repayment Go into the right line of work after college, and you could be eligible for Public Student Loan Forgiveness (PSLF). This is available to students who pursue careers with nonprofits, government agencies, and some public sectors. If you make monthly qualifying payments for 10 years, then you can apply for forgiveness. If you don’t qualify for PSLF, but you’re on an IDR plan, you have another potential pathway to forgiveness. After 20-25 years of monthly payments, you may qualify for forgiveness, too. Unfortunately, on this path, you have to pay income taxes on the amount that was forgiven. (This is referred to as a “tax bomb.”) Consolidating and refinancing student loans Sometimes it’s tough to juggle multiple repayment schedules, interest rates, and payment amounts. If you’re having a hard time keeping track of your student loans, you may want to consider consolidating them so you have one monthly payment. Consolidating through a private institution could also give you a new interest rate (the average of your old ones, or sometimes lower, depending on your circumstances) and let you adjust your payment time horizon. The federal consolidation program won’t change your interest rate, but it will still group your loans into a single payment for you. Whatever loans you wind up with and whatever your repayment plan, make sure you stay on top of your minimum payments. Fees and penalties can significantly increase your debt over time.

How To Use Your Health Savings Account (HSA) For Retirement Oct 20, 2022 3:31:00 PM Once you turn 65, you can use them for anything you want—without incurring penalties. Health Savings Accounts (HSAs) are designed to cover future medical expenses. But that’s not the only way to use them. Thanks to their tax benefits and withdrawal rules, HSAs can make a valuable addition to your retirement plan. In this guide, we’ll cover: HSA eligibility The benefits of HSAs HSA contribution limits HSA withdrawal rules Using an HSA for retirement Am I eligible for an HSA? To be eligible for an HSA, you have to: Be covered under a high deductible health plan (HDHP). Not be enrolled in Medicare. Not be claimed as a dependent on someone else’s tax return. Have no other health coverage except what the IRS covers under “Other Employee Health Plans.” Your employer may have information on HSA providers available to you. The expanded IRS rules can provide more detailed eligibility information. What are the benefits of an HSA? Health Savings Accounts have a couple tax benefits that help you make the most of your assets. Your contributions are pre-tax, meaning you can deduct them from your income taxes. You can use these funds at any time to pay for qualified medical expenses without paying taxes or penalties. And when you turn 65, you can use your HSA for anything without incurring a penalty. While you must have a high deductible health plan in order to contribute to your HSA, your HSA isn’t tied to a specific employer. It stays with you when you change jobs or retire. The money doesn’t leave the account until you use it. Also, your employer may contribute to your HSA—and since the contribution is pre-tax, it doesn’t count toward your gross income. Some HSAs are specialized savings accounts. But some are actually investment accounts. Any interest and earnings that come from these HSAs are tax-free provided you don’t use them on unqualified expenses before you turn 65. So HSAs can rank amongst the best ways to save for retirement, on par with some 401(k)s and IRAs depending on factors such as an employer match, fees, and/or investment choices. HSA contribution limits In 2023, the HSA contribution limit for self-only HDHP coverage is $3,850, while the limit for family HDHP coverage is $7,750.  HSA withdrawal rules Need some money to cover unexpected medical costs? Make a tax-free withdrawal. Don’t need it? Save it for your retirement. Withdrawing from an HSA for non-medical expenses comes with a 20% penalty . . . unless you’re over 65. Once you turn 65, withdrawals from an HSA work a lot like withdrawals from a traditional IRA or 401(k). Your withdrawals count toward your annual income, so you’ll pay income taxes based on your tax bracket. However, if you use your withdrawal to pay for medical expenses, it’s still tax-free. Basically, there are three possible outcomes when you withdraw from an HSA—and it all comes down to your age and what you use the money for. Your age Qualified Medical Expenses Other Expenses Less than 65 years old No taxes, no penalty Taxes are applicable, 20% penalty 65 years old or older Taxes are applicable, no penalty How to use your Health Savings Account for retirement When you reach retirement age, medical bills can start to add up quickly. Use your HSA to cover these expenses, and you’re triple-dipping on the tax benefits! Your contributions are tax free, your interest and earnings are tax free, and so are your withdrawals. From a financial planning perspective, that’s hard to beat. And it can make expenses like long-term care a lot less frightening. But an HSA is also a great supplement to your IRA or 401(k). Since the 20% penalty disappears when you turn 65, you won’t have to worry about whether an expense is qualified—just use your money as you see fit. Considerations before you choose an HSA An HSA is like a financial Swiss Army Knife. But while it’s highly versatile, it’s not the right choice for everyone. So, before you switch health plans and open an HSA, there are a few things to consider. Know the fees When it comes to fees and other costs, HSAs are often less transparent than accounts like 401(k)s. Look at the full fee schedule for your HSA before contributing. Also, sometimes your employer will cover all, or a portion, of your fees—so find out about that, too.  Explore the investment options Ideally, you want an HSA with investment options that fit your goals. Some providers only allow investments with low risk and low returns, like money market funds. Other HSAs offer multiple mutual fund listings with higher returns and more risk exposure. Some HSAs have minimums before you can start investing. For example, you might only be able to invest your money once you’ve contributed $1,000 to the HSA. Stay current on withdrawal rules Withdrawal rules around taxes and penalties can change with new regulations, so it’s important to stay up-to-date with any new changes that take place. Don’t just switch to an HDHP A high-deductible health plan isn’t right for everyone. Before switching to an HDHP so you can use an HSA to save for retirement, make sure that works for you and your family. A high-deductible health plan brings with it the potential for higher out-of-pocket medical costs.

How We Can Do Better at Building Black Wealth Oct 20, 2022 10:00:00 AM In honor of Black History Month, we reflect on the past, present and future state of Black wealth. We at Betterment dedicate our time and energy with the goal to make people’s lives better through investing. So when deciding how best to join the chorus of Black empowerment that builds each February during Black History Month, we decided to focus on generational wealth. At the end of the day, we believe that wealth-building is one of the most powerful tools to live a better life and lead a path for generations to come.  The uncomfortable truth behind the racial wealth gap We can’t fully appreciate the importance of creating generational wealth for Black people without acknowledging our collective past and examining where it has left us. It’s no secret that rising out of slavery did not create equality for Black Americans in 1865. Over a century and a half later, there are still enormous wealth disparities between Black and non-Black households. According to the 2019 Survey of Consumer Finances, the average net worth of a White family is over 7x than that of a Black family.  Many factors have contributed to this gap–and continue to persist–including years of housing discrimination, credit inequality, mass incarceration, inaccessible healthcare and education, and lower paying jobs. The domino effect of these factors leaves Black families with little to inherit and often less to pass on. So now what? The racial wealth gap is clearly not just a Black problem, nor can it be solved by individual actions alone. Organizations like the National Advisory Council on Eliminating the Black-White Wealth Gap are at the forefront of developing proposals to address the issue systemically. Ideas range from job creation to baby bonds to reparations. Ultimately, we all have a part in building strong Black financial futures. Here at Betterment, we’re committed to supporting individuals through our investing products and our voices. In that spirit, we’ve gathered resources in the section below to help chip away at the gap through personal finance decisions.  Personal steps to building Black wealth Despite systemic barriers, there are still tangible strategies that Black Americans can apply to help boost their wealth: Make the most of your savings Before parking your cash in a standard savings account (or worse…your mattress), consider a Cash Reserve account. Think of it as an alternative option with none of the common drawbacks like transfer limits, minimums, and fees. Create multiple streams of income You can reward yourself for the hard work at your day job by letting your money work for you. Passive income is earned through sources like interest and dividends from stocks with minimal effort. Automated investing can make earning passive income even simpler. Align your investments to your goals Whether you’re an expert or completely new to investing, a goal-based approach can help you personalize your financial plan. Once you’ve thought about your short-term and long-term needs, you can set an investment strategy that aligns with your values and risk tolerance.  Here are articles written by our own Bryan Stiger, CFP®, that can also help you get your financial house in order: How to Build an Emergency Fund An Investor’s Guide to Diversification Setting and Prioritizing Your Financial Goals How to support or invest in organizations working to improve Black lives Centuries of racism, institutional discrimination and lack of wealth building opportunities still impact the Black community today. Here are five organizations you can donate to today who are working to address these social and economic gaps: Center for Black Equity: Improving the lives of Black LGBTQ+ Black people globally Black Girls Code: Fighting to establish equal representation in the tech sector Black Organizing for Leadership and Dignity (BOLD): Training Black organizers in the US  National Fair Housing Alliance: Working to eliminate housing discrimination Equal Justice Initiative: Fighting to end mass incarceration and racial inequality  If you’re a Betterment customer, you have two additional avenues for empowering like-minded organizations: Donate eligible shares to any of our partner charities through our Charitable Giving feature. Here are three of those partner charities working to improve Black lives: NAACP Empowerment Programs Envision Freedom Fund  American Civil Liberties Union (ACLU) Invest in companies actively working toward minority empowerment through our Socially Responsible Investing portfolios.  What does Black wealth look like? We recognize that wealth is different for everyone. For Black communities, we believe wealth looks like empowerment, equity and the means to pass something meaningful from one generation to the next. We hope that you’ll join us this month to celebrate Black excellence and get involved in building Black wealth.

Three LGBTQ+ Influencers Share Tips For Successful Financial Planning Oct 20, 2022 12:00:00 AM LGBTQ individuals and same-sex couples face unique financial challenges when it comes to family planning, healthcare, and more. Here’s how three individuals are preparing for a secure and meaningful financial future. We sat down with three influencers to pull back the curtain on some of the unique factors of LGBTQ+ financial planning, and what that planning, saving, and investing actually looks like. CHRISTOPHER RHODES What’s a financial goal that you’re currently working towards? Or, what’s a financial goal you’re proud of achieving? Saving for top surgery was probably the largest financial goal I've achieved thus far in my life. Top surgery is a huge part of many trans masculine people's lives, and that surgery was incredibly affirming for me and life changing. My insurance did not cover the procedure so I was left with the full amount to cover on my own, which can be quite daunting. What tools and habits helped you reach that goal? I am self-employed and so saving money can be difficult, but the company I run helps trans folks afford gender-affirming surgeries. By the time I was saving money for top surgery we had partnered with five individuals before me to help them reach their financial goals. My brand helped raise about half of the funds I needed for my surgery, and besides that I used my skills to help raise the funds—I did custom art, tattoo designs, and social media work for money. I also was just a lot more conscious about what I was putting away in savings at the time and for what. Nowadays, my biggest goal is saving for the future: Hopefully saving to buy a house, and I do so by having a specific goal and timeline for the amount of savings I have in my account. By dedicating certain paychecks specifically to paying off debt or savings, versus for spending. What would you tell your younger self about money? Money is stressful, and a little bit complicated. I don't think anyone when they're younger quite comprehends how expensive being an adult is. But I think I'd tell myself that it's possible to do what you love and still be able to afford a living— you just have to figure out how to make that work for you, and be responsible and smart about where and how and why you spend your money. Has your identity influenced your relationship with money in any way? Why or why not? I do think that in some aspects my relationship with money is definitely different than it would be if I wasn't trans. The costs of transitioning add up, between doctor's visits, blood work, weekly testosterone injections, surgeries, the legal costs of changing my name and gender marker, not even to mention the costs of family planning one day, etc. I had to account for saving up for things that felt very "adult" starting when I was in my young 20's. ZOE STOLLER What's a financial goal you are currently working towards, or what's one that you've already achieved and are really proud of? I’m officially going to graduate school! I’ve left my 9 to 5 marketing job, and am working more fully as a content creator. I’m saving for graduate school and it’s a lot of work, but I’m confident that I’ll achieve my financial goal. I had known before I decided to enroll that my full time job wasn’t as fulfilling as I wanted it to be, and I recently started making enough money as a content creator to leave. So all the stars aligned, where I was able to leave my job, do content creation full time, and go back to school for my graduate degree. What habits or tools are helping you reach that goal? I’ve gotten very into spreadsheets lately—even though I’m not confident with numbers or money. It’s been a year of transition for me to figure out exactly how to keep meticulous track of my income, my big expenses, and my savings. I’ve been trying to be really proactive, financially. What would you tell your younger self about money? I was very clueless about money, but I have a lot more knowledge now. Growing up, I didn’t understand saving, investing, or general money management. I’d tell my younger self that it’s okay not to know those things, but life is about learning and growing, and going on different journeys. Just because younger me wasn’t very financially aware, doesn’t mean that it’s always going to be that way. And now, I feel much more knowledgeable about money—I’m still learning a lot, but I’m much more confident. Has your identity influenced your relationship with money? Why or why not? As I’ve discovered my lesbian and non-binary identities, I’ve definitely thought about how money will play a role in my future. There are so many more expenses that come with having a family or getting pregnant when you’re LGBTQ. I want a family, but I’ll probably have to do fertility treatments or maybe adoption. There are so many added obstacles that require money when you can’t conceive with a partner, so I’ve been thinking about how to best prepare for that in my future. I want to be able to afford that, should I decide it’s in my future. Anything else you’d like to share with us? Wherever you are in your money and identity journeys, I have full confidence that you will make it through and achieve the goals you’ve set for yourself. GENVIEVE JAFFE What’s a financial goal that you’re currently working towards? Or, what’s a financial goal you’re proud of achieving? My wife and I are hoping to build our dream home next year, in 2022. We want to buy in a community around my home, and we want to be able to put down a lot of money. When we bought our first house, we only put down 10% and had to get a PMI. We’d like to not do that this time, so that’s a big financial goal right now. What tools and habits helped you reach that goal? We have two different investment accounts that we use for the house fund. One is super safe - not risky at all, because we want to be safe if anything should happen. I also have a moderately aggressive portfolio that I don’t manage myself. When COVID hit, it did take a downturn, so it’s important for us to have half in a safer type of investment. In terms of allocating my money, any time I have money coming in from my business, I put some aside into these accounts. My wife and I also have a 529 plan that we put money in for our kids at the end of every year. Additionally, my wife is very on top of our expenses and keeping track of our books. Almost every day she goes into all of our accounts to check balances, check for invoices, and double check our credit cards, student loans, etc. What would you tell your younger self about money? I grew up with working class parents. They traded money for hours, and that’s not a bad thing, but it’s not the way I wanted to live my life. So I actually got a job as a corporate lawyer and was miserable, but had a really great paycheck. I’d always learned that you work until you can retire and live off your 401K, and it wasn’t until I met my wife, who was an entrepreneur, that I realized that’s not how I had to live my life. So I’ve done a lot of mindset work around money, and getting rid of that old school belief that money doesn’t grow on trees. I try to really have a good relationship with money and remember that money is also an exchange of energy. I also just wanted to share that in 2015, I almost had to file for bankruptcy. I was not smart with my money at all. I’d been a corporate lawyer making a very nice, steady paycheck, and when I quit my job, the business that I started actually did very well. But it wasn’t this consistent substantial paycheck I was used to, and I hadn’t changed my habits or my lifestyle. SO I really had to learn quickly to be cognizant of the money that I have, and not rely on the money that I could potentially earn. I did not have to file bankruptcy, thank goodness. But, that fear is something that still lives within me—and now it’s really about being conscious of the money we have and the money we’re spending. Has your identity influenced your relationship with money in any way? Why or why not? We spent $50K+ having our children. I don't say this to freak anyone out but to help prepare you for potential costs that you could incur growing your family as an LGTBQ+ individual / couple / throuple, etc. We had no idea how much money we were about to drop when we started to grow our family. Our path to pregnancy wasn't super straightforward—we ended up doing 3 intrauterine inseminations (IUI), two egg retrievals, and three embryo transfers. Insurance didn't cover in vitro fertilization (IVF), stimulation meds (about $5K), egg retrieval ($11K), or transfer ($3K). We also had to buy sperm (they're about $1,000 per vial), go through tons of testing, and we each had to have surgery. Financially planning for a family is something that I stress people should start early. Seriously, ask for people to contribute to a baby fund for your engagement and wedding. Trust me, no one needs fancy dish-ware. Everyone loves babies and it's an incredible way to make everyone feel part of your journey!

How Our Tax Coordination Feature Can Boost Your Returns Oct 20, 2022 12:00:00 AM Our spin on asset location can help shelter retirement investment growth from some taxes. Taxes. You may try to think of them as little as possible, but they’re on our minds a lot. Especially when they relate to investments. That’s because we’re always looking to maximize our customers’ take-home returns—and key to that pursuit is minimizing how big of a bite taxes take. On that front, our Tax Coordination feature is a fully-automated approach to an investment strategy known as asset location—and it’s available at no additional cost. If you’re saving for retirement in more than one type of account, then asset location in general, and our spin on it specifically, can help to increase your after-tax expected returns without taking on additional risk. Here’s how. How Tax Coordination works Many Americans wind up saving for retirement in some combination of three account types: Taxable Tax-deferred (Traditional 401(k) or IRA) Tax-exempt (Roth 401(k) or Roth IRA) Each type of account gets a different tax treatment, and different assets are taxed differently as well. These rules make certain investments a better fit for one account type over another. Returns in IRAs and 401(k)s, for example, don’t get taxed annually, so they generally shelter growth from tax better than a taxable account. We’d rather shield assets that lose more to tax in these types of retirement accounts, assets such as bonds, whose dividends are usually taxed annually and at a high rate.  In the taxable account, however, we’d generally prefer to have assets that don’t get taxed as much, assets such as stocks, whose growth in value (“capital gains”) is taxed at a lower rate and crucially only when they’re “realized,” or in other words, when they’re sold at a higher price than what you paid for them. Wisely applying this strategy to a globally-diversified portfolio can get complicated quickly. Check out our full Asset Location methodology if you’re curious what that complexity looks like—or keep reading for more of the simplified explanation. The big picture diversification of asset location When investing in more than one account, many people select the same portfolio in each one. This is easy to do, and when you add everything up, you get the same portfolio, only bigger. To illustrate this approach, here’s what it looks like with a hypothetical asset allocation of 70% stocks and 30% bonds. The different shades of green represent various types of stocks, and the different shades of blue represent various types of bonds. But as long as all the accounts add up to the portfolio we want, each individual account on its own doesn’t have to mirror that portfolio. Each asset can go in the account where it makes the most sense from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase the after-tax expected return without taking on more risk. This is asset location in action, and here’s what it looks like, again for illustrative purposes: This is the same overall portfolio as we originally showed, except we redistributed the assets unevenly to reduce taxes. Note that the aggregate allocation is still a 70/30 split of stocks and bonds. The concept of asset location isn’t new. Advisors and sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for more benefit is very mathematically-complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts. Our expert-built technology handles all of the complexity in a way that a manual approach just can’t match. Our rigorous research and testing, as outlined in our Asset Location methodology, demonstrates that accounts managed by Tax Coordination are expected to yield meaningfully higher after-tax returns than uncoordinated accounts. How to benefit from Betterment’s Tax Coordination To benefit from from our Tax Coordination feature, you first need to be a Betterment customer with a balance in at least two of the following types of Betterment accounts: Taxable account Tax-deferred account: A Traditional IRA or a Betterment Traditional 401(k) offered by your employer. Tax-exempt account: A Roth IRA or a Betterment Roth 401(k) offered by your employer. Note that you can only include a 401(k) in a goal using Tax Coordination if it’s one we manage on behalf of your current or former employer. If your employer doesn’t currently use Betterment to provide their 401(k) plan, tell them to give us a look at betterment.com/work! If you have an old 401(k) with a previous employer, you can still benefit from our Tax Coordination feature by rolling it over to a Betterment IRA. For step-by-step instructions on how to set up Tax Coordination in your Betterment account, as well as answers to frequently asked questions, head on over to our Help Center. Or if you’re not yet a Betterment customer, get started by signing up today.

How Memestocks Affected Investors’ Actions And Emotions Oct 20, 2022 12:00:00 AM We surveyed 1,500 investors to examine “the rise of the day trader.” Money and emotions have long gone hand-in-hand, and this is no more apparent than during significant financial crises. From the 2008 market crash to COVID-19’s economic impact, we’ve seen first hand how money has the ability to impact our stress levels, mental health and personal relationships. And yet in times of particular financial strife—or likely because of it— many people take actions with their money that often undermine their emotional wellbeing, sacrificing long-term happiness for short-term pleasure without even realizing it at the time. This trend toward short-termism grew in 2020: people stuck inside, on screens all day and kept from their normal activities sought new ways to fill their time and energy. Many took up day trading, culminating in one of the wildest rides at the beginning of 2021 (and recent surges demonstrating people are still trying to head to the moon) with Gamestop, AMC, Blackberry and other retail stocks caught in the middle of a clash between amateur retail and institutional investors. Following this eventful start to the year, Betterment was curious to see both the immediate and long-term impact this had on investors, particularly those involved in the action. In this report -- a survey of 1,500 active investors conducted by a third party -- we took a look at the rise of day trading activity and the impact it did (or didn’t have) on people’s behavior. From their own forecasts, it looks like “the rise of the day trader” is here to stay -- but forecasting is hard. None of us would have bet on the pandemic and the changes it's causing. People actually aren't very good at forecasting their own preferences and behavior in the future, so it will be interesting to see if said forecasts actually come to fruition. Regardless, at Betterment we welcome the addition of consumers looking to learn more about the markets and, ultimately, how to balance their portfolios for the long-term too. Section 1: The Rise Of Day Trading Activity With movie theaters, stadiums, bars and restaurants closed, many people took up day trading during the COVID-19 pandemic. Half of our total respondents said they actively day trade investments, and nearly half of those day-traders (49%) have been doing it for 2 years or less. While most day traders indicated their main reason for doing so was that they believed they could make more money in a shorter period of time (58%), many (43%) also indicated it was because it is fun and entertaining. Of those who look to day trading for fun/entertainment, half (52%) said it was to make up for the bulk of their other hobbies—like sports, live music, social gatherings, gambling—not being available due to COVID-19. And these day traders have fully acknowledge that COVID-19 played a big impact role in their market activity overall: 54% indicated they trade more often as a result of COVID-19; and interestingly, 58% said they expect to day trade more as normal activities return and COVID-19 restrictions are lifted, likely as a result of what they learned during this downtime. Only 12% said they expect to trade less. More than half (58%) are using less than 30% of their portfolio to actively trade individual securities or stocks. Nearly two thirds also allow an advisor (either online or in-person) to manage a separate part of their portfolio. It's interesting to see more respondents expect to day trade more after the pandemic than are currently day trading: we imagine it is hard for people to forecast themselves into the future and imagine doing things differently than they are now. However, what is positive to see is these people aren’t using an excessive amount of their portfolio to day trade. The majority of investors day trade with a minority of their total investing balance, and delegate day-to-day management of the larger portion of their portfolio to an advisor. Passing hobby or not, how educated is the average day trader on what they’re buying and what they stand to gain—or lose? Sixty one percent rely on financial news websites to decide which stocks to buy, but nearly half (42%) are influenced by social media accounts, showing just how powerful “memestocks” can be. More than half of the respondents suggested they buy stocks based on company names they’re familiar with, but we’ve seen this lead to issues in the past—with “ticker mis-matches,” where people trade the ticker of a stock that isn't the correct company. For example, after a tweet from Elon Musk about Signal (a non-profit messaging app), a different company’s stock was sent soaring 3,092%. We also asked day trader respondents if they consider capital gains taxes when deciding to sell their investments. While the majority (60%) indicated that it influences them to hold onto stocks longer to avoid short-term capital gains, 14% said they weren’t aware there was a difference in taxes based on how long they hold a stock. Another 17% said they simply don’t care about the short-term capital gains tax. Who invested their stimmys? Almost all (91%) respondents received some stimulus money, and nearly half (46%) invested some of that money; of those who did invest it, 70% invested half or less of their stimulus. Day trader and male respondents were more likely to invest then their counterparts, as represented in the graphic below. Section 2: Memestocks Understanding And Involvement We asked all respondents how well they understood what occurred in the stock market in January & February surrounding “memestocks” like GameStop, AMC, BlackBerry and other retail investments. Most indicated having some level of understanding, but nearly a quarter (24%) of all respondents said they didn’t understand it well at all; and only half (51%) of day trader respondents said they understood what happened very well. Nearly two-thirds (64%) of all survey respondents said they did not actively purchase any popular retail investments (GameStop, AMC, BlackBerry, etc.) during the stock market rally in January or February. But those that DID were primarily day traders. Of all respondents that did buy in actively, 55% are still holding onto all their investments. Only 2% of those that sold these investments sold everything at a loss; 44% sold all for a profit and 54% sold some at a profit and some at a loss. Of those that bought into memestocks, there is a near universal consensus that they will continue investing in stocks like these that get a lot of attention in the future—97% said they’re at least somewhat likely to invest.   Betterment's Point Of View: It is interesting to see the majority of respondents holding onto their investments - are they expecting another high or holding on because they don't want to admit they made a bad investment? Disposition Effect says people tend to hold on until they get back to zero loss. However, 60% previously said thinking of short-term capital gains taxes encourages them to hold onto their investments longer. Section 3: Money And Stress Factors It’s no secret that money and stress are linked, so we wanted to take a look at respondents’ money habits and how that may be impacting stress levels. The consensus is that for better and for worse day traders and younger generations are more engaged with their finances. We asked respondents how much they stress about their finances on a daily basis—three quarters said they stress to some degree. Interestingly, when we looked a layer deeper, day traders are much more stressed than non-day trader—86% indicated they stress to some degree, vs 65% of their counterparts. In looking at the causes of the stress: respondents are nearly equally concerned about money in the short term, near term future, and long term future with the top 3 financial stress factors being their daily expenses (43%), how much money they will have in retirement (43%), and how much money they have saved (42%). We asked respondents how often they are checking their bank account and investment portfolio balances -  39% are looking at their bank account balances every day, with 11% of those checking multiple times a day; 37% also check their investment portfolio balances every day, with 16% of those checking multiple times a day. When we look a layer deeper, we find that day traders are checking both their bank account and investment portfolio balances significantly more than non-day traders. Interesting Bank Account Habits 50% of day traders indicated they check at least once a day (18% multiple times) vs 29% of non-daytraders (5% multiple times). Men check their accounts more often—41% at least once a day (13% multiple times) vs 36% of women (8% multiple times). 46% of Gen Z/Millennials and Gen X both said they check their accounts at least once a day, whereas only 28% of Boomers said the same. Those making more money actually check their accounts more often—42% of respondents making $100K or more check every day, compared to 39% of those making between $50-100K and 35% of those making less than $50K. Interesting Investment Account Habits Unsurprisingly, 56% of day traders said they check their investment portfolio balances every day (25% multiple times a day), whereas only 18% of non-day traders said the same. 41% of men check every day, compared to 30% of women. 47% of Gen Z/Millennials check every day, compared to 41% of Gen X and 22% of Boomers. 42% of those making 100K or more check every day, compared to 35% making between $50-100K and 30% of those making less than $50K. Encouragingly, when we asked people how they felt checking these accounts, the positive responses outweighed negative options for both. Interestingly, day traders were significantly more excited for both (21% for bank accounts, 25% for investments) than non-day traders (4% and 12%, respectively) as well. Most respondents (89%) indicated they’re putting some money away every month, but it's equally split as to where that money is actually going. Conclusion At Betterment, we have often compared day trading to going to Vegas—have a great time, enjoy yourself, but be prepared to come back home with fewer dollars in your wallet and a hangover.  The trends outlined in this report seem to indicate that more people are dipping their toe into the investing pool and (so far) few have decided to walk away. Whether this trend will continue—and the long term impact it will have on people’s finances, health, stress, etc.—remains to be seen. And for those who want to avoid the FOMO of the next big memestock, but aren’t sure of the best way to get started—a simple alternative is investing in a well-diversified portfolio. That way, whenever someone asks if you own the hottest thing, you can say “yes,” regardless of what it is. Methodology An online survey was conducted with a panel of potential respondents from April 26, 2021 to May 3, 2021. The survey was completed by a total of 1,500 respondents who are 18 years and older and have any kind of investment (excluded if only 401k). Of the 1,500 respondents, 750 of them actively day traded their investments while the other 750 did not. The sample was provided by Market Cube, a research panel company. All respondents were invited to take the survey via an email invitation. Panel respondents were incentivized to participate via the panel’s established points program, regardless of positive or negative feedback. Participants were not required to be Betterment clients to participate. Findings and analysis are presented for informational purposes only and are not intended to be investment advice, nor is this indicative of client sentiment or experience. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.

Financial Resources For Women’s History Month Oct 20, 2022 12:00:00 AM Join us as we celebrate Women’s History Month. Explore our personal recommendations for featured organizations, financial content, and more below. What better way to celebrate Women’s History Month than by considering women’s financial well-being? Though many women are increasingly independent, they’re also often supporting both themselves and other family members. General financial planning often ignores gender-specific issues that continue to challenge long-term financial security for women. Here’s Betterment’s guide to help you navigate the month. Meet Women+ of Betterment The Women+ of Betterment ERSG works to improve the company by partnering across the organization to amplify the voices of and advance equity for all women+, however you identify. We work alongside ERSGs of Betterment to ensure proposed solutions are intersectional. We provide women+ opportunities to strengthen relationships, lead, and broaden their network. Organizations We’re Supporting Here's a list of organizations you can donate to today who are working to address social and economic gaps for women: Bottomless Closet - Helps women in New York prepare for job interviews and sets them up for success in their careers. Moms Helping Moms - Supports hundreds of thousands of individuals in New Jersey by providing them with essential items for their children and families. Days for Girls - Provides women and girls with reusable menstrual products, health education programs, and training classes. Trans Lifeline - Offers direct emotional and financial support to trans people in crisis – for the trans community, by the trans community. Ladies Who Launch - Facilitates the connections needed to support female entrepreneurs as they follow their passions and launch their businesses. Organizations Supporting Women On Betterment’s Platform Through our Charitable Giving feature, customers can donate shares held for longer than one year to any organization we partner with. Below are three charities working to improve women’s lives: Breast Cancer Research Foundation - Fund the best ideas in breast cancer research. Hour Children - Reunify families impacted by incarceration. Boys & Girls Clubs of America - Provide a safe space for kids and teens during out-of-school time. Invest in gender equity with our Social Impact portfolio If you’re passionate about issues like gender and racial equity and want to support companies who demonstrate a commitment to gender diversity within senior leadership, you can invest your money in Betterment’s Social Impact portfolio. There are also two other Socially Responsible Investing portfolios that may align with your values: the Broad Impact portfolio and Climate Impact portfolio.

Investing in Your 30s: 3 Goals You Should Set Today Oct 20, 2022 12:00:00 AM It’s never too early or too late to start investing for a better future. Here’s what you need to know about investing in your 30s. In your 30s, your finances get real. Your income may have increased significantly since your first job. You might have investments, stock compensation, or a small business. You may be using or have access to different kinds of financial accounts (e.g. 401(k), IRA, Roth IRA, HSA, 529, UTMA). In this decade of your life, chances are you’ll get married, and even start a family. Even if you’ve taken this complexity in stride, it’s good to take a step back to review where you are and where you want to go. This review of your plan (or reminder to create a plan) is essential to setting up your financial situation for future decades of financial success. Don’t Delay Creating A Plan: Three Goals For Your 30s As always, the best thing to do is start with your financial goals. Keep in mind that goals change through time, and this review is an important step to make updates based on where you are now. If you don’t have any goals yet, or need some guidance on which investing objectives might be important for you, here are three to consider. Emergency Fund Sometimes your plan doesn’t go as planned, and having an adequate emergency fund can help ensure those hiccups don’t affect the rest of your goals. An emergency fund (at Betterment, we refer to it as a "Safety Net" goal) should contain enough money to cover your basic expenses for a minimum of three to six months. You may need more than that estimate depending on your career, which may or may not be one in which finding new work happens quickly. Also, depending on how much risk you want to take with these funds, you may need a buffer on top of that amount. Retirement Most people don’t want to work forever. Even if you enjoy your work, you’ll likely work less as you age, presumably reducing your income. To maintain your standard of living, or spend more on travel, hobbies or grandkids, you’ll need to spend from savings. Saving for your retirement early in your career—especially in your 30s–is essential. Thanks to medical improvements and healthier living, we are living longer in retirement, which means we need to save even more. Luckily, you have a secret weapon—compounding—but you have to use it. Compounding can be simply understood as “interest earning interest,”a snowball effect that can build your account balance more quickly over time. The earlier you start saving, the more time you have, and the more compounding can work for you. In your goal review, you’ll want to make sure you are on track to retire according to your plan, and make savings adjustments if not. You’ll also want to make sure you are using the best retirement accounts for your current financial situation, such as your workplace retirement plan, an IRA, or a Roth IRA. Your household income, tax rate, future tax rate and availability of accounts for you and your spouse will determine what is best for you. As you consider your goals, you may want to check out Betterment's retirement planning tools, which helps answer all of these questions. Also, if you’ve changed jobs, make sure you are not leaving your retirement savings behind, especially if it has high fees. Often, consolidating your old 401(k)s and IRAs into one account can make it easier to manage, and might even reduce your costs. You can consolidate retirement accounts tax-free with a rollover. If you have questions about your plan or the results using our tools, consider getting help from an expert through our Advice Packages. Major Purchases A wedding, a house, a big trip, or college for your kids. Each of these goals has a different amount needed, and a different time horizon. Our goal-based savings advice can help you figure out how to invest and how much to save each month to achieve them. Take the chance in your goal review to decide which of these goals is most important to you, and make sure you set them up as goals in your Betterment account. Our goal features allow you to see, track, and manage each goal, even if the savings aren’t at Betterment.

Investing in Your 20s: 4 Major Financial Questions Answered Oct 20, 2022 12:00:00 AM When you're in your 20s, you may be starting to invest or you might have some existing assets you need to take better care of. Pay attention to these major issues. For most of us, our 20s is the first decade of life where investing might become a priority. You may have just graduated college, and having landed your first few full-time jobs, you’re starting to get serious about putting your money to work. More likely than not, you’re motivated and eager to start forging your financial future. Unfortunately, eagerness alone isn’t enough to be a successful investor. Once you make the decision to start investing, and you’ve done a bit of research, dozens of new questions emerge. Questions like, “Should I invest or pay down debt?” or “What should I do to start a nest egg?” In this article, we’ll cover the top four questions we hear from investors in their twenties that we believe are important questions to be asking—and answering. “Should I invest aggressively just because I’m young?” “Should I pay down my debts or start investing?” “Should I contribute to a Roth or Traditional retirement account?” “How long should it take to see results?” Let’s explore these to help you develop a clearer path through your 20s. “Should I invest aggressively just because I’m young?” Young investors often hear that they should invest aggressively because they “have time on their side.” That usually means investing in a high percentage of stocks and a small percentage of bonds or cash. While the logic is sound, it’s really only half of the story. And the half that is missing is the most important part: the foundation of your finances. The portion of your money that is for long-term goals, such as retirement, should most likely be invested aggressively. But in your twenties you have other financial goals besides just retirement. Let’s look at some common goals that should not have aggressive, high risk investments just because you’re young. A safety net. It’s extremely important to build up an emergency fund that covers 3-6 months of your expenses. We usually recommend your safety net should be kept in a lower risk option, like a high yield savings account or low risk investment account. Wedding costs. According to the U.S. Census Bureau, the median age of a first marriage for men is 29, and for women, it’s 27. You don’t want to have to delay matrimony just because the stock market took a dip, so money set aside for these goals should also probably be invested conservatively. A home down payment. The median age for purchasing a first home is age 33, according to the the National Association of Realtors. That means most people should start saving for that house in their twenties. When saving for a relatively short-term goal—especially one as important as your first home—it likely doesn’t make sense to invest very aggressively. So how should you invest for these shorter-term goals? If you plan on keeping your savings in cash, make sure your money is working for you. Consider using a cash account like Cash Reserve, which could earn a higher rate than traditional savings accounts. If you want to invest your money, you should separate your savings into different buckets for each goal, and invest each bucket according to its time horizon. An example looks like this. The above graph is Betterment’s recommendation for how stock-to-bond allocations should change over time for a major purchase goal. And don’t forget to adjust your risk as your goal gets closer—or if you use Betterment, we’ll adjust your risk automatically with the exception of our BlackRock Target Income portfolio. “Should I pay down my debts or start investing?” The right risk level for your investments depends not just on your age, but on the purpose of that particular bucket of money. But should you even be investing in the first place? Or, would it be better to focus on paying down debt? In some cases, paying down debt should be prioritized over investing, but that’s not always the case. Here’s one example: “Should I pay down a 4.5% mortgage or contribute to my 401(k) to get a 100% employer match?” Mathematically, the employer match is usually the right move. The return on a 100% employer match is usually better than saving 4.5% by paying extra on your mortgage if you’re planning to pay the same amount for either option. It comes down to what is the most optimal use of your next dollar. We've discussed the topic in more detail previously, but the quick summary is that, when deciding to pay off debt or invest, use this prioritized framework: Always make your minimum debt payments on time. Maximise the match in your employer-sponsored retirement plan. Pay off high-cost debt. Build your safety net. Save for retirement. Save for your other goals (home purchase, kid’s college). “Should I contribute to a Roth or Traditional retirement account?” Speaking of employer matches in your retirement account, which type of retirement account is best for you? Should you choose a Roth retirement account (e.g. Roth 401(k), Roth IRA) in your twenties? Or should you use a traditional account? As a quick refresher, here’s how Roth and traditional retirement accounts generally work: Traditional: Contributions to these accounts are usually pre-tax. In exchange for this upfront tax break, you usually must pay taxes on all future withdrawals. Roth: Contributions to these accounts are generally after-tax. Instead of getting a tax break today, all of the future earnings and qualified withdrawals will be tax-free. So you can’t avoid paying taxes, but at least you can choose when you pay them. Either now when you make the contribution, or in the future when you make the withdrawal. As a general rule: If your current tax bracket is higher than your expected tax bracket in retirement, you should choose the Traditional option. If your current tax bracket is the same or lower than your expected tax bracket in retirement, you should choose the Roth option. The good news is that Betterment’s retirement planning tool can do this all for you and recommend which is likely best for your situation. We estimate your current and future tax bracket, and even factor in additional factors like employer matches, fees and even your spouse’s accounts, if applicable. “How long should it take to see investing results?” Humans are wired to seek immediate gratification. We want to see results and we want them fast. The investments we choose are no different. We want to see our money grow, even double or triple as fast as possible! We are always taught of the magic of compound interest, and how if you save $x amount over time, you’ll have so much money by the time you retire. That is great for initial motivation, but it’s important to understand that most of that growth happens later in life. In fact very little growth occurs while you are just starting. The graph below shows what happens over 30 years if you save $250/month in today’s dollars and earn a 7% rate of return. By the end you’ll have over $372,000! But it’s not until year 5 that you would earn more money than you contributed that year. And it would take 18 years for the total earnings in your account to be larger than your total contributions. How Compounding Works: Contributions vs. Future Earnings The figure shows a hypothetical example of compounding, based on a $3,000 annual contribution over 30 years with an assumed growth rate of 7%, compounded each year. Performance is provided for illustrative purposes, and performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. Content is meant for educational purposes on the power of compound interest over time, and not intended to be taken as advice or a recommendation for any specific investment product or strategy. The point is it can take time to see the fruits of your investing labor. That’s entirely normal. But don’t let that discourage you. Some things you can do early on to help are to make your saving automatic and reduce your fees. Both of these things will help you save more and make your money work harder. Use Your 20s To Your Advantage Your 20s are an important time in your financial life. It is the decade where you can build a strong foundation for decades to come. Whether that’s choosing the proper risk level for your goals, deciding to pay down debt or invest, or selecting the right retirement accounts. Making the right decisions now can save you the headache of having to correct these things later. Lastly, remember to stay the course. It can take time to see the type of growth you want in your account.

Personal Finance Stories From Our AAPI Community Oct 20, 2022 12:00:00 AM Members of the Asians of Betterment ERSG share financial advice learned from their parents and the immigrant experience, and how their financial perspectives have shifted over time. Advice is a powerful way of connecting families across generations. In honor of Asian American and Pacific Islander Heritage Month, we asked members of our Asians of Betterment community to share personal finance advice from their parents. Financial advice is rooted in our experiences While our families grew up at different times and in different countries, many still have a shared experience of moving to the United States that left an impact on their advice for how to grow their wealth through saving. Anwesha Banerjee, Senior Counsel: My parents taught me about getting a bank account and a (starter) credit card early and paying it in full each month, to start building good financial habits and credit. Also, they emphasized strong and quick mental math—you can't get cheated if you know your numbers! John Kim, Mobile Engineer: My parents were responsible spenders and liked to save. They taught me not to make purchases off of impulse and I learned how to live within my means happily. Jeff Park, Software Engineer: My family's perception of money has always been heavily influenced by historical events that affected my family over generations. My father's family, for example, were scholars in the nobility class, and for all intents and purposes, they were pretty well-off. My grandfather was a university professor in the early 1920s, but due to his vocal criticism of the Japanese occupation, he and his family were forced to leave their wealth behind as they ran away to China to avoid criminal prosecution. My mother's family also saw their wealth significantly decline due to the Korean War. As both my parents looked abroad for sustainable opportunities, they brought with them an understandable fear that events outside of their control can significantly affect their well-being. Prudence and savings were often preached in my family, and we were always told that it is often better to forego immediate petty pleasures for the peace of mind of a prepared tomorrow. "Save where you can, spend when you need to." -Thi Nguyen Taking care of our families always comes first Family is a recurring theme in the way that our community thinks about finances. Our parents instilled a strong sense of frugality and saving, but taking care of family financially, both at home and abroad, always comes first. Erica Li, Software Engineer: My family taught me to recognize and prioritize your financial goals. Work towards reaching them even if it means sacrificing from other areas. My dad made $30 a month in China before getting the opportunity to immigrate to the United States. His biggest goal, in addition to learning English and acclimating to an entirely new culture, was to save enough money to bring my mother and I over as well. Once my mother and I settled in the United States, new goals and expenses appeared: buying a house in a good public school district and starting a college fund for me. Saving for these goals wasn't such a smooth journey. My mother had to transition from a stay-at-home role to working alongside my dad as our financial circumstances fluctuated. They took up multiple jobs and sacrificed retirement savings to put money towards these goals. We eventually bought a house in New Jersey, and I was lucky to have had financial support from my parents during my college years. Our financial perspectives shifted over time, too Part of the beauty of the advice passed from generation to generation is how it evolves and adapts over time. Times change, environments change, knowledge changes and our perspectives shift with that. Our community members, many of whom grew up in a different country than their parents, shared how their personal outlook on finances evolved from that of their families. John Kim, Mobile Engineer: I definitely took after my parents’ saving habits and learned to expand that mentality through investing. Nima Khavari, Account Executive: Moving to the United States and watching my parents adapt to a consumer driven economy based on access to credit was a significant observation. Remembering them trying to understand credit scores and how to improve it in order to purchase a home left a lasting impression. Erica Li, Software Engineer: Now that I'm all grown up, my parents are no longer putting away money towards goals for my benefit. Alongside catch-up retirement contributions, it makes me happy to see that my parents are finally using their money for pleasure. They recently bought themselves a new car after having their old one for 20 years. Also happy to say that they finally replaced their stove with one that has a working oven! Anonymous: My family made every financial mistake in the book. I can't blame them since they immigrated to this country without knowing English and without a formal financial education. They fell for every scam, pyramid scheme, loan shark, didn't know how credit worked, and lost everything. However, it was an opportunity to learn from their mistakes. After seeing what my parents went through, I learned how credit and financing worked magic, financial planning, and how to recognize cons. I wouldn't be as financially apt if it weren't for their experiences—a huge motivation for why I'm studying for the CFP® exam. The plan is to go back to immigrant communities and warn others from making the same mistakes.

The Betterment Portfolio Strategy Oct 19, 2022 12:00:00 AM We continually improve the portfolio strategy over time in line with our research-focused investment philosophy. TABLE OF CONTENTS Introduction Global Diversification and  Asset Allocation Portfolio Optimization Tax Management Using Municipal Bonds Conclusion Citations I. Introduction Betterment has a singular objective: to help you make the most of your money, so that you can live better. Our investment philosophy forms the basis for how we pursue that objective: Betterment uses real-world evidence and systematic decision-making to help increase our customers’ wealth. In building our platform and offering individualized advice, Betterment’s philosophy is actualized by our five investing principles. Regardless of one’s assets or specific situation, Betterment believes all investors should: Make a personalized plan. Build in discipline. Maintain diversification. Balance cost and value. Manage taxes. To align with Betterment’s investing principles, a portfolio strategy must enable personalized planning and built-in discipline for investors. The Betterment Portfolio Strategy is comprised of 101 individualized portfolios, in part, because that level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances.  In this in-depth guide to the Betterment Portfolio Strategy, our goal is to demonstrate how the Betterment Portfolio Strategy, in both its application and development, contributes to how Betterment carries out its investing principles. When developing a portfolio strategy, any investment manager faces two main tasks: asset class selection and portfolio optimization. How we select funds to implement the Betterment Portfolio Strategy is also guided by our investing principles, and is covered separately in our Investment Selection Methodology paper. II. Global Diversification and Asset Allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for the lowest amount of risk. The objective of most long-term portfolio strategies is to maximize return, while the associated risk is measured in terms of volatility—the dispersion of those returns. In line with our investment philosophy of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory, as well as subsequent advancements based on that theory 1. A major tenet of Modern Portfolio Theory is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. Modern Portfolio Theory seeks to optimize maximizing expected returns and minimizing expected risk.  Other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. However, our portfolio construction goes beyond traditional Modern Portfolio Theory in five important ways: Estimating forward looking returns Estimating covariance Tilting specific factors in the portfolio Accounting for estimation error in the inputs Accounting for taxes in taxable accounts Asset Classes Selected for the Betterment Portfolio Strategy The Betterment Portfolio Strategy’s asset allocation starts with a universe of investable assets. Leaning on the work of Black-Litterman, the universe of investable assets for us is the global market portfolio 2. To capture the exposures of the asset classes for the global market portfolio, Betterment evaluates available exchange-traded funds (ETFs) that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns portfolio construction with our investment selection methodology. Betterment’s portfolios are constructed of the following asset classes: Equities U.S. Equities International developed market equities Emerging market equities Bonds U.S. short-term treasury bonds U.S. inflation protected bonds U.S. investment grade bonds U.S. municipal bonds International developed market bonds Emerging market bonds We select U.S. and international developed market equities as a core part of the portfolio. Historically, equities exhibit a high degree of volatility, but provide some degree of inflation protection. Even though significant historical drawdowns, such as the global financial crisis of 2008, demonstrate the possible risk of investing in equities, longer-term historical data and our forward expected returns calculations suggest that developed market equities remain a core part of any asset allocation aimed at achieving positive returns. This is because, over the long term, developed market equities have tended to outperform bonds on a risk-adjusted basis. To achieve a global market portfolio, we also include equities from less developed economies, called emerging markets. Generally, emerging market equities tend to be more volatile than U.S. and international developed equities. And while our research shows high correlation between this asset class and developed market equities, their inclusion on a risk-adjusted basis is important for global diversification. Note that Betterment’s portfolios exclude frontier markets, which are even smaller than emerging markets, due to their widely varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. The Betterment Portfolio Strategy also includes bond exposure because historically, bonds have a low correlation with equities, and they remain an important way to dial down the overall risk of a portfolio. To promote diversification and leverage various risk and reward tradeoffs, the Betterment Portfolio Strategy includes exposure to several asset classes of bonds. Asset Classes Excluded from the Betterment Portfolio Strategy While Modern Portfolio Theory would have us craft the Betterment Portfolio Strategy to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion in the Portfolio Strategy. The Betterment portfolio construction process excludes private equity, commodities, and natural resources asset classes. Specifically, while commodities represent an investable asset class in the global financial market (it is however available as an asset class as part of Flexible Portfolio if investors wish to create their own custom portfolio), we have excluded commodities ETFs from the Betterment Portfolio Strategy because of their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in the Portfolio Strategy (but is also available as part of the Flexible Portfolio to create custom portfolios). The Betterment Portfolio Strategy does however provide exposure to real estate, but as a sector within equities. Adding additional real estate exposure by including a REIT asset class would overweight the Portfolio Strategy’s exposure to real estate relative to the overall market. III. Portfolio Optimization While asset selection sets the stage for a globally diversified portfolio strategy, we further optimize the Betterment Portfolio Strategy by tilting the portfolio strategy to drive higher return potential. While most asset managers offer a limited set of model portfolios at a defined risk scale, the Betterment Portfolio Strategy is designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable the Betterment Portfolio Strategy to contain 101 different portfolios. Optimizing Portfolios Modern Portfolio Theory requires estimating returns and covariances to optimize for portfolios that sit along an efficient frontier. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model (CAPM) along with a utility function which allows us to optimize for the portfolio with a higher return for the risk that the investor is willing to accept. Computing Forward-Looking Return Inputs Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market 3. This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio 4. By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers 5. In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input.  The covariance matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the assets themselves. Our process for estimating the covariance matrix aims to avoid skewed analysis of the conventional historical sample covariance matrix and instead employs Ledoit and Wolf’s shrinkage methodology, which uses a linear combination of a target matrix with the sample covariance to pull the most extreme coefficients toward the center, which helps reduce estimation error 6. Tilting the Betterment Portfolios based on the Fama-French Model Academic research also points to persistent drivers of returns that the market portfolio doesn’t fully capture. A framework known as the Fama-French Model demonstrates how equity returns are driven by three factors: market, value, and size 7. The underlying asset allocation of the Betterment Portfolio Strategy ensures the market factor is incorporated, but to gain higher returns from value and size, Betterment tilts the portfolios. For the actual mechanism of tilting, we turn to the Black-Litterman model. Black-Litterman starts with our global market portfolio as the asset allocation that an investor should take in the absence of views on the underlying assets. Then, using the Idzorek implementation of Black-Litterman, the Betterment Portfolio Strategy is tilted based on the level of confidence we have for our views on size and value 8. These views are computed from historical data analysis, and our confidence level is a free parameter of the implementation. Tilts are expressed, taking into account the constraints imposed by the liquidity of the underlying funds. Monte Carlo Simulations Betterment uses Monte Carlo simulations to predict alternative market scenarios. By doing an optimization of the Portfolio Strategy under these simulated market scenarios, Betterment averages the weights of asset classes in each scenario, which provides a more robust estimate of the optimal weights. Betterment believes this secondary optimization analysis alleviates the portfolio construction’s sensitivity to returns estimates and leads to more diversification and expected performance over a broader range of potential market outcomes. Thus, through our method of portfolio optimization, the Betterment Portfolio Strategy is weighted based on the tilted market portfolio, based on Fama-French, averaged by the weights produced by our Monte Carlo simulations. This portfolio construction process gives us a portfolio strategy designed to be optimal at any risk level for not just diversification and expected future value, but also ideal for good financial planning and for managing investor behavior. IV. Tax Management Using Municipal Bonds For investors with taxable accounts, portfolio returns may be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, the Betterment Portfolio Strategy in taxable accounts is also tilted toward municipal bonds because interest from municipal bonds is exempt from federal income tax, which can further optimize portfolio returns. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved by tilting towards municipal bonds. For investors in states with the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state specific municipal bonds. Conclusion After setting the strategic weight of assets in the Betterment Portfolio Strategy, the next step in implementing the strategy is Betterment’s investment selection process, which selects the appropriate ETFs for the respective asset exposure in a low-cost, tax-efficient way. In keeping with our philosophy, that process, like the portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time—and our methodology for automatic asset location, which we call Tax Coordination. Finally, our overlay features of automated rebalancing and tax-loss harvesting are designed to be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, to help each and every Betterment customer maximize value while invested at Betterment and when they take their money home. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 4 Note that that the risk aversion parameter is a essentially a free parameter. 5 Ilmnen, A., Expected Returns. 6 Ledoit, O. and Wolf, M., Honey, I Shrunk the Sample Covariance Matrix, Olivier Ledoit & Michael Wolf. 7 Fama, E. and French, K., (1992). "The Cross-Section of Expected Stock Returns". The Journal of Finance.47 (2): 427. 8 Idzorek, T., A step-by-step guide to the Black-Litterman Model.  

The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way) Oct 18, 2022 2:19:00 PM Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his successor and new CEO of Betterment. It’s the fall of 2007 on the Lower East Side. My Betterment clock starts not when we launch in 2010 but as I hash out the concept in conversations with roommates and friends. I have a crazy idea: to pursue my happiness via helping Americans pursue their happiness. I write a mission statement: empower customers to do what’s best with their money so they can live better. Investing feels complicated to most people, but the best practices are known and straightforward. Why not take the smart services used by the wealthy and institutions and make them accessible to every American? People like this crazy idea, some join me, and with sweat and sacrifice, a tiny, hungry, customer-impact-obsessed company is born. I pursue Betterment’s mission doggedly. My wife (whom I met in 2006—not coincidentally—her encouragement begets a startup) calls Betterment my “first child.” I say often (usually sincerely): “I’m the luckiest person, I have the best job in the world.” At times, it feels like all of my being, every waking hour, every dream, is intertwined with my company. I am Betterment. There is nothing else. Teammates become best friends (and each other's family: I officiate weddings of Bettementers who later have Betterment babies). I star in TV ads—never imagined that career turn. Early customers email me personally for support (and some still do—love y’all, customers). We grow to $25B AUM, more than 500,000 customers, a team of more than 300, and we move the industry forward. And yet, I know we can achieve more; we have millions more Americans to reach. The Pursuit Of Our Potential For some time, I look to bring in an experienced, dynamic operating leader to help drive the company forward. The search is not initially focused on one specific role to fill; it is about finding amazing talent that could help lead Betterment to realize our full potential. The time at home this year affords more time to devote to the search process, to talk to senior operating leaders and to think about what might be needed for the next leg of the journey. I spend time with hundreds of diverse candidates. I realize that the best way to achieve our mission might be to invite a successor to lead Betterment in the next phase of growth. Due to good fortune and intense effort in a most challenging year, the company has never been in a stronger position. Each line of business is reaching new heights in 2020. We’re beating targets, well-capitalized, with wind at our backs. It’s a good time to hand over the reins. Over the summer, I connect with Sarah Kirshbaum Levy. There is something enthralling about her. I don’t want to jinx or overload it, but outside of meeting my wife, it’s hard, at present, to think of a more consequential introduction. And this is over video conference! The Pursuit Of The One Over the next few months, I spend more time with Sarah and she begins engaging with members of the team and our board. I bring her in full-time as a consultant in a trial run. What a privilege not only to recruit my successor, but to observe her building relationships, to work side by side with her as she iterates on her plan, and to see her making every meeting more open and efficient. I give her my authority to work with the team to architect plans for 2021 and beyond, and she excels. My admiration grows as she starts effectively running the company, with my proxy. My execs tell me they have so much to learn from her. The only thing that is missing is the title—and today, we give her the title. Sarah’s Pursuits Sarah started out at Disney and spent the last 20 years at Viacom, home to beloved brands including Nickelodeon, BET, MTV, and Comedy Central. Through a series of senior leadership roles, culminating in Chief Operating Officer, she’s shepherded global phenomena, from SpongeBob to The Daily Show with Trevor Noah, connecting with audiences in meaningful ways. With her experiences leading large public companies, Sarah is the right executive to lead Betterment now, as we contemplate a transition from private to public in the coming years. For someone with a “big company” pedigree, she’s remarkably down to earth and scrappy. She’s launched and grown businesses, bought and sold businesses, managed the bottom line, and driven consumer brands to win. I appreciate her “outsider” perspective. Betterment is a unique company—not just finance, not just tech, 100% customer-impact obsessed. Take it from one who’s looked: It’d be hard to find someone who’s both spent a career in financial services and can credibly lead the change we envision: to empower customers to do what’s best with their money, so they can live better. The Pursuit Of Happiness I’ve done the best work of my life at Betterment, and I have worked too hard to stop giving it my all to realize this company’s mission, whatever form those efforts may take. From my role on the board, I’ll be supporting Sarah and her team, whether it be via recruiting, investor relations, telling our story, or upholding company culture and values. A dream for me since that Lower East Side fall in 2007 has been to build a sustainable institution, to build something that will outlast me. I’ve never taken a larger step toward that accomplishment than I am today in passing the torch to Sarah. I asked Sarah what mattered most to her in her next role, and she said, without hesitation, “A brand and mission I believe in.” She’s evidenced this for me in every interaction since. I believe that she’ll more fully realize the vision I laid out years ago, and make Betterment the most beloved, most essential financial brand for this generation. And in so doing, she’ll power the pursuit of happiness for millions of Americans.

How to Use Your Bonus to Get a Tax Break Oct 18, 2022 2:16:00 PM Bonuses are tricky. Here's how you can make your bonus work harder for you by reducing the tax impact. How are you planning to spend your annual bonus? Like with any cash windfall, we all want to use it wisely. But bonuses can be tricky because of taxes. To use a bonus most tax-efficiently, you’ll need to juggle multiple objectives and concerns. If you’re expecting to get more than one bonus per year, it’s important to consider all of the possible ways to invest a bonus to maximize its potential value. In this article, we’ll review how bonuses are typically taxed, what factors you should be aware of, and how to take advantage of different accounts and investing strategies to make your bonus work harder for you. How does a bonus get taxed? Bonuses are considered “supplemental income” by the IRS, which means they could be withheld differently than your regular salary. The IRS suggests a flat withholding of 22% from bonuses, and many employers follow that method. (Remember that withholdings are meant to be an estimate of how much you’ll owe at the end of the year, not the actual tax itself.) But some employers use the aggregate method, in which your whole bonus is added to your regular paycheck, and the combined amount is withheld at the normal income rate, as though that amount is representative of what you make every paycheck, which could be higher (or lower) than 22%. Some people believe that bonuses are taxed at a higher rate than ordinary wages, but that’s not the case. The aggregate method of withholding can result in bumping you into a higher estimated tax bracket, which creates the illusion that you “keep less of it,” but no special tax rates apply just because a payment from your employer is characterized as a bonus. Tax-savvy ways to use your bonus Bear in mind, while we hope you find this information helpful, you should consult a tax professional to understand your individual circumstances. Betterment is not a tax advisor, so while we like to offer helpful information to get you started, this should not be considered tax advice. With that said, here are some simple suggestions for how you might be able to use tax-deferred or even taxable accounts to help preserve and grow your windfall. Boost your 401(k) Before you add your bonus to your 401(k), check with your employer about how bonuses are handled. In some cases, your company may not allow you to make 401(k) contributions using your bonus. In others, your 401(k) plan may be set up to withhold the same percentage from your bonus as from your paycheck. Thus, if you typically contribute 10% from every paycheck to your 401(k), that same amount could be withheld from your bonus (unless you say otherwise). In the case of a $15,000 bonus, $1,500 would go into your 401(k), which may be too little for your aims. Of course, you can’t contribute more than the annual limit, so be sure to check how much you’ve contributed for the year to date. The 401(k) contribution limit in 2023 is $22,500 for those under 50 and $30,000 for those ages 50 and up. You can choose any combination of pre-tax or Roth contributions as part of your total contribution limit. Not sure which type is good for you? Many participants “split the difference” and contribute 50% pre-tax and 50% Roth. To figure out what kind of contribution might work well for you, Betterment offers some thoughts on a Traditional vs. Roth 401(k). Also, don’t assume that a lump-sum deposit is best, especially if your employer matches your 401(k) contributions. A single large deposit might not get the same amount of matching dollars that a comparable amount would if you spread the deposits over time. Betterment’s resident CFP® professional Nick Holeman notes that it depends on your employer’s matching structure. Certain plans offer a “true-up” for matching contributions if you max out early in the year while many plans do not offer that feature. Talk to your employer to find out exactly how they calculate the match. Take advantage of multiple accounts Now here’s the part you may not be aware of: depending on your income and whether you or your spouse is participating in a company retirement plan, you might be able to reduce your taxable income further by contributing to your flexible spending account this year, a health savings account, and a Traditional or Roth IRA. Many people don’t realize that you can participate in a company plan and still fund a traditional or Roth IRA. You could contribute to your 401(k) this year, and contribute to a traditional or Roth IRA as well, or a combination of those. As the IRS notes: You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level. Invest in a “happiness fund” If it’s not possible or advantageous to put your money only into tax-deferred accounts, use your windfall to invest by creating “a gift that keeps on giving.” You could spend it all, sure, but by investing your windfall in a well-diversified portfolio, you can create an additional source of cash flow that steadily adds to your quality of life, year after year.

Putting Together An Estate Plan For Your Investments Oct 18, 2022 2:09:00 PM Help make sure the right people make decisions on your behalf and receive the inheritance you want. If you suddenly found yourself on life support or developed a serious mental illness, what would happen to you? If you died tomorrow, what would happen to your children, and your things? State laws can answer these questions, or you can decide for yourself with an estate plan. By preparing in advance, you can help ensure that the right people make decisions on your behalf and that your loved ones receive the inheritance you want them to. (And if there’s anyone who shouldn’t receive an inheritance, your estate plan can keep them from cutting in.) In this guide, we’ll cover: What your estate plan needs to do Who should be part of your estate plan What documents to include in your estate plan An estate plan can define what will happen with the people and things you’re responsible for if you die or become incapacitated. Who will make medical or financial decisions on your behalf? Who will be your child’s new guardian? How will your finances be divided? Who gets the house? Those aren’t decisions you want a stranger to make for you. But without an estate plan, that could be what happens. Unless you say otherwise, state laws will govern your estate. And those generic laws may not align with your values and goals. That’s why whatever your age and whatever your financial situation, an estate plan is crucial. Before you start creating an estate plan, it helps to consider your unique situation. What does your estate plan need to do? Your estate plan can answer questions about what happens with your assets and how your loved ones will be taken care of when you’re gone. So you need to consider how you’d answer those questions now, anticipating choices that could come up in the future. For example, if you’re expecting to receive an inheritance, be sure to think through how your estate plan would distribute it or who would manage it. And if there’s anyone you need or want to financially support, that should guide your estate plan as well. Who should be part of your estate plan? An estate plan doesn’t just decide who gets what. It can also determine who’s in charge of what. There are several key roles to consider in your estate plan. You may want to divide these roles between multiple people, or let one call the shots. For example, if all of your children have the authority to make medical decisions on your behalf, that may lead to more thoughtful decisions. But it’s a trade off. Each of the people you give power to has to sign off on decisions, which can slow things down and make it much more difficult to coordinate. Financial Power Of Attorney (POA) Giving someone financial power of attorney can make it easier for them to pay bills, file taxes, or cash checks on your behalf. You can decide how broad or limited their control is. Even with broad authority, a financial power of attorney can’t change your will. The idea is that if you’re physically or mentally unable to take care of your day-to-day finances, you’ve designated someone to take care of that for you. Make sure the person you designate has a copy of this paperwork or knows where to find it. You can also give a copy to your financial institutions. Advanced Healthcare Directive An advanced healthcare directive helps decide how to handle medical decisions when you can’t make them yourself. It can lay out specific care instructions like, “Do not resuscitate,” but it can also give someone medical power of attorney to make decisions on your behalf. When you can’t think through important decisions anymore, who do you want to make the call? Your spouse? Your children? A parent? A sibling? As with financial power of attorney, you can define the scope of this power. Joint Owner If you name someone the joint owner of your accounts, then when you die, they become the sole owner. This is a common way for married couples to handle their estates, and it usually keeps the state from getting involved in distributing your assets when you die. Just keep in mind: anyone you name as a joint owner gains equal control of your assets while you’re alive, too. Also, retirement accounts such as 401(k)s and IRAs can’t be put into joint ownership. Beneficiaries You may also want individual assets to go to specific people. In that case, you may want to name beneficiaries for your bank accounts, investment accounts, life insurance policy, real estate, and other major assets. Name beneficiaries in your will, and these assets will have to go through probate first, where a court process proves that your will is authentic. This typically increases the time before your beneficiaries receive the inheritance and reduces the amount that ultimately makes it to them. For your accounts, adding beneficiaries can be as simple as filling out a form through your bank or investment firm. In some states, you may be able to use a Transfer on Death (TOD) Deed to ensure that your real estate goes directly to the beneficiary. What documents should your estate plan include? While there are many legal documents that make up an estate plan, two of the more important ones are a will and a trust. Here’s what those entail. Last will and testament A will serves several purposes. It can clearly lay out your final wishes, state who will take care of your non-adult children, and say who receives your belongings. If you do a good job naming beneficiaries for your assets, this mostly affects personal belongings. A will should usually start with a declaration. This identifies who you are and says that the document is your will. You’ll generally have to sign it in front of witnesses (and possibly a notary). You’ll need to choose an executor who will ensure your wishes are carried out, including any final arrangements for your death and funeral services. Your will can define the scope and limitations of their power as well as any compensation you want them to receive. If you have non-adult children, your will should name their new guardians. Wills also define bequests: individual gifts you give someone. Think family heirlooms. Clothing. Vehicles. Money. You can change your will at any time. And as your valuables and relationships change, you’ll want to keep it up to date. Trust A trust is a legal entity that gives someone (usually you) the right to hold your assets for the benefit of someone else. It provides several advantages that help your financial plan live on when you’re gone. Some types of trusts can shield your assets from estate taxes. They can also protect your assets from creditors, litigation, and even public records. As part of your trust, these assets also avoid probate. By using a trust, you keep greater control over your assets, too. You can define who gets your assets and when, as well as what they can do with them. With Betterment, you can open an account in the name of a trust–revocable or irrevocable–that you have already established.

What’s An Investment Portfolio? Oct 18, 2022 2:03:00 PM And why it's best to choose one suited to your goals and appetite for risk. The investment portfolio that’s right for you depends on your goals and the level of risk you’re comfortable with. What do you want to accomplish? How fast do you want to reach your goals? What timeline are you working with? Your answers guide which kinds of assets might be best for your portfolio—and where you’ll want to put them. When choosing or constructing an investment portfolio, you’ll need to consider: Asset allocation: Choose the types of assets you want in your portfolio. The right asset allocation balances risk and reward according to your goals. Got big long-term plans? You may want more stocks in your portfolio. Just investing for a few years? Maybe play it safe, and lean more on bonds. In this guide, we’ll: Explain what an investment portfolio is Explore the types of assets you can put in your portfolio Discuss how risk and diversification influence your portfolio Explain how to choose the right investment portfolio What’s an investment portfolio? When it comes to your financial goals, you don’t want your success or failure to depend on a single asset. An investment portfolio is a collection of financial assets designed to reach your goals. The portfolio that can help you reach your goals depends on how much risk you’re willing to take on and how soon you hope to reach them. Whether you’re planning for retirement, building generational wealth, saving for a child’s education, or something else, the types of assets your portfolio includes will affect how much it can gain or lose—and how long it takes to achieve your goal. What assets can your portfolio include? Investment portfolios can include many kinds of financial assets. Each comes with its own strengths and weaknesses. How much of each asset you include is called asset allocation. Cash can be used right away and carries very little risk when compared to other asset classes. But unlike most other assets, cash won’t appreciate more than inflation. Stocks represent shares of a company, and they tend to be more volatile. Their value fluctuates significantly with the market. More stocks means more potential gains, and more potential losses. Bonds are like owning shares of a loan whether made directly to companies or governments. They tend to be more stable than stocks. There’s less potential for gain over time, but less risk, too. Commodities like oil, gold, and wheat are risky investments, but they’re also one of the few asset classes that typically benefit from inflation. Unfortunately, inflation is pretty unpredictable, and commodities can often underperform compared to other asset classes. Mutual funds are like bundles of assets. It’s a portfolio-in-a-box. Stocks. Bonds. Commodities. Real estate. Alternative assets. The works. For a fee, investors like you can buy into a professionally managed portfolio. Exchange traded funds (ETFs) are similar to mutual funds in composition–they’re both professionally-curated groupings of individual stocks or bonds–but ETFs have some key differences. They can be bought and sold throughout the day, just like stocks—which often makes them better for tax-loss harvesting. They also typically have lower fees as well. ETFs are an increasingly popular portfolio option. Why diversification is key to a strong portfolio Higher levels of diversification in your investment portfolio allow you to reduce your exposure to risk that hopefully will result in achieving your desired level of return. Think of your assets like legs holding up a chair. If your whole portfolio is built around a single asset, it’s pretty unstable. Regular market fluctuations could easily bring its value crashing to the floor. Diversification adds legs to the chair, building your portfolio around a set of imperfectly correlated assets. With a diverse portfolio, your gains and losses are less sensitive to the performance of any one asset class and your overall portfolio becomes less volatile. Price volatility is unavoidable, but with the right set of investments, you can lower the overall risk of your portfolio. This is why asset allocation and diversification go hand-in-hand. As you consider your goals and the level of risk you're comfortable with, that should guide the assets you choose and the ratio of assets in your portfolio. How to align your portfolio with your goal Since some asset classes like stocks and commodities have greater potential for significant gains or losses, it’s important to understand when you might want your portfolio to take on more or less risk. Bottom line: the more time you have to accomplish your goal, the less you should worry about risk. For goals with a longer time horizon, holding a larger portion of your portfolio in asset classes more likely to experience loss of value, like stocks, can also mean greater potential gains, and more time to compensate for any losses. For shorter-term goals, a lower allocation to volatile assets like stocks and commodities will help you avoid large drops in your balance right before you plan to use what you’ve saved. Over time, your risk tolerance will likely change. As you get closer to reaching retirement age, for example, you’ll want to lower your risk and lean more heavily on asset classes that deliver less volatile returns—like bonds.

The Most Common Asset Classes For Investors Oct 18, 2022 1:58:00 PM Every type of asset gains or loses value differently, so it helps to know what those types are and how they work. An asset class is a name for a group of assets that share common qualities and behave similarly in the market. They’re governed by the same rules and regulations, and gain or lose value based on the same factors and circumstances. Different asset classes have relatively little in common, and tend to have fluctuations in value that are imperfectly correlated. Common asset classes include: Equities (stocks) Fixed income (bonds) Cash Real Estate Commodities Cryptocurrencies Alternative investments Financial Derivatives Within these groups, there are several assets people commonly invest in. The most common types of assets for investors The three financial assets you may hear about the most are stocks, bonds, and cash. A strong investment portfolio often includes a balance of these assets, or combines them with others. Let’s take a closer look at each of these. Stocks A stock is a type of equity. It’s basically a tiny piece of a company. When you invest in stocks, you become a partial “owner” of the companies that issued those stocks. You don’t own the building, and you can’t go bossing around the employees, but you’re a shareholder. Your stock’s value is directly tied to the company’s profits, assets, and liabilities. And that means you have a stake in the company’s success or failure. Stocks are volatile assets—their value changes often—and they have historically had the greatest risk and highest returns out of these three asset categories (stocks, bonds and cash). Choosing stocks from a wide range of companies in different industries can be a smart way to diversify your portfolio. Bonds A bond represents a portion of a loan. Its value to the bondholder comes from the interest on the loan. Bonds are typically more stable than stocks—lower risk, lower reward. Bonds belong to the “fixed income” asset class, which focuses on preserving capital and income, and tend to depend on different risk variables than stocks. If a company has a bad quarter, that’s probably not going to affect the value of your bond, unless they have a really bad quarter then default on their loan. When stock markets have a bad month, investors tend to flock to safer asset classes. In those cases, returns on bonds may outperform returns from the stock market. Something else to consider with bonds is the impact of interest rates and inflation. When interest rates increase or decrease, they directly affect how much bond interest you accrue. And since bonds generate lower returns than stocks, they may struggle at times to beat inflation. Cash With cash investments, things like money market accounts and certificates of deposit (CDs), you’re basically loaning cash (often to a bank) in exchange for interest. This is usually a short-term investment, but some cash investments like CDs can lock up funds for a few years. These investments are often low-risk because you can be confident they will generate a return, even though it might be lower than returns for other types of asset classes. Cash investments offer higher liquidity, meaning you can more quickly sell or access these assets when you need the money. As such, the return you get is typically lower than what you’d achieve with other asset classes. Investors therefore tend to park the money they need to spend in the near-term in cash investments. Other common assets Those are the big three. But investors also invest in real estate, commodities, alternative asset classes, financial derivatives, and cryptocurrencies. Each of these asset classes come with their own set of risk factors and potential advantages. What about investment funds? An investment fund is a basket of assets that can include stocks, bonds, and other investments. The most common kinds of funds you can invest in are mutual funds and exchange-traded funds (ETFs). Mutual funds and ETFs are similar, but there’s a reason ETFs are gaining popularity: they’re usually cheaper. ETFs tend to be less expensive to manage and therefore typically have lower expense ratios. Additionally, mutual funds charge a fee to cover their marketing expenses. ETFs don’t. Mutual funds are also more likely to be actively managed, so they can have more administrative costs. Most ETFs are funds that simply track the performance of a specific benchmark index (e.g., the S&P 500), so there’s less overhead to manage ETFs than mutual funds. ETFs have another advantage: you can buy and sell them on the stock exchange, just like stocks. You can only sell a mutual fund once per day, at the end of the day. That’s not always the best time. Being able to sell at other times opens the door to other investment strategies, like tax-loss harvesting. How to choose the right assets When you start investing, it’s hard to know what assets belong in your investment portfolio. And it’s easy to make costly mistakes. But if you start with a goal, choosing the right assets is actually pretty easy. Say you want $100,000 to make a down payment on a house in 10 years. You have a target amount and a deadline. Now all you have to do is decide how much risk you’re willing to take on and choose assets that fit that risk level. For many investors, it’s simply a matter of balancing the ratio of stocks and bonds in your portfolio.

Betterment Raises $160 Million in Growth Capital Oct 18, 2022 12:00:00 AM The additional funding will be used to accelerate the record growth Betterment has delivered year-to-date. Today, we're announcing that Betterment has secured $160 million in growth capital comprised of a $60 million Series F equity round and a $100 million credit facility. This moment comes as Betterment is the largest independent digital investment advisor with $32 billion in assets under management and nearly 700,000 clients. The Series F round was led by Treasury, with participation from existing investors, including Kinnevik, Bessemer Venture Partners, Francisco Partners, Menlo Ventures, Anthemis Group, Globespan Capital Partners, Citi Ventures, and The Private Shares Fund, as well as new investors Aflac Ventures and ID8 Investments. The financing valued the company at nearly $1.3 billion. The $100 million credit facility was established with ORIX Corporation USA’s Growth Capital group and Runway Growth Capital. ORIX’s Growth Capital group acted as lead arranger and agent. The additional funding will be used to accelerate the record growth Betterment has delivered year-to-date across its core retail investment products and advisor solutions, and particularly its rapidly growing 401(k) offering for small and medium sized businesses. “From day one, Betterment’s mission has been to make people’s lives better with easy-to-use, personalized investment solutions. The record growth and demand for Betterment products and services proves how well we deliver,” said Sarah Levy, Betterment's CEO. “We are thrilled to have the support of new and existing investors who believe in our business model and are excited by the opportunity to support our growth. We’re using these funds to further cement our category leadership with rapid innovation on top of our already differentiated product suite and unique, multi-pronged distribution model that serves retail investors, advisors and small businesses.” “I’ve seen first hand the strength of Betterment’s business model since its founding over a decade ago,” said Eli Broverman, a co-founder of Betterment and a founder of Treasury. “I believe in Betterment’s team and vision, and we are thrilled to support the company’s future success.” To all of our customers, we couldn't have achieved this without you. Thank you!

Four Ways We Can Help Limit the Tax Impact Of Your Investments Oct 18, 2022 12:00:00 AM Betterment has a variety of processes in place to help limit the impact of your investments on your tax bill, depending on your situation. Let’s demystify these powerful strategies. We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time. Let’s dive right in to get a further understanding of: What accounts are available and why you might choose them The benefits of receiving dividends Betterment’s powerful tax-sensitive features How Are Different Investment Accounts Taxed? Taxable Accounts Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions. Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis. While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income. Key Considerations You would like the option to withdraw at any time with no IRS penalties. You already contributed the maximum amount to all tax-advantaged retirement accounts. Traditional Accounts Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs). Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies. Key Considerations You expect your tax rate to be lower in retirement than it is now. You recognize and accept the possibility of an early withdrawal penalty. Roth Accounts This includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs). Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies. Key Considerations You expect your tax rate to be higher in retirement than it is right now. You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly). You desire the option to withdraw contributions without being taxed. You recognize the possibility of a penalty on earnings withdrawn early. Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible. Four Ways Betterment Helps You Limit Your Tax Impact We use any additional cash to rebalance your portfolio When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class. Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world. Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that aims to help keep your tax bill down at the end of the year. And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio. This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account. Performance of S&P 500 With Dividends Reinvested Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for [asset classes] that may not be used in all Betterment portfolios. The [asset class] performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used for each asset class in the Betterment portfolio will differ from the performance of the broad market index returns reflected here. Past performance is not indicative of future results. You cannot invest directly in the index. Content is meant for educational purposes and not intended to be taken as advice or a recommendation for any specific investment product or strategy. We “harvest” investment losses Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested. When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill. In fact, if losses outpace gains in a tax year, you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years. So how do you do it? When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure. Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock. Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account. We use asset location to your advantage Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix. For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account. In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden. We use ETFs instead of mutual funds Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you. While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

The Benefits of Estimating Your Tax Bracket When Investing Oct 18, 2022 12:00:00 AM Knowing your tax bracket opens up a huge number of planning opportunities that have the potential to save you taxes and increase your investment returns. If you’re an investor, knowing your tax bracket opens up a number of planning opportunities that can decrease your tax liability and increase your investment returns. Investing based on your tax bracket is something that good CPAs and financial advisors, including Betterment, do for customers. Because the IRS taxes different components of investment income (e.g., dividends, capital gains, retirement withdrawals) in different ways depending on your tax bracket, knowing your tax bracket is an important part of optimizing your investment strategy. In this article, we’ll show you how to estimate your tax bracket and begin making more strategic decisions about your investments with regards to your income taxes. First, what is a tax bracket? In the United States, federal income tax follows what policy experts call a "progressive" tax system. This means that people with higher incomes are generally subject to a higher tax rate than people with lower incomes. 2023 Tax Brackets Tax rate Taxable income for single filers Taxable income for married, filing jointly 10% $0 to $11,000 $0 to $22,000 12% $11,001 to $44,725 $22,001 to $89,450 22% $44,726 to $95,375 $89,451 to $190,750 24% $95,376 to $182,100 $190,751 to $364,200 32% $182,101 to $231,250 $364,201 to $462,500 35% $231,251 to $578,125 $462,501 to $693,750 37% $578,126 or more $693,751 or more Source: Internal Revenue Service Instead of thinking solely in terms of which single tax bracket you fall into, however, it's helpful to think of the multiple tax brackets each of your dollars of taxable income may fall into. That's because tax brackets apply to those specific portions of your income. For example, let's simplify things and say there's hypothetically only two tax brackets for single filers: A tax rate of 10% for taxable income up to $10,000 A tax rate of 20% for taxable income of $10,001 and up If you're a single filer and have taxable income of $15,000 this year, you fall into the second tax bracket. This is what's typically referred to as your "marginal" tax rate. Portions of your income, however, fall into both tax brackets, and those portions are taxed accordingly. The first $10,000 of your income is taxed at 10%, and the remaining $5,000 is taxed at 20%. How difficult is it to estimate my tax bracket? Luckily, estimating your tax bracket is much easier than actually calculating your exact taxes, because U.S. tax brackets are fairly wide, often spanning tens of thousands of dollars. That’s a big margin of error for making an estimate. The wide tax brackets allow you to estimate your tax bracket fairly accurately even at the start of the year, before you know how big your bonus will be, or how much you will donate to charity. Of course, the more detailed you are in calculating your tax bracket, the more accurate your estimate will be. And if you are near the cutoff between one bracket and the next, you will want to be as precise as possible. How Do I Estimate My Tax Bracket? Estimating your tax bracket requires two main pieces of information: Your estimated annual income Tax deductions you expect to file These are the same pieces of information you or your accountant deals with every year when you file your taxes. Normally, if your personal situation has not changed very much from last year, the easiest way to estimate your tax bracket is to look at your last year’s tax return. The 2017 Tax Cuts and Jobs Act changed a lot of the rules and brackets. The brackets may also be adjusted each year to account for inflation. Thus, it might make sense for most people to estimate their bracket by crunching new numbers. Estimating Your Tax Bracket with Last Year’s Tax Return If you expect your situation to be roughly similar to last year, then open up last year’s tax return. If you review Form 1040, you can see your taxable income on Page 1, Line 15, titled “Taxable Income.” As long as you don’t have any major changes in your income or personal situation this year, you can use that number as an estimate to find the appropriate tax bracket. Estimating Your Tax Bracket by Predicting Income, Deductions, and Exemptions Estimating your bracket requires a bit more work if your personal situation has changed from last year. For example, if you got married, changed jobs, had a child or bought a house, those, and many more factors, can all affect your tax bracket. It’s important to point out that your taxable income, the number you need to estimate your tax bracket, is not the same as your gross income. The IRS generally allows you to reduce your gross income through various deductions, before arriving at your taxable income. When Betterment calculates your estimated tax bracket, we use the two factors above to arrive at your estimated taxable income. You can use the same process. Add up your income from all expected sources for the year. This includes salaries, bonuses, interest, business income, pensions, dividends and more. If you’re married and filing jointly, don’t forget to include your spouse’s income sources. Subtract your deductions. Tax deductions reduce your taxable income. Common examples include mortgage interest, property taxes and charity, but you can find a full list on Schedule A – Itemized Deductions. If you don’t know your deductions, or don’t expect to have very many, simply subtract the Standard Deduction instead. By default, Betterment assumes you take the standard deduction. If you know your actual deductions will be significantly higher than the standard deduction, you should not use this assumption when estimating your bracket, and our default estimation will likely be inaccurate. The number you arrive at after reducing your gross income by deductions and exemptions is called your taxable income. This is an estimate of the number that would go on line 15 of your 1040, and the number that determines your tax bracket. Look up this number on the appropriate tax bracket table and see where you land. Again, this is only an estimate. There are countless other factors that can affect your marginal tax bracket such as exclusions, phaseouts and the alternative minimum tax. But for planning purposes, this estimation is more than sufficient for most investors. If you have reason to think you need a more detailed calculation to help formulate your financial plan for the year, you can consult with a tax professional. How Can I Use My Tax Bracket to Optimize My Investment Options? Now that you have an estimate of your tax bracket, you can use that information in many aspects of your financial plan. Here are a few ways that Betterment uses a tax bracket estimate to give you better, more personalized advice. Tax-Loss Harvesting: This is a powerful strategy that seeks to use the ups/downs of your investments to save you taxes. However, it typically doesn't make sense if you fall into a lower tax bracket due to the way capital gains are taxed differently. Tax Coordination: This strategy reshuffles which investments you hold in which accounts to try to boost your after-tax returns. For the same reasons listed above, if you fall on the lower end of the tax bracket spectrum, the benefits of this strategy are reduced significantly. Traditional vs. Roth Contributions: Choosing the proper retirement account to contribute to can also save you taxes both now and throughout your lifetime. Generally, if you expect to be in a higher tax bracket in the future, Roth accounts are best. If you expect to be in a lower tax bracket in the future, Traditional accounts are best. That’s why our automated retirement planning advice estimates your current tax bracket and where we expect you to be in the future, and uses that information to recommend which retirement accounts make the most sense for you. In addition to these strategies, Betterment’s team of financial experts can help you with even more complex strategies such as Roth conversions, estimating taxes from moving outside investments to Betterment and structuring tax-efficient withdrawals during retirement. Tax optimization is a critical part to your overall financial success, and knowing your tax bracket is a fundamental step toward optimizing your investment decisions. That’s why Betterment uses estimates of your bracket to recommend strategies tailored specifically to you. It’s just one way we partner with you to help maximize your money.

Buying A Home: Down Payments, Mortgages, And Saving For Your Future Oct 17, 2022 12:00:00 AM Your home may be the largest single purchase you make during your lifetime. That can make it both incredibly exciting and nerve wracking. Purchasing a primary residence often falls in the gray area between a pure investment (meant to increase one’s capital) and a consumer good (meant to increase one’s satisfaction). Your home has aspects of both, and we recognize that you may purchase a home for reasons that are not strictly monetary, such as being in a particular school district or proximity to one’s family. Those are perfectly valid inputs to your purchasing decision. However, this guide will focus primarily on the financial aspects of your potential home purchase: We’ll do this by walking through the five tasks that should be done before you purchase your home: Build your emergency fund Choose a fixed-rate mortgage Save for a down payment and closing costs Think long-term Calculate your monthly affordability Build your emergency fund Houses are built on top of foundations to help keep them stable. Just like houses, your finances also need a stable foundation. Part of that includes your emergency fund. We recommend that, before purchasing a home, you should have a fully-funded emergency fund. Your emergency fund should be a minimum of three months’ worth of expenses. How big your emergency fund should be is a common question. By definition, emergencies are difficult to plan for. We don’t know when they will occur or how much they will cost. But we do know that life doesn’t always go smoothly, and thus that we should plan ahead for unexpected emergencies. Emergency funds are important for everyone, but especially so if you are a homeowner. When you are a renter, your landlord is likely responsible for the majority of repairs and maintenance of your building. As a homeowner, that responsibility now falls on your shoulders. Yes, owning a home can be a good investment, but it can also be an expensive endeavor. That is exactly why you should not purchase a home before having a fully-funded emergency fund. And don’t forget that your monthly expenses may increase once you purchase your new home. To determine the appropriate size for your emergency fund, we recommend using what your monthly expenses will be after you own your new home, not just what they are today. Choose a fixed-rate mortgage If you’re financing a home purchase by way of a mortgage, you have to choose which type of mortgage is appropriate for you. One of the key factors is deciding between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). Betterment generally recommends choosing a fixed-rate mortgage, because while ARMs usually—but not always—offer a lower initial interest rate than FRMs, this lower rate comes with additional risk. With an ARM, your monthly payment can increase over time, and it’s difficult to predict what those payments will be. This may make it tough to stick to a budget and plan for your other financial goals. Fixed-rate mortgages, on the other hand, lock in the interest rate for the lifetime of the loan. This stability makes budgeting and planning for your financial future much easier. Locking in an interest rate for the duration of your mortgage helps you budget and minimizes risk. Most home buyers do choose a fixed-rate mortgage. According to 2021 survey data by the National Association of Realtors®, 92% of home buyers who financed their home purchase used a fixed-rate mortgage, and this was very consistent across all age groups. Research by the Urban Institute also shows FRMs have accounted for the vast majority of mortgages over the past 2 decades. Save for a down payment and closing costs You’ll need more than just your emergency fund to purchase your dream home. You’ll also need a down payment and money for closing costs. Betterment recommends making a down payment of at least 20%, and setting aside about 2% of the home purchase for closing costs. It’s true that you’re often allowed to purchase a home with down payments far below 20%. For example: FHA loans allow down payments as small as 3.5%. Fannie Mae allows mortgages with down payments as small as 3%. VA loans allow you to purchase a home with no down payment. However, Betterment typically advises putting down at least 20% when purchasing your home. A down payment of 20% or more can help avoid Private Mortgage Insurance (PMI). Putting at least 20% down is also a good sign you are not overleveraging yourself with debt. Lastly, a down payment of at least 20% may help lower your interest rate. This is acknowledged by the CFPB and seems to be true when comparing interest rates of mortgages with Loan-to-Values (LTVs) below and above 80%, as shown below. Source: Federal Reserve Bank of St. Louis. Visualization of data by Betterment. Depending on your situation, it may even make sense to go above a 20% down payment. Just remember, you likely should not put every spare dollar you have into your home, as that could mean you don’t have enough liquid assets elsewhere for things such as your emergency fund and other financial goals like retirement. Closing Costs In addition to a down payment, buying a home also has significant transaction costs. These transaction costs are commonly referred to as “closing costs” or “settlement costs.” Closing costs depend on many factors, such as where you live and the price of the home. ClosingCorp, a company that specializes in closing costs and services, conducted a study that analyzed 2.9 million home purchases throughout 2020. They found that closing costs for buyers averaged 1.69% of the home’s purchase price, and ranged between states from a low of 0.71% of the home price (Missouri) up to a high of 5.90% of the home price (Delaware). The chart below shows more detail. Source: ClosingCorp, 2020 Closing Cost Trends. Visualization of data by Betterment. As a starting point, we recommend saving up about 2% of the home price (about the national average) for closing costs. But of course, if your state tends to be much higher or lower than that, you should plan accordingly. In total, that means that you should generally save at least 20% of the home price to go towards a down payment, and around 2% for estimated closing costs. With Betterment, you can open a Major Purchase goal and save for your downpayment and closing costs using either a cash portfolio or investing portfolio, depending on your risk tolerance and when you think you’ll buy your home. Think long-term We mentioned the closing costs for buyers above, but remember: There are also closing costs when you sell your home. These closing costs mean it may take you a while to break even on your purchase, and that selling your home soon after is more likely to result in a financial loss. That’s why Betterment doesn’t recommend buying a home unless you plan to own that home for at least 4 years, and ideally longer. Unfortunately, closing costs for selling your home tend to be even higher than when you buy a home. Zillow, Bankrate, NerdWallet, The Balance and Opendoor all estimate them at around 8% to 10% of the home price. The below chart is built from 2020 survey data by the National Association of Realtors® and shows that most home sellers stay in their homes beyond this 4 year rule of thumb. Across all age groups, the median length of time was 10 years. That’s excellent. However, we can see that younger buyers, on average, come in well below the 10-year median, which indicates they are more at risk of not breaking even on their home purchases. Source: National Association of Realtors®, 2020 Home Buyers and Sellers Generational Trends. Visualization of data by Betterment. Some things you can do to help ensure you stay in your home long enough to at least break even include: If you’re buying a home in an area you don’t know very well, consider renting in the neighborhood first to make sure you actually enjoy living there. Think ahead and make sure the home makes sense for you four years from now, not just you today. Are you planning on having kids soon? Might your elderly parents move in with you? How stable is your job? All of these are good questions to consider. Don’t rush your home purchase. Take your time and think through this very large decision. The phrase “measure twice, cut once” is very applicable to home purchases. Calculate your monthly affordability The upfront costs are just one component of home affordability. The other is the ongoing monthly costs. Betterment recommends building a financial plan to determine how much home you can afford while still achieving your other financial goals. But if you don’t have a financial plan, we recommend not exceeding a debt-to-income (DTI) ratio of 36%. In other words, you take your monthly debt payments (including your housing costs), and divide them by your gross monthly income. Lenders often use this as one factor when it comes to approving you for a mortgage. Debt income ratios There are lots of rules in terms of what counts as income and what counts as debt. These rules are all outlined in parts of Fannie Mae’s Selling Guide and Freddie Mac’s Seller/Servicer Guide. While the above formula is just an estimate, it is helpful for planning purposes. In certain cases Fannie Mae and Freddie Mac will allow debt-to-income ratios as high as 45%-50%. But just because you can get approved for that, doesn’t mean it makes financial sense to do so. Keep in mind that the lender’s concern is your ability to repay the money they lent you. They are far less concerned with whether or not you can also afford to retire or send your kids to college. The debt to income ratio calculation also doesn’t factor in income taxes or home repairs, both of which can be significant. This is all to say that using DTI ratios to calculate home affordability may be an okay starting point, but they fail to capture many key inputs for calculating how much you personally can afford. We outline our preferred alternative below, but if you do choose to use a DTI ratio, we recommend using a maximum of 36%. That means all of your debts—including your housing payment—should not exceed 36% of your gross income. In our opinion, the best way to determine how much home you can afford is to build a financial plan. That way, you can identify your various financial goals, and calculate how much you need to be saving on a regular basis to achieve those goals. With the confidence that your other goals are on-track, any excess cash flow can be used towards monthly housing costs. Think of this as starting with your financial goals, and then backing into home affordability, instead of the other way around. Wrapping things up If owning a home is important to you, the five steps in this guide can help you make a wiser purchasing decision: Have an emergency fund of at least three months’ worth of expenses to help with unexpected maintenance and emergencies. Choose a fixed-rate mortgage to help keep your budget stable. Save for a minimum 20% down payment to avoid PMI, and plan for paying ~2% in closing costs. Don’t buy a home unless you plan to own it for at least 4 years. Otherwise, you are not likely to break even after you factor in the various costs of homeownership. Build a financial plan to determine your monthly affordability, but as a starting point, don’t exceed a debt-to-income ratio of 36%.

Meet the Innovative Technology Portfolio Oct 14, 2022 11:01:00 AM If you believe in the power of tech to blaze new trails, you can now tailor your investing to track the companies leading the way. The most valuable companies of today aren’t the same bunch as 20 years ago. With each generation comes new challengers and new categories (Hello, Big Tech). And while we can’t really predict the next class of top performers, innovation will likely come from parts of the economy that use technology in new and exciting applications, industries like: semiconductors clean energy virtual reality artificial intelligence nanotechnology This dynamic led us to create the Innovative Technology portfolio. What is the Innovative Technology Portfolio? The portfolio increases your exposure to companies pioneering the technology mentioned above and more. These innovations carry the potential to reshape the way we work and play, and in the process shape the market’s next generation of high-performing companies. Using the Core portfolio as its foundation, the Innovative Technology portfolio is built to generate long-term returns with a diversified, low-cost approach, but with increased exposure to risk. It contains many of the same investments as Core, but swaps specific exposures to value stocks with an allocation to the SPDR S&P Kensho New Economies Composite ETF (Ticker: KOMP). For a more in-depth look at the portfolio’s methodology, skip over to its disclosure. How are pioneering companies selected? The Kensho index that KOMP tracks uses a special branch of artificial intelligence called Natural Language Processing to screen regulatory data and identify companies helping drive the Fourth Industrial Revolution. After picking companies across 22 categories, each is combined into the overall index and weighted according to their risk and return profiles. Why might you choose this portfolio over Betterment’s Core portfolio? We built the Innovative Technology portfolio to perform more or less the same as an equivalent stock/bond allocation of the Core portfolio. It may, however, outperform or underperform depending on the return experience of KOMP and the companies this fund tracks. So, if you believe the emerging tech of today will drive the returns of tomorrow—and are willing to take on some additional risk to make that bet— this is a portfolio made with you in mind. Risk and early adoption can tend to go hand-in-hand, after all. Why invest in innovation with Betterment? Full disclosure: we’re a little biased when it comes to making bets on new frontiers and the plucky companies exploring them. We may be the largest independent digital investment advisor now, but the category barely existed when we opened shop in 2008. Innovative tech is in our DNA, so if you choose to invest in it with Betterment, you not only get our professional portfolio management tools, you get an advisor with first-hand experience in the field of first movers.

What Is a Tax Advisor? Attributes to Look For Oct 14, 2022 8:44:00 AM Since Betterment isn't a tax advisor, we often suggest that customers see a tax advisor regarding certain issues or decisions. Who exactly is a tax advisor and how should you think about picking one? Tax season is now upon us. Now that you’ve probably received all of your tax forms, you may be facing a choice for how to proceed with filing: do it yourself with tax software or hire a professional tax advisor? Although it certainly will be more expensive than using tax software, hiring a tax advisor makes sense for certain individuals, depending on their financial circumstances. Here are two important factors to consider when deciding if a tax advisor is right for you: Time: Even with tax software guiding you, filing your taxes yourself can be time consuming. You’ll need to make sure that you’ve entered or imported the data from your tax forms correctly, which often takes at least several hours, and your time is worth something. Complexity: The more complicated your financial situation, the more a tax advisor may be able to help you. Have partnership income, or income from an S corporation? Been subject to alternative minimum tax in past years? Received or exercised stock options this year? Tax software can handle these issues, but it will take time, and the risk of mistakes (and even an audit) increases. If you decide that your situation warrants professional assistance, some further questions are worth exploring: what exactly is a tax advisor and how should you think about picking one? Who counts as a tax advisor? Anyone with an IRS Prepare Tax Identification number (a “PTIN” for short) can be paid to file tax returns on behalf of others. But merely having a PTIN doesn’t tell you much about the tax preparer; tax preparers have different experience, skills, and expertise. What you really want is a tax advisor, a professional with a certification and experience level that qualifies her not only to prepare your return, but to use her knowledge of the tax code to provide advice on your financial situation. There are three different professional certifications to consider, each of which qualifies a tax advisor to practice with unlimited representation rights before the IRS. This means that in addition to preparing returns, they also are licensed to represent their clients on audits, payments and collection issues, and appeals. Certified Public Accountants (CPAs) CPAs have completed coursework in accounting, passed the Uniform CPA Examination, and are licensed by state boards of accountancy (which require that they meet experience and good character standards). Some, but not all, CPAs specialize in tax preparation and planning. You can find complaints about CPAs either by searching records with state boards of accountancy and at Better Business Bureaus. Enrolled Agents Enrolled agents are licensed by the Internal Revenue Service after they have passed a three-part examination and a background check. The IRS maintains complaints about enrolled agents on the website of its office for enrollment, and you can also find complaints on the National Association of Enrolled Agents website. Licensed Tax Attorneys Licensed attorneys have graduated from law school, passed a state bar exam, and are admitted to the bar in at least one state. Some, but not all, attorneys specialize in tax preparation and planning. Many tax attorneys have completed an additional year of law school study in a master’s program in tax (called a Tax LL.M. degree). Disciplinary actions against attorneys can be found by searching the state bar associations with which the attorney is registered. How to Select a Tax Advisor or Tax Consultant No tax advisor with one of the certifications described above is necessarily better than any of the others in all situations. Rather, what matters most is: How the advisor approaches the tax preparation process, including the specific experience the tax advisor has with issues relevant to your particular financial situation. Whether you feel comfortable with the tax advisor. How the advisor structures their fees. You may be able to screen potential advisors along several of these dimensions based on information you can find about them online; for others, an initial meeting will be critical to determine if the advisor is right for you. 1. Assess your confidence in the quality of a tax advisor's recommendations, as well as their experience. Here are a few specific factors to consider carefully when assessing the potential quality of a tax advisor's work. First, you should try to identify a tax advisor who will act ethically and with integrity. Before scheduling a meeting with a potential tax advisor, check to see if the advisor has been subject to any complaints, disciplinary actions, or other ethical infractions. When meeting with the advisor, be on the lookout for outlandish promises: if an advisor guarantees you a certain refund without having first looked at your returns, you should be wary (any promise that sounds too good to be true probably is). If the advisor suggests taking a position on a tax return that strikes you as overly aggressive (because it is not grounded in your actual financial situation) or if you simply do not understand something the advisor is saying, make sure to ask, and keep asking until you are satisfied with the answer. Having a tax advisor prepare your returns does not take away your responsibility for the accuracy of your tax return. Of course, an advisor who knowingly takes an improper position on a tax return will face consequences, but it is your return, and you can too. A good tax advisor also should provide more value than simply filling out your returns. She should help you to structure your finances in an optimal way from a tax perspective. Not every tax advisor has expertise with every nuance of the tax code, and so you’ll want to make sure that the advisor you select has significant experience with the particular issues for which you’re seeking expert advice. Of course, there are certain common issues that every good advisor should know: for example, how to maximize the value and efficacy of your charitable contributions, how to weigh the tax tradeoffs between renting and owning a home, or how to save money for or gift money to family members. For other less common situations, however, you’ll want an advisor with specific experience. If you own a business or are self-employed, if you work for a startup and own a significant number of stock options, or if some portion of your income is reported on a K-1 (because you are a partner in a business or own shares in an S corporation), you likely will be best served by finding an advisor who has worked with a significant number of clients with these tax issues. Finally, maintaining the security of your personal information is more important than ever these days, and the inputs for your taxes is some of the most sensitive information you have. There will always be some risk of data breaches, but a good tax advisor will take steps to safeguard your information. Make sure that you ask about how the tax advisor stores your personal information and what methods she uses to communicate with you regarding sensitive topics. You also should ask about whether the advisor has ever been subject to a data breach and what steps the advisor is taking to protect against future ones. 2. Assess your comfort level with the working relationship. You want to make sure you have a good rapport with your tax advisor, and that you feel like you understand each other. At your first meeting, make sure to bring three years’ worth of old tax returns for your advisor to review. Ask if you missed any deductions, and if your old returns raise any audit flags. Consider the advisor’s responses. Does the advisor seem willing to spend time with you to ask thorough questions to fully understand your situation? Or does she rush through in a way that makes you feel like she might be missing certain issues or nuances? Does the advisor explain herself in a way that is understandable to you, even though you don’t have a tax background? Or does the advisor leave you confused? A tax advisor may work by herself or be a member of a larger organization or practice. Each approach has its benefits and drawbacks. You can be sure that a solo practitioner will be the one who actually prepares your returns, but it may be harder to reach the advisor during the height of tax season, and the advisor may find it difficult to get a second opinion on tricky issues or issues outside her core areas of expertise. On the other hand, although the collective expertise of a larger practice may exceed that of even a very talented advisor practicing on her own, it may be more difficult to ensure that your return is prepared personally by your advisor. Finally, think about whether you want to work with a tax advisor who is already part of your social network, or who has been referred by a trusted family member or friend. On the one hand, having the seal of approval of someone you know and trust may help to assure you that the advisor is right for you. On the other hand, consider whether it will be harder to part ways with the advisor down the road if she fails to meet your standards. 3. Evaluate the cost of the tax advice. The final issue you’ll want to think about is cost. Tax preparation services are a low margin business (particularly with the competition that tax preparers face from low cost software), but you can expect to pay more for tax planning services or advice. The best cost structure is one where the tax advisor charges for her time or for the specific forms that the advisor completes and files. By paying for the advice itself and not a particular outcome, this cost arrangement properly aligns the incentives between your tax advisor and you. Be wary of compensation structures that create the potential for conflicts of interest between you and and your tax advisor. For example, some tax advisors may try to earn additional revenue from you by selling other services or financial products along with tax preparation. Ultimately, when it comes to cost, your goal should not be solely to minimize your combined out of pocket cost to the IRS and your advisor for this year’s tax return. Rather, you should take a longer term view, recognizing that good, personalized tax advice can help you to structure your financial life in a tax-efficient way that can pay dividends for years to come.

5 Common Roth Conversion Mistakes Oct 14, 2022 12:00:00 AM Learn more about Roth conversion benefits—for high earners and retirees especially—and common conversion mistakes to avoid. IRAs, as you may already know, have two popular flavors among others: Traditional IRA: Anyone can open and contribute to one, but one of the Traditional IRA’s primary appeals to investors is the ability to deduct contributions to it from their taxable income, a benefit the IRS phases out at certain income thresholds. Roth IRA: Contributions to a Roth IRA aren’t tax-deductible—you’re investing with “post-tax” dollars—but when it comes time to withdraw from the account, those withdrawals will generally be tax-free. The IRS also restricts access to a Roth IRA based on income. We go into more detail on the basics of IRAs and their respective pros and cons elsewhere. For this article, we’ll focus on the process of converting funds from a Traditional IRA to a Roth IRA—also known as a Roth conversion or, in some cases, a “Backdoor Roth”—why investors might consider one, and five common mistakes to avoid when executing one. But first, a disclaimer: Roth conversions come with all sorts of tax-centric complexities. We wouldn’t be writing this article if they didn’t. We’re not a tax advisor, nor can we provide tax advice for your specific situation, so we strongly recommend you consult one before deciding whether a Roth conversion is right for you. Why consider a Roth conversion in the first place? Before we dive into the potential tripups of a Roth conversion, let’s look at a couple typical reasons someone might consider one: You make too much money. Because the tax benefits for both of these IRA types are restricted by income, some high earners can neither deduct contributions to a Traditional IRA nor contribute directly to a Roth IRA at all. They can, however, contribute to a Roth IRA indirectly. If you have a Traditional IRA, you’re currently allowed to contribute to it first, then convert those contributions into a Roth IRA afterwards, even if your income exceeds the limits, in what some people call a “Backdoor Roth.”  You want to avoid a Traditional IRA’s Required Minimum Distributions in retirement. The IRS requires that once you reach a certain age, you must begin taking Required Minimum Distributions (RMDs) from your Traditional IRA every year, regardless of whether you want or need to. That means, in turn, that you pay taxes on any of those distributions that haven't already been taxed. A Roth IRA doesn’t require minimum distributions, so for some future retirees this could be advantageous. Five common Roth conversion mistakes to avoid Converting outside of your intended tax year You must complete a Roth conversion by a year’s end (December 31) in order for it to count toward that specific tax year’s income. Keep in mind this is different from the IRA contribution deadline for a specific tax year, which (somewhat confusingly) bleeds into the following calendar year. As we’ve mentioned before, Roth conversions require careful planning on your part (and ideally your tax advisor) to determine how much you should convert, if at all, and when. Converting too much Speaking of, the question of how much to convert is a crucial one. Blindly converting too much could push you into a higher tax bracket. A common strategy used to avoid this is called “bracket filling.” You determine your income and how much room you have until you hit the next tax bracket, then convert just enough to “fill up” your current bracket.  Of course, it can be difficult to determine your exact income. You might not know whether you’ll get a raise, for example, or how many dividends you’ll earn in investment accounts. Because of this, we highly recommend you work with a tax advisor to figure out exactly how much room you have and how much to convert. You no longer have the luxury of undoing a Roth conversion thanks to the 2017 Tax Cuts and Jobs Act. As a side note, you can squeeze more converted shares into your current bracket if the market is down since each share is worth less in that moment. To be clear, we don’t recommend making a Roth conversion solely because the market is down, but if you were already considering one, this sort of market volatility could make the conversion more efficient.  Withdrawing the converted funds too early When making a Roth conversion, you need to be mindful of what is called the “five year rule” regarding withdrawals after a conversion. As we mentioned earlier, you’ll typically pay taxes on the amount you convert at the time of conversion, and future withdrawals can be tax-free. After making a Roth conversion, however, you must wait five tax years for your full withdrawal of your converted amount to avoid taxes and penalties.   Notably, this countdown clock is based on tax years, so any conversion made during a calendar year is deemed to have taken place January 1 of that year. So even if you make a conversion in December, the clock for the five year rule starts from earlier that year in January. One more thing to keep in mind is that each Roth conversion you make is subject to its own five year period.  Paying taxes from your IRA Paying any taxes due from a conversion out of the IRA itself will make that conversion less effective. As an example, if you convert $10,000 and are in the 22% tax bracket, you’ll owe $2,200 in taxes. One option is to pay the taxes out of the IRA itself. However, this means you’ll have only $7,800 left to potentially grow and compound over time. If you’re under the age of 59 ½, the amount withheld for taxes will also be subject to a 10% early withdrawal penalty. Instead, consider paying taxes owed using excess cash or a non-retirement account you have. This will help keep the most money possible inside the Roth IRA to grow tax-free over time. Keeping the same investments Conversions can be a great tool, but don’t stop there. Once you convert, you should also consider adjusting your portfolio to take advantage of the different tax treatment of Traditional and Roth accounts. Each account type is taxed differently, which means their investments grow differently, too. You can take advantage of this by strategically coordinating which investments you hold in which accounts. This strategy is called asset location and can be quite complex. Luckily, we automated it through our Tax Coordination feature. Pairing asset location with Roth conversions can help supercharge your retirement saving even further.

Take on More Control with Flexible Portfolios Oct 14, 2022 12:00:00 AM For experienced investors looking to tweak asset class weights, we offer a Flexible portfolio option. Let’s say you’re an experienced investor. You’re already a Betterment customer—or you’re considering becoming one. You dig our personalized approach to automated investing, but you’d like to get granular with your portfolio’s specific asset class weights. Well, our Flexible portfolio option lets you do just that. It starts with our Core portfolio’s distribution of asset classes before handing over the wheel to you, so to speak. In the process, you get access to additional asset classes including Commodities, High Yield Bonds, and REITs. If all of this sounds a little overwhelming or confusing, you should probably consider sticking with one of our expert-built, curated portfolio options. But for those comfortable with the added risk, research, and responsibility in general that comes with managing your own portfolio, a Flexible portfolio may be a good fit. Keep reading for more details on the pros, cons and other considerations of this option. The benefits of a Flexible portfolio You get a sound start with the Betterment portfolio strategy Our investing advice has several layers, and the portfolio we recommend to you is just one of them. At the core is our approach to building a diversified, risk-efficient portfolio strategy and our cost-aware selection of ETFs. A Flexible portfolio lets you benefit from this approach and start with the asset class weighting we believe comprises a diversified portfolio, but gives you the final say in those weights. You get principled feedback on your Flexible portfolio You can tweak the asset class weights, but we’ll still rate the diversification and relative risk of those tweaks before any investment changes are actually made. We want any customer with a Flexible portfolio to better understand the risks of the changes they’re considering. This also lets you experiment with different weights in theory before putting them into practice. For illustrative purposes only You can still benefit from our automation and tax optimization Although the use of a Flexible portfolio means your preferences may deviate from our portfolio recommendation, you still get access to our automated investing and tax features. These include things like automatic rebalancing and Tax Loss Harvesting+. Altering or removing asset classes altogether, however, may impact the effectiveness of tax-saving strategies. The drawbacks of a Flexible portfolio Adjusting an investment portfolio requires careful consideration, experience, and a higher level of effort beyond choosing one of our preset portfolio strategies. Your performance may be better or worse than the performance of those portfolio strategies with a comparable level of risk. And beyond the potential for diminished tax-saving strategies, choosing a Flexible portfolio also disables the Auto-adjust feature. This feature automatically “glides” your portfolio to a lower overall risk level as you get closer to the end date of your goal. Without it, you’ll be responsible for manually maintaining the appropriate allocation of stocks and/or bonds and its corresponding risk level.

Investing in Your 40s: 4 Financial Goals You Should Prioritize at Mid-Life Oct 14, 2022 12:00:00 AM In your 40s, your priorities and investing goals become clearer than ever; it’s your mid-life opportunity to get your goals on track. It’s easy to put off planning for the future when the present is so demanding. Unlike in your 20s and 30s when your retirement seemed like a distant event, your 40s are when your financial responsibilities become palpable—now and for retirement. You may be earning more income than ever, so you can benefit far more from planning your taxes carefully. Perhaps you have increased expenses as a result of homeownership. If you have kids, now may also be the time that you’re thinking about or preparing to pay for college tuition. When all of these elements of your financial life converge, they require some thoughtful planning and strategic investing. Consider the following roadmap to planning your investments wisely during these rewarding years of your life. Here are four ways to think about goals you might prepare for. Preparing for Your Next Phase: Four Goals for Your 40s You may have already made a plan for the future. If so, now is a good time to review it and adjust course if necessary. If you haven’t yet made a plan, it’s not too late to get started. Set aside some time to think about your situation and long-term goals. If you’re married or in a relationship, you likely may need to include your spouse or partner in identifying your goals. Consider the facts: How much are you making? How much do you spend? Will your spending needs be changing in the near future? (Perhaps you're paying for day care right now but can plan to redirect that amount towards savings in a few years instead.) How much are you setting aside for savings, investments, and retirement? What will you need in the next five, 10, or 20 years? Work these factors into your short- and long-term financial goals. Pay off high-interest debt The average credit card interest rate is more than 20%, so paying off any high-interest credit card debt can boost your financial security more than almost any other financial move you make related to savings or investing. Student loans may also be a high-cost form of debt, especially if you borrowed money when rates were higher. If you have a high-interest-rate student loan (say more than 5%), or if you have multiple loans that you’d like to consolidate, you may want to consider refinancing your student debt. These days, lenders offer many options to refinance higher-rate student loans. There’s one form of debt that you don’t necessarily need to repay early, however: your mortgage. This is because mortgage rates are lower than most credit cards and may offer you a tax break. If you itemize deductions, you may be able to subtract mortgage interest from your taxable income. Many people file using the standard deduction, however, so check with your tax professional about what deductions may apply to your situation come tax time. Check that you’re saving enough for retirement If you’ve had several jobs—which means you might have several retirement or 401(k) plans—now is a good time to organize and check how all of your investments have performed. Betterment can help you accomplish this by allowing you to connect and review your outside accounts. Connecting external accounts allows you to see your wealth in one place and align different accounts to your financial goals. Connecting your accounts in Betterment can also help you see higher investment management fees you might be paying, grab opportunities to invest idle cash, and determine how your portfolios are allocated when we are able to pull that data from other institutions. There could also be several potential benefits of consolidating your various retirement accounts into low-fee IRA accounts at Betterment. Because it’s much easier to get on track in your 40s than in your 50s since you have more time to invest, you should also check in on the advice personalized for you in a Betterment retirement goal. Creating a Retirement goal at Betterment allows you to build a customized retirement plan to help you understand how much you’ll need to save for retirement based on when and where you plan on retiring. The plan also considers current and future income—including Social Security income—as well as your 401(k) accounts and other savings. Your plan updates regularly, and when you connect all of your outside accounts, it provides even more personalized retirement guidance. Optimize your taxes In your 40s, you’re likely to be earning more than earlier in your career–which may put you in a higher tax bracket. Reviewing your tax situation can help make sure you are keeping as much of your hard-earned income as you can. Determine if you should be investing in a Roth (after-tax contribution) or traditional (pre-tax contribution) employer plan option, or an IRA. The optimal choice usually depends on your current income versus your expected income in retirement. If your income is higher now than you expect it to be in retirement, it’s generally better to use a traditional 401(k) and take the tax deduction. If your income is similar or less than what you expect in retirement, you should consider choosing a Roth if available. Those without employer plans can generally take traditional IRA deductions no matter what their taxable income is (as long as your spouse doesn’t have one, either). You’ll also want to make sure you take advantage of all the tax credits and deductions that may be available to you. You may also want to check to see whether your company offers tax-free transportation benefits—including subway or bus passes or commuter parking. The value of these benefits isn’t included in your taxable income, so you can save money. You can also save money on a pre-tax basis by contributing to a Health Savings Account (HSA) or Flexible Spending Account (FSA).  Health Saving Accounts (HSA) Health savings accounts (HSAs) are like personal savings accounts, but the money in them is used to pay for health care expenses. Only you—not your employer or insurance company—own and control the money in your HSA. The money you deposit into the account is not taxed. To be eligible to open an HSA, you must have a high-deductible insurance plan. Your 401(k) may be tied to your employer, however your HSA is not. As long as your health plan meets the deductible requirement and permits you to open an HSA, and you’re not receiving Medicare benefits or claimed as a dependent on someone else’s tax return, you can open one with various HSA “administrators” or “custodians” such as banks, credit unions, insurance companies, and other financial institutions. You can withdraw the funds tax-free at any time for qualified medical expenses. Flexible Spending Accounts (FSA) A Flexible Spending Account (FSA) is a special account that can be used to save for certain out-of-pocket health care costs. You don’t pay taxes on this money—this is a tax-favored program that some employers offer to their employees. If you have an FSA, remember that in most cases your spending allowance does not carry over from year-to-year. It’s important to find out whether your employer offers a grace period into the next year (typically through mid-March) to spend down your account. Before you waste your tax-free savings on eyeglasses, check what you can buy with FSA money—with and without a prescription. Any unused funds will be forfeited, so it’s a good idea to use up what you can. If you find yourself with more than you can spend, then you might want to adjust how much you’re allocating to your FSA. If you have children, start saving for college—just don’t shortchange your retirement to do it If you have children, you may already be paying for their college tuition, or at least preparing to pay for it. It’s advisable to focus on your own financial security while also doing what you can to save for your kids’ college costs. So, first things first, make sure you’re saving enough for your own retirement. Then if you have money left over, think about tax-deferred college savings plans, such as 529 plans. A 529—named for the section of the tax code that allows for them—can be a great way to save for college because earnings are tax-free if used for qualified education expenses. Some states even allow you to deduct contributions from your state income tax, if you use your state’s plan. (While each state has its own plan, you can use any state’s plan, no matter where your child will go to college.) An alternative is to put money away in your own taxable savings accounts. Some investors prefer this method since it gives them more control over the money if things change, and may be more beneficial for financial aid. Your 40s are all about taking stock of how far you’ve come, re-adjusting your priorities, and getting ready for the next phase of life. By working on your financial goals now, you can gain peace of mind that allows you to concentrate on important things like family, friends, work, and the way you want to spend this rewarding decade of your life.

How We Help Investors Seamlessly Switch to Betterment Oct 14, 2022 12:00:00 AM Moving investment accounts from one provider to another can be tedious and complicated. We can help make it seamless. Transitioning investment accounts from one provider to another can be complicated. You may be in the early days of exploration. Or you may be ready to make a switch but want to learn more about how Betterment will handle the trading and operational steps required to complete your transfer. How we help customers transition to Betterment We’ve largely automated the process of transferring outside investment accounts to Betterment. Our in-app tooling fully addresses the needs of many customers, and some transfers can be self-serviced entirely online. While our online tools provide a great foundation, personalized guidance from an expert can make for easier transfers and help investors navigate more complex situations. If you’re considering moving accounts to Betterment, our transfer specialists and Licensed Concierge team are available to help you explore the options and complete a smooth transition. Fortunately, IRAs and 401(k)s can be directly transferred without creating a taxable event, so we help investors understand our philosophy, and ensure that the accounts are moved using efficient transfer methods. For taxable accounts, especially those with large embedded gains, we take things a step further, offering personalized tax-impact and break-even analyses. Breaking down our taxable account guidance As your fiduciary, we believe that transparency is key to making well-informed investment decisions. Whether you’re in the early stages of exploring if Betterment’s right for you, or fully sold and ready to get started, knowing the potential tax implications and the trading and operational steps required to complete your transfers is important. Below, we offer a step-by-step preview into the Licensed Concierge-specific process. Step 1: Review Current Situation When a Licensed Concierge associate is connected with a new client, our first priority is to understand their main goals. We start by reviewing their current investment accounts to see if they are properly aligned to their financial goals from a fee, investment mix, and risk perspective. Misalignment in any of these areas can impact a customer’s likelihood of reaching their goals. We prefer connecting with clients over the phone to gather information more efficiently, but we’re also available via email. We’ll also request account statements and fee information so that we can offer a more thorough analysis. Our free, automated tooling will analyze your account details and let you know if you’re taking on too much (or too little) risk, paying too high of fees, or don’t have proper portfolio diversification. Syncing your accounts to Betterment will also allow our human-facing teams to better guide you, if need be. Step 2: Establish A Plan Once we understand a customer’s current situation, our next step is to put together a comprehensive assessment and action plan. While the details are unique to each customer, at a high-level, the moving parts are largely the same. Based on the firm where an account is currently held, the type of taxable account (individual, joint, trust), and the underlying investments, we are able to tell our customers: Whether making a switch to Betterment comes highly recommended based on any red flags from our Step 1 review. Whether the firm and account type can be moved electronically to Betterment through the ACATS network. Which of the current holdings (if any) can be moved to Betterment in-kind without first selling at the current provider. What to expect once we receive the transferred account and begin transitioning it into the target Betterment portfolio. What the estimated tax-impact (if any) will be to move forward with the transfer to Betterment. The above information is delivered to the customer without industry jargon, so that making an official decision is as straightforward as possible. Step 3: Executing The Plan Assuming the customer would like to proceed with a transfer to Betterment, we’ll do a final check to ensure their Betterment account is set up properly. Once everything is in order from our side, we can begin implementing the transfer plan. Since it’s likely that our team has performed transfers from the customer’s current provider to Betterment, we’re usually able to be specific about what to expect throughout the process. We’ll communicate the steps involved, the expected timeline to complete, and when possible, we’ll handle any heavy lifting. We’ll regularly check-in and once the transfer has arrived, we’ll confirm with the customer and ensure any outstanding questions are answered.

ETF Selection For Portfolio Construction: A Methodology Oct 13, 2022 12:00:00 AM TABLE OF CONTENTS Why ETFs Total Annual Cost of Ownership Mitigating Market Impact Conclusion 1. Why ETFs? When constructing a portfolio, Betterment focuses on exchange traded funds (“ETFs”) securities with generally low-costs and high liquidity. An ETF is a security that generally tracks a broad-market stock or bond index or a basket of assets just like an index mutual fund, but trades just like a stock on a listed exchange. By design, index ETFs closely track their benchmarks—such as the S&P 500 or the Dow Jones Industrial Average—and are bought and sold like stocks throughout the day. ETFs have certain structural advantages when compared to mutual funds. These include: A. Clear Goals and Mandates Betterment generally selects ETFs that have mandates to passively track broad-market benchmark indexes. A passive mandate explicitly restricts the fund administrator to the singular goal of replicating a benchmark rather than making active investment decisions constituting market timing, building concentration in either a single name, group of names, or themes in an effort to beat the fund’s underlying benchmark. Adherence to this mandate ensures the same level of investment diversification as the benchmark indexes, makes performance more predictable, and reduces idiosyncratic risk associated with active manager decisions. B. Intraday Availability ETFs are transactable during all open market hours just like any other stock. As such, they are heavily traded by the full spectrum of equity market participants including market makers, short-term traders, buy-and-hold investors, and fund administrators themselves creating and redeeming units as needed (or increasing or decreasing the supply of ETFs based on market demand). This diverse trading activity leads to most ETFs carrying low liquidity premiums (or lower costs to transact due to competition from readily available market participants pushing prices downward) and equity-like transaction times irrespective of the underlying holdings of each fund. This generally makes ETFs fairly liquid, which makes them cheaper and easier to trade on-demand for activities like creating a new portfolio or rebalancing an existing one. C. Low Fee Structures Because most benchmarks update constituents (i.e., the specific stocks and related weights that make up a broad-market index) fairly infrequently, passive index-tracking ETFs also register lower annual turnover (or the rate a fund tends to transact its holdings) and thus fewer associated costs are passed through to investors. In addition, ETFs are generally managed by their administrators as a single share class that holds all assets as a single entity. This structure naturally lends itself as a defense against administrators practicing fee discrimination across the spectrum of available investors. With only one share class, ETFs are investor-type agnostic. The result is that ETF administrators provide the same exposures and low fees to the entire spectrum of potential buyers. D. Tax Efficiency In the case when a fund (irrespective of its specific structure) sells holdings that have experienced capital appreciation, the capital gains generated from those sales must, by law, be accrued and distributed to shareholders by year-end in the form of distributions. These distributions increase tax liabilities for all of the fund’s shareholders. With respect to these distributions, ETFs offer a significant tax advantage for shareholders over mutual funds. Because mutual funds are not exchange traded, the only available counterparty available for a buyer or seller is the fund administrator. When a shareholder in a mutual fund wishes to liquidate their holdings in the fund, the fund’s administrator must sell securities in order to generate the cash required to satisfy the redemption request. These redemption-driven sales generate capital gains that lead to distributions for not just the redeeming investor, but all shareholders in the fund. Mutual funds thus effectively socialize the fund’s tax liability to all shareholders, leading to passive, long-term investors having to help pay a tax bill for all intermediate (and potentially short-term) shareholder transactions. Because ETFs are exchange traded, the entire market serves as potential counterparties to a buyer or seller. When a shareholder in an ETF wishes to liquidate their holdings in the fund, they simply sell their shares to another investor just like that of a single company’s equity shares. The resulting transaction would only generate a capital gain or loss for the seller and not all investors in the fund. In addition, ETFs enjoy a slight advantage when it comes to taxation on dividends paid out to investors. After the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003, certain qualified dividend payments from corporations to investors are only subject to the lower long-term capital gains tax rather than standard income tax (which is still in force for ordinary, non-qualified dividends). Qualified dividends have to be paid by a domestic corporation (or foreign corporation listed on a domestic stock exchange) and must be held by both the investor and the fund for 61 of the 120 days surrounding the dividend payout date. As a result of active mutual funds’ higher turnover, a higher percentage of dividends paid out to their investors violate the holding period requirement and increase investor tax profiles. E. Investment Flexibility The maturation and growth of the global ETF market over the past few decades has led to the development of an immense spectrum of products covering different asset classes, markets, styles, and geographies. The result is a robust market of potential portfolio components which are versatile, extremely liquid, and easily substitutable. Despite all the advantages of ETFs, it is still important to note that not all ETFs are exactly alike or equally beneficial to an investor. Betterment’s investment selection process seeks to select ETFs that provide exposure to the desired asset classes with the least amount of difference between underlying asset class behavior and portfolio performance. In other words, we attempt to minimize the “frictions” (the collection of systematic and idiosyncratic factors that lead to performance deviations) between ETFs and their benchmarks. Betterment’s measure of these frictions is summarized as the “total annual cost of ownership”, or TACO: a composition of all relevant frictions used to rank and select ETF candidates for the Betterment portfolio. 2. Total Annual Cost of Ownership (TACO) The total annual cost of ownership (TACO) is Betterment’s fund scoring method, used to rate funds for inclusion in the Betterment portfolio. TACO takes into account an ETF’s transactional and liquidity costs as well as costs associated with holding funds. In addition to TACO, Betterment also considers certain other qualitative factors of ETFs, including but not limited to, whether the ETF fulfills a desired portfolio mandate and/or exposure. TACO is determined by two components, a fund’s cost-to-trade and cost-to-hold. The first, cost-to-trade, represents the cost associated with trading in and out of funds during the course of regular investing activities, such as rebalancing, cash inflows or withdrawals, and tax loss harvesting. Cost-to-trade is generally influenced by two factors: Volume: A measure of how many shares change hands each day. Bid-ask spread: The difference between the price at which you can buy a security and the price at which you can sell the same security at any given time. The second component, cost-to-hold, represents the annual costs associated with owning the fund and is generally influenced by these two factors: Expense ratios: Fund expenses imposed by an ETF administrator. Tracking difference: The deviation in performance from the fund’s benchmark index. Let’s review the specific inputs to each component in more detail: Cost-to-Trade: Volume and Bid-Ask Spread Volume: Volume is a historical measure of how many shares may change hands each day. This helps assess how easy it might be to find a buyer or seller in the future. This is important because it tends to indicate the availability of counterparties to buy (e.g., when Betterment is selling ETFs) and sell (e.g., when Betterment is buying ETFs). The more shares of an ETF Betterment needs to buy on behalf of our client, the more volume is needed to complete the trades without impacting market prices. As such, we measure average market volume for each ETF as a percentage of Betterment’s normal trading activity. Funds with low average daily trading volume compared to Betterment’s trading volume will have a higher cost, because Betterment’s higher trading volume is more likely to influence market prices. Bid-Ask Spread: Generally market transactions are associated with two prices: the price at which people are willing to sell a security, and the price others are willing to pay to buy it. The difference between these two numbers is known as the bid-ask spread, and can be expressed in currency or percentage terms. For example, a trader may be happy to sell a share at $100.02, but only wishes to buy it at $99.98. The bid-ask currency spread here is $.04, which coincidentally also represents a bid-ask percentage of 0.04%. In this example, if you were to buy a share, and immediately sell it, you’d end up with 0.04% less due to the spread. This is how traders and market makers make money—by providing liquid access to markets for small margins. Generally, heavily traded securities with more competitive counterparties willing to transact will carry lower bid-ask spreads. Unlike the expense ratio, the degree to which you care about bid-ask spread likely depends on how actively you trade. Buy-and-hold investors typically care about it less compared to active traders, because they will accrue significantly fewer transactions over their intended investment horizons. Minimizing these costs is beneficial to building an efficient portfolio which is why Betterment attempts to select ETFs with narrower bid-ask spreads. Cost-to-Hold: Expense Ratio and Tracking Difference Expense Ratio: An expense ratio is the set percentage of the price of a single share paid by shareholders to the fund administrators every year. ETFs often collect these fees from the dividends passed through from the underlying assets to holders of the security, which result in lower total returns to shareholders. Tracking Difference: Tracking difference is the underperformance or outperformance of a fund relative to the benchmark index it seeks to track. Funds may deviate from their benchmark indexes for a number of reasons, including any trades with respect to the fund’s holdings, deviations in weights between fund holdings and the benchmark index, and rebates from securities lending. It’s important to note that, over any given period, tracking difference isn’t necessarily negative; in some periods, it could lead to outperformance. However, tracking difference can introduce systematic deviation in the long-term returns of the overall portfolio when compared purely with a comparable basket of benchmark indexes other than ETFs. Finding TACO We calculate TACO as the sum of the above components: TACO = "Cost-to-Trade" + "Cost-to-Hold" As mentioned above, cost-to-trade estimates the costs associated with buying and selling funds in the open market. This amount is weighted to appropriately represent the aggregate investing activities of the average Betterment client in terms of cash flows, rebalances, and tax loss harvests. The cost-to-hold represents our expectations of the annual costs an investor will incur from owning a fund. Expense ratio makes up the majority of this cost, as it is the most explicit and often the largest cost associated with holding a fund. We also account for tracking difference between the fund and its benchmark index. In many cases, cost-to-hold, which includes an ETF’s expense ratio, will be the dominant factor in the total cost calculations. Of course, one can’t hold a security without first purchasing it, so we must also account for transaction costs, which we accomplish with our cost-to-trade component. 3. Minimizing Market Impact Market impact, or the change in price caused by an investor buying or selling a fund, is incorporated into Betterment’s total cost number through the cost-to-trade component. This is specifically through the interaction of bid-ask spreads and volume. However, we take additional considerations to control for market impact when evaluating our universe of investable funds. A key factor in Betterment’s decision-making is whether the ETF has relatively high levels of existing assets under management and average daily traded volumes. This helps to ensure that Betterment’s trading activity and holdings will not dominate the security’s natural market efficiency, which could either drive the price of the ETF up or down when trading. We define market impact for any given investment vehicle as the Betterment platform’s relative size (RSRS) in two key areas. Our share of the fund’s assets under managements is calculated quite simply as RS of AUM = ('AUM of Betterment' / 'AUM of ETF') while our share of the fund’s daily traded volume is calculated as RS Vol = ('Vol of Betterment' / 'Vol of ETF') ETFs without an appropriate level of assets or daily trade volume might lead to a situation where Betterment’s activity on behalf of clients moves the existing market for the security. In an attempt to avoid potentially negative effects upon our investors, we generally do not consider ETFs with smaller asset bases and limited trading activity unless some other extenuating factor is present. Conclusion As with any investment, ETFs are subject to market risk, including the possible loss of principal. The value of any portfolio will fluctuate with the value of the underlying securities. ETFs may trade for less than their net asset value (NAV). There is always a risk that an ETF will not meet its stated objective on any given trading day. Betterment reviews its asset selection analysis on a periodic basis to assess: the validity of existing selections, potential changes by fund administrators (raising or lowering expense ratios), and changes in specific ETF market factors (including tighter bid-ask spreads, lower tracking differences, growing asset bases, or reduced selection-driven market impact). Betterment also considers the tax implications of portfolio selection changes and estimates the net benefit of transitioning between investment vehicles for our clients. We use the ETFs that result from this process in our allocation advice that is based on your investment horizon, balance, and goal. For the details on our allocation advice, please see Betterment’s Goal Allocation Recommendation Methodology.

How to Get Started Investing in Crypto Oct 12, 2022 7:59:00 AM Investing in crypto is complicated but it doesn’t have to be. Here’s how to get started.   Think about investing in stocks and bonds. Most people are not experts, yet most are comfortable enough to invest. That’s our goal with crypto: helping you feel comfortable enough to decide if it’s right for you. Before you invest in crypto, our team of financial advisors recommends having a solid financial plan in place. This includes things like paying off high-interest debt, starting an emergency fund, and saving for retirement. Once you have that foundation, we’re here to walk you through the world of Crypto Investing. Three steps to get started investing in crypto. Step 1: Learn about the major cryptocurrencies and categories.  You don’t have to be an expert but the goal is to be comfortable with concepts like the metaverse and decentralized finance. The largest cryptocurrencies: Bitcoin - The first and largest cryptocurrency. It's a virtual currency designed to act as a form of payment outside the control of the traditional legacy financial system. Ethereum - A decentralized computing network best known for its virtual cryptocurrency, Ether or ETH. One of Ethereum’s distinguishing features is its smart contracts, a program that runs on the network and completes transactions without needing an intermediary. The big crypto categories: Metaverse - A growing number of platforms creating a decentralized network of virtual experiences, combining property, gaming, entertainment, social events, education, and more. Learn more about the metaverse. Decentralized Finance  - Platforms offer financial services without the need for banks or other centralized institutions using smart contracts. Learn more about decentralized finance. Step 2: Decide how much you want to invest and for how long.  We view investing in crypto as part of a diversified investment strategy, with a small crypto investment belonging alongside stocks, bonds, and other assets.  Crypto Tip: Our golden rule - We recommend investing 5% or less of your total investable assets in crypto. Step 3: Pick your investment.  We make that simple—you can pick a crypto portfolio based on your investment interests. Universe Portfolio Sustainable Portfolio Metaverse Portfolio Decentralized Finance Portfolio 

How Much of Your Portfolio Should be in Crypto? Oct 12, 2022 7:59:00 AM Our golden rule to investing in crypto. How much to invest in crypto is a personal question all investors have to answer. We’ll get straight to our recommendation. We call it our 5% golden rule: At Betterment, we recommend investing 5% or less of your investable assets (your investable cash, stocks, bonds, mutual funds, exchange-traded funds, etc.) in crypto. Assuming you are a long-term investor, a simple way to think about this is to ask yourself how confident you are that the crypto industry will continue to grow over time. Then decide how much you want to invest into a diversified portfolio based on that, no more than 5% of your investable assets. Where does the 5% golden rule come from? Using some math with fancy terms like the Black-Litterman model, our investing experts can calculate our maximum recommended crypto allocation. To get to our recommended allocation, the model takes into consideration our analyst’s answers to two important questions: How much, by percent, will crypto outperform stocks per year? In terms of probability, how confident are you that crypto will outperform stocks? Answers to both of the questions above exist on a spectrum, meaning that individuals may have different answers to the two questions. By plugging in the answers to those two questions into the Black-Litterman model, our experts recommend no more than 5% if you have high confidence that crypto will significantly outperform stocks. Many individuals may not be as confident in crypto outperforming stocks. In this case, we would recommend allocating less than 5% to match your comfort level. Allocation then diversification. Once you settle on your preferred crypto allocation of 5% or less, remember to consider diversification. All of our Crypto Investing portfolios are designed to offer broad diversification across many crypto assets.

Top 5 Benefits of Managed Crypto Investing Oct 12, 2022 7:59:00 AM Crypto investing is complex. We’re trying to make it simpler.   Our goal is to be here for you, to be your guide on your crypto investing journey. That’s why we created managed crypto portfolios, expertly-curated selections of crypto investments—so you don’t have to navigate the world of crypto alone. Check out the five benefits that we built our managed crypto portfolios around: 1. Diversification With our portfolios, you directly own multiple cryptocurrencies in a diversified way that reflects the crypto landscape. Investing in a diverse set of cryptocurrencies helps lower exposure to any single crypto asset, which may decrease the impact of volatility on your portfolio. 2. Automation You can turn on recurring deposits to invest effortlessly. Plus, automatic rebalancing helps manage risk in your portfolio. The automated rebalancing process is designed to periodically sell some of the highest-performing assets and buy some of the lowest-performing assets to return the basket to its overall desired weighting, reducing overexposure to any single crypto asset. 3. Expert-built Our experts track the industry closely to build and manage crypto portfolios designed to capture the long-term growth of crypto markets overall while mitigating risk through diversification. Our investment team curates portfolios using a set of consistent criteria for each crypto asset including an established historical trading history, an adequate market capitalization, and the ability to trade each individual crypto asset easily. 4. In-depth resources We’re here to help you better understand crypto, with short articles, videos, and our easy-to-read newsletter BetterBlocks. Check out our Crypto Resource Center. 5. Advanced security protocols You can invest comfortably knowing that we use advanced security protocols. We partnered with Gemini Trust Company, LLC as our custodian for crypto assets, and Gemini is a New York registered trust company regulated by the New York State Department of Financial Services (NYDFS) and New York Banking Law.

A Sustainable Approach to Crypto Investing Oct 12, 2022 7:59:00 AM See how our experts have built a Sustainable crypto portfolio. Crypto requires large amounts of computing power for its underlying blockchain technologies to operate. Some critics of cryptocurrency have even suggested that the required computing power could lead to an energy crisis. For example, each year Bitcoin uses more electricity than the entire country of Argentina, a population of around 45 million. Crypto’s sustainability has been a concern of governments and industry critics alike. Leading with Cautious Optimism The sustainability concerns around crypto are worth taking seriously. At Betterment, we see a couple of reasons for cautious optimism. Not all blockchains are the same when it comes to energy consumption. Generally, Proof of Stake blockchains are more sustainable than Proof of Work blockchains. (Proof of Work and Proof of Stake are two of the main methods to validate cryptocurrency transactions.) Some blockchains are working to improve their energy efficiency. One way to do this is by migrating from Proof of Work to Proof of Stake. Building a Sustainable Crypto Portfolio For our Sustainable Crypto portfolio, we look to balance diversification and sustainability, by looking to both cryptocurrencies that transact sustainably, and to those on networks with a path to sustainability. We start with all the crypto assets which meet our overall selection criteria, then factor in the following considerations: We keep assets that currently transact on lower energy intensive blockchains, such as Proof of Stake. We also consider keeping any assets that transact on a Proof of Work blockchain, if there is a credible roadmap to migrate to Proof of Stake. We exclude assets that transact on Proof of Work blockchains, without a credible roadmap to migrate to Proof of Stake. Ethereum: A Path to Sustainability At Betterment, we’re taking a forward-looking approach as we assess the sustainability path of any given cryptocurrency. Ethereum is a great example of a leading cryptocurrency that is moving along a path to sustainability. In September of 2022, Ethereum migrated from Proof of Work towards Proof of Stake in an event dubbed “the Merge.” It is estimated that Ethereum’s total energy use may decrease by 99.95% as a result. Ethereum is a perfect example of a crypto project that is executing on a plan to advance along the sustainability spectrum, thus making its way into our Sustainable Crypto portfolio. We believe that the Merge can be seen as analogous to a net-zero commitment made by a massive global enterprise. We expect more projects to follow in Ethereum’s footsteps, and begin to address the sustainability concerns around their operations. Moreover, as the industry evolves, we expect more projects to make sustainability their core focus.

What is a Crypto Portfolio? Oct 12, 2022 7:59:00 AM To ease the burden of investing in crypto, we’ve created managed crypto portfolios, built by our investing experts.   There are many ways to invest in crypto but we’ll boil this down to two categories for you. Common but not recommended: DIY crypto Most common, but not necessarily recommended, is what we call do-it-yourself crypto—AKA DIY crypto. DIY crypto investing can involve navigating digital wallets, selecting crypto exchanges, and safekeeping keys (so important!). Before you do any of that, don’t forget you need to research which of the 10,000-plus cryptocurrencies you want to invest in. Sound overwhelming? We think there’s a better way. Our better way: Managed crypto portfolios. To ease the burden of investing in crypto, we’ve created managed crypto portfolios. Our managed crypto portfolios provide an experience similar to that of an ETF or mutual fund. Betterment experts build portfolios and take care of the ongoing management, things like rebalancing to reduce your risk of overexposure to a single crypto asset. With a managed crypto portfolio, we also take care of selecting cryptocurrencies and account security. Even with expert-built crypto portfolios, you’re still in control with tools including: Recurring deposits so you can schedule your transfers ahead of time. You can exclude specific cryptocurrencies that you may not want in your portfolio.

Why Invest in Decentralized Finance? Oct 12, 2022 7:59:00 AM Decentralized finance, or DeFi, as it’s commonly known, can be a somewhat mysterious part of crypto. But for investors, it’s worth exploring DeFi and understanding how it could change the financial services landscape.   First, what is decentralized finance? It’s not as confusing as it sounds. Simply put: DeFi platforms offer financial services without the need for banks or other centralized institutions. But how? Well, instead of a bank or financial institution in the middle of a transaction, DeFi uses smart contracts (a computer program on a blockchain) to manage transactions. Some established examples of DeFi are: Lending and borrowing: A technical term for a decentralized lending platform is a “liquidity protocol,” which is a fancy way of saying a place where many people deposit assets so that others may borrow them. Depositors provide liquidity and can earn interest when borrowers take out loans. Trading: There are various trading platforms like exchanges that allow for the simple exchange of crypto assets to more advanced DeFi trading services including derivatives of real-world assets. Staking: You can think of staking sort of like a high-yield savings account or a bank CD but without the consumer protection of a traditional bank account. When crypto is staked–meaning the deposit is locked–for a period of time, it allows users to earn rewards similar to earning interest. Why invest in decentralized finance? There are risks to investing in DeFi as even established platforms are relatively untested compared to the traditional financial system. But we are seeing further adoption of DeFi services including institutional activity from large banks. That may sound surprising but it could be seen as a sign that DeFi is maturing and on its way to a more mainstream audience. Aside from its growth potential, DeFi may be an attractive investment if you believe in its broader purpose. DeFi has the potential to provide wider access to financial services across the globe and decrease transaction times (and hopefully costs) for consumers as it strips away some of the third parties that take profits.

Why Invest in the Metaverse? Oct 12, 2022 7:59:00 AM From digital meetings to virtual field trips, the metaverse could be the next stage of a more digitally connected world.   The term metaverse has had a short but storied history, gaining traction in 2021, when everyone from celebrities to big brands wanted to have a presence in the metaverse. Things went so far that Facebook changed its name to Meta signaling its commitment to creating a metaverse. But through all of the hype, there is real potential for the growth of this digital landscape. First, what is the metaverse? It’s important to note that the metaverse is a growing number of multiple platforms. And these platforms are working to shift the balance of power away from centralized platforms towards users and creators, building: An evolving decentralized network of virtual reality experiences, bringing many aspects of our physical world into the digital world. E-commerce within these new digital worlds includes property, gaming, entertainment, social events, education, and more. (Imagine going to a digital concert of your favorite band, buying digital art, or taking a field trip across the world in a few seconds.) Why invest in the metaverse? The metaverse is very early, so there are risks to consider as it is unknown territory. But the general investing thesis for the metaverse focuses on its ability to reshape how we live our digital lives: From digital meetings to virtual field trips, the metaverse could be the next stage of a more digitally connected world. We are seeing businesses—including social media, entertainment, and clothing companies—testing new ways to engage with consumers in the metaverse. What gives metaverse property its value? The success of a virtual world, and the property within, largely depends on a network effect that drives more participants into that virtual world. Similar to the real world, the value of a property in the metaverse may be driven by what and who the property is located near, but even more specifically, the value may largely be determined by the activities the property is near (think digital concerts, shopping malls, etc).

Making Sense of Crypto Volatility Oct 12, 2022 7:59:00 AM Crypto is a volatile asset class. But there are things you can do to prepare for likely losses that accompany potential gains. We’ll jump straight to the point: Crypto is definitely a volatile asset class, meaning it can have large positive and negative returns. But there are things you can do to prepare for likely losses that accompany potential gains. Your secret power: Being ready for volatility There is no sugar-coating volatility in crypto, but understanding it can help set you up for long-term success. As an investor, having a plan for how you will respond to volatility ahead of time (and sticking to it) can be your secret power. When the market falls and everyone else is panic selling, you’ll know what to do. Let’s cover the basics of volatility in crypto: Volatility refers to how much crypto prices change over time. Generally, the larger the price changes, the more risky an investment tends to be, and the greater chances of both gains and losses. Crypto has been very volatile in its short life, with prices climbing and falling regularly. For example, since 2021, the price of Bitcoin has bounced around with peaks near $70,000 and lows under $20,000—this is volatility in action. 3 steps to help coast through crypto volatility You don’t have to let volatility take you for a ride. Here are three tools that you can use to manage through volatility to help keep your investments on track over the long term: Diversify your investments. If your overall investment portfolio is diversified, crypto doesn’t have to feel as daunting if it’s only a small percent of your net worth. That’s also why we recommend only 5% or less of your investable assets in crypto. Use dollar cost averaging. One method is to use dollar cost averaging to reduce risk and build up your investment over time. Using dollar cost averaging, you would deposit a consistent amount into your crypto portfolio each month. At Betterment, you can set up a scheduled deposit into your crypto portfolio to automate dollar cost averaging. This results in buying more units when prices are low and less when they’re high. You can use this approach with stocks and bonds as well. Be intentional about monitoring your portfolio. It can feel good to log in and see gains, sure. But logging in during a down period will probably just make you feel stressed. And we don’t make good decisions when we’re stressed—like panic selling for a loss. Take a break from frequently checking your performance when markets are down.

Beyond Bitcoin: The Importance of Diversification in Crypto Oct 12, 2022 7:59:00 AM You should invest in more than one cryptocurrency just like you’d invest in multiple stocks and bonds. Sometimes we hear the question: Is diversification important in crypto in the same way it is with traditional investing in stocks and bonds? The short answer is: Yes, diversification is important—you should invest in more than one cryptocurrency just like you’d invest in multiple stocks and bonds. But let’s expand on this thought. Diversification beyond Bitcoin and Ethereum The general goal of diversification is to try and reduce the risk of losses while increasing your expected return. We can do this by making investments in a broad set of assets, limiting exposure to any one holding. With crypto, we recommend investing in multiple tokens, expanding beyond Bitcoin and Ethereum, to help limit exposure to any single asset. Diversification can give you wider exposure to the growing crypto landscape, including tokens in decentralized finance and the metaverse. How to diversify in crypto If you haven’t invested in crypto yet, or have only invested a little in Bitcoin or a small handful of other tokens, we recommend starting small and slow. Here are two tips to get started: Choose your overall crypto allocation Think of crypto as a small part of your larger investment strategy—not a one-off investment. Diversification matters within your crypto investment but also across all of your investments. You need to answer the question: how much of my investable assets do I want in crypto? It seems like a big question, but we try to make it easier on you. Our experts recommend no more than a 5% allocation of your total investable assets. Invest in multiple cryptocurrencies This one is important. We’re so early in the life span of crypto that picking a few winners from thousands of coins is unlikely—that’s why we offer diversified, expert-curated portfolios with multiple coins that can change over time as the crypto markets evolve.

Crypto’s Value: The Opportunity to Invest in an Unknown Future Oct 12, 2022 7:59:00 AM Investing in crypto could be the first opportunity that all investors have had to participate in an asset class from its origin. “Investing in the future” may sound cliche but investing in crypto could be the first opportunity that all investors, regardless of wealth, have had to participate in an asset class from its origin, shaping the future of our economy.   If you think about angel investing or startups, investing in a business during its early days is risky and often limited to a select few insiders. But with crypto, these high-risk (potentially high-reward) investment opportunities are open to everyone. It’s a way for an investor to take a piece of their portfolio and invest in an unknown future—potentially a piece of the world’s future business models. The world’s future business models Crypto means different things to different people. But at its core, many legitimate crypto initiatives are trying to build businesses of the future. That’s easy to miss with thousands of coins to choose from and too many negative news headlines about crypto. At Betterment, we’ve built diverse portfolios of crypto assets with use cases that are trying to bring wider access to digital goods and services. These business models run the gamut, including: Stores of value Financial services Digital commerce Data storage Gaming and entertainment We believe that a small, diversified investment in these innovative projects belongs in the modern investment portfolio. Where do we see crypto headed in the next 1-2 years? In one sentence: Crypto is here to stay but it likely will be a bumpy ride. Crypto is still in its early years, so a lot can change (and is changing daily). Even with the ups and downs in the market, we don’t think crypto is going anywhere based on these three measures: Increased consumer adoption. Crypto ownership has more than doubled globally since 2020. Increased institutional adoption. We’re seeing increased institutional adoption from banks to retailers which haven’t shown signs of stopping even in down markets. Increased government regulation. Regulation across the globe may help the industry mature and introduce consumer protections.

How To Manage Your Income In Retirement Oct 10, 2022 10:00:00 AM An income strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens. Retirement planning doesn’t end when you retire. To have the retirement you’ve been dreaming of, you need to ensure your savings will last. And how much you withdraw each month isn’t all that matters. In this guide we’ll cover: Why changes in the market affect you differently in retirement How to help keep bad timing from ruining your retirement How to decide which accounts to withdraw from first How Betterment helps take the guesswork out of your retirement income Part of retirement planning involves thinking about your retirement budget. But whether you’re already retired or you’re simply thinking ahead, it’s also important to think about how you’ll manage your income in retirement. Retirement is a huge milestone. And reaching it changes how you have to think about taxes, your investments, and your income. For starters, changes in the market can seriously affect how long your money lasts. Why changes in the market affect you differently in retirement Stock markets can swing up or down at any time. They’re volatile. When you’re saving for a distant retirement, you usually don’t have to worry as much about temporary dips. But during retirement, market volatility can have a dramatic effect on your savings. An investment account is a collection of individual assets. When you make a withdrawal from your retirement account, you’re selling off assets to equal the amount you want to withdraw. So say the market is going through a temporary dip. Since you’re retired, you have to continue making withdrawals in order to maintain your income. During the dip, your investment assets may have less value, so you have to sell more of them to equal the same amount of money. When the market goes back up, you have fewer assets that benefit from the rebound. The opposite is true, too. When the market is up, you don’t have to sell as many of your assets to maintain your income. There will always be good years and bad years in the market. How your withdrawals line up with the market’s volatility is called the “sequence of returns.” Unfortunately, you can’t control it. In many ways, it’s the luck of the withdrawal. Still, there are ways to help decrease the potential impact of a bad sequence of returns. How to keep bad timing from ruining your retirement The last thing you want is to retire and then lose your savings to market volatility. So you’ll want to take some steps to try and protect your retirement from a bad sequence of returns. Adjust your level of risk As you near or enter retirement, it’s likely time to start cranking down your stock-to-bond allocation. Invest too heavily in stocks, and your retirement savings could tank right when you need them. Betterment generally recommends turning down your ratio to about 56% stocks in early retirement, then gradually decreasing to about 30% toward the end of retirement. Rebalance your portfolio During retirement, the two most common cash flows in/out of your investment accounts will likely be dividends you earn and withdrawals you make. If you’re strategic, you can use these cash flows as opportunities to rebalance your portfolio. For example, if stocks are down at the moment, you likely want to withdraw from your bonds instead. This can help prevent you from selling stocks at a loss. Alternatively, if stocks are rallying, you may want to reinvest your dividends into bonds (instead of cashing them out) in order to bring your portfolio back into balance with your preferred ratio of stocks to bonds. Keep a safety net Even in retirement, it’s important to have an emergency fund. If you keep a separate account in your portfolio with enough money to cover three to six months of expenses, you can likely cushion—or ride out altogether—the blow of a bad sequence of returns. Supplement your income Hopefully, you’ll have enough retirement savings to produce a steady income from withdrawals. But it’s nice to have other income sources, too, to minimize your reliance on investment withdrawals in the first place.  Social Security might be enough—although a pandemic or other disaster can deplete these funds faster than expected. Maybe you have a pension you can withdraw from, too. Or a part-time job. Or rental properties. Along with the other precautions above, these additional income sources can help counter bad returns early in retirement. While you can’t control your sequence of returns, you can control the order you withdraw from your accounts. And that’s important, too. How to decide which accounts to withdraw from first In retirement, taxes are usually one of your biggest expenses. They’re right up there with healthcare costs. When it comes to your retirement savings, there are three “tax pools” your accounts can fall under: Taxable accounts: individual accounts, joint accounts, and trusts. Tax-deferred accounts: individual retirement accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans Tax-free accounts: Roth IRAs, Roth 401(k)s Each of these account types (taxable, tax-deferred, and tax-free) are taxed differently—and that’s important to understand when you start making withdrawals. When you have funds in all three tax pools, this is known as “tax diversification.” This strategy can create some unique opportunities for managing your retirement income. For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. With a tax-deferred account like a Traditional 401(k), you usually pay taxes on the full amount you withdraw, so with each withdrawal, taxes take more away from your portfolio’s future earning potential. Since you don’t have to pay taxes on withdrawals from your tax-free accounts, it’s typically best to save these for last. You want as much tax-free money as possible, right? So, while we’re not a tax advisor, and none of this information should be considered advice for your specific situation, the ideal withdrawal order generally-speaking is: Taxable accounts Tax-deferred accounts Tax-free accounts But there are a few exceptions. Incorporating minimum distributions Once you reach a certain age, you must generally begin taking required minimum distributions (RMDs) from your tax-deferred accounts. Failure to do so results in a steep penalty on the amount you were supposed to take. This changes things—but only slightly. At this point, you may want to consider following a new order: Withdraw your RMDs. If you still need more, then pull from taxable accounts. When there’s nothing left in those, start withdrawing from your tax-deferred accounts. Pull money from tax-free accounts. Smoothing out bumps in your tax bracket In retirement, you’ll likely have multiple sources of non-investment income, coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. Since these income streams vary from year to year, your tax bracket may fluctuate throughout retirement. With a little extra planning, you can sometimes use these fluctuations to your advantage. For years where you’re in a lower bracket than usual–say, if you’re retiring before you plan on claiming Social Security benefits–it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions. For years where you’re in a higher tax bracket, like if you sell a home and end up with large capital gains–it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested.

How To Plan Your Taxes When Investing Sep 14, 2022 10:12:52 AM Tax planning should happen year round. Here are some smart moves to consider that can help you save money now—and for years to come. Editor’s note: We’re about to dish on taxes and investing in length, but please keep in mind Betterment isn’t a tax advisor, nor should any information here be considered tax advice. Please consult a tax professional for advice on your specific situation. In 1 minute No one wants to pay more taxes than they have to. But as an investor, it’s not always clear how your choices change what you may ultimately owe to the IRS. Consider these strategies that can help reduce your taxes, giving you more to spend or invest as you see fit. Max out retirement accounts: The more you invest in your IRA and/or 401(k), the more tax benefits you receive. So contribute as much as you’re able to. Consider tax loss harvesting: When your investments lose value, you have the opportunity to reduce your tax bill. Selling depreciated assets lets you deduct the loss to offset other investment gains or decrease your taxable income. You can do this for up to $3,000 worth of losses every year, and additional losses can count toward future years. Rebalance your portfolio with cash flows: To avoid realizing gains before you may need to, try to rebalance your portfolio without selling any existing investments. Instead, use cash flows, including new deposits and dividends, to adjust your portfolio’s allocation. Consider a Roth conversion: You can convert all or some of traditional IRA into a Roth IRA at any income level and at any time. You’ll pay taxes upfront, but when you retire, your withdrawals are tax free. It’s worth noting that doing so is a permanent change, and it isn’t right for everyone. We recommend consulting a qualified tax advisor before making the decision. Invest your tax refund: Tax refunds can feel like pleasant surprises, but in reality they represent a missed opportunity. In practice, they mean you’ve been overpaying Uncle Sam throughout the year, and only now are you getting your money back. If you can, make up for this lost time by investing your refund right away. Donate to charity: Giving to causes you care about provides tax benefits. Donate in the form of appreciated investments instead of cash, and your tax-deductible donation can also help you avoid paying taxes on capital gains. In 5 minutes Taxes are complicated. It’s no wonder so many people dread tax season. But if you only think about them at the start of the year or when you look at your paycheck, you could be missing out. As an investor, you can save a lot more in taxes by being strategic with your investments throughout the year. In this guide, we’ll: Explain how you can save on taxes with strategic investing Examine specific tips for tax optimization Consider streamlining the process via automation Max out retirement accounts every year Retirement accounts such as IRAs and 401(k)s come with tax benefits. The more you contribute to them, the more of those benefits you enjoy. Depending on your financial situation, it may be worth maxing them out every year. The tax advantages of 401(k)s and IRAs come in two flavors: Roth and traditional. Contributions to Roth accounts are made with post-tax dollars, meaning Uncle Sam has already taken a cut. Contributions to traditional accounts, on the other hand, are usually made with pre-tax dollars. These two options effectively determine whether you pay taxes on this money now or later. So, which is better, Roth or Traditional? The answer depends on how much money you expect to live on during retirement. If you think you’ll be in a higher tax bracket when you retire (because you’ll be withdrawing more than you currently make each month), then paying taxes now with a Roth account can keep more in your pocket. But if you expect to be in the same or lower tax bracket when you retire, then pushing your tax bill down the road via a Traditional retirement account may be the better route. Use tax loss harvesting throughout the year Some of your assets will decrease in value. That’s part of investing. But tax loss harvesting is designed to allow you to use losses in your taxable (i.e. brokerage) investing accounts to your advantage. You gain a tax deduction by selling assets at a loss. That deduction can offset other investment gains or decrease your taxable income by up to $3,000 every year. And any losses you don’t use rollover to future years. Traditionally, you’d harvest these losses at the end of the year as you finalize your deductions. But then you could miss out on other losses throughout the year. Continuously monitoring your portfolio lets you harvest losses as they happen. This could be complicated to do on your own, but automated tools make it easy. At Betterment, we offer Tax Loss Harvesting+ at no extra cost. Once you determine if Tax Loss Harvesting+ is right for you (Betterment will ask you a few questions to help you determine this), all you have to do is enable it, and this feature looks for opportunities regularly, seeking to help increase your after-tax returns.* Keep in mind, however, that everyone’s tax situation is different—and Tax Loss Harvesting+ may not be suitable for yours. In general, we don’t recommend it if: Your future tax bracket will be higher than your current tax bracket. You can currently realize capital gains at a 0% tax rate. You’re planning to withdraw a large portion of your taxable assets in the next 12 months. You risk causing wash sales due to having substantially identical investments elsewhere. Rebalance your portfolio with cash flows As the market ebbs and flows, your portfolio can drift from its target allocation. One way to rebalance your portfolio is by selling assets, but that can cost you in taxes. A more efficient method for rebalancing is to use cash flows like new deposits and dividends you’ve earned. This can help keep your allocation on target while keeping taxes to a minimum. Betterment can automate this process, automatically monitoring your portfolio for rebalancing opportunities, and efficiently rebalancing your portfolio throughout the year once your account has reached the balance threshold. Consider getting out of high-cost investments Sometimes switching to a lower-cost investment firm means having to sell investments, which can trigger taxes. But over time, high-fee investments could cost you more than you’d pay in taxes to move to a lower cost money manager. For example, if selling a fund will cost you $1,000 in taxes, but you will save $500 per year in fees, you can break even in just two years. If you plan to be invested for longer than that, switching can be a savvy investment move. Consider a Roth conversion The IRS limits who can contribute to a Roth IRA based on income. But there’s no income limit for converting your traditional IRA into a Roth IRA. It’s not for everyone, and it does come with some potential pitfalls, but you have good reasons to consider it. A Roth conversion could: Lower the taxable portion of the conversion due to after-tax contributions made previously Lower your tax rates Put you in a lower tax bracket than normal due to retirement or low-income year Provide tax-free income in retirement or for a beneficiary Provide an opportunity to use an AMT (alternative minimum tax) credit carryover Provide an opportunity to use an NOL (net operating loss) carryover If you decide to convert your IRA, don’t wait until December—you’d miss out on 11 months of potential tax-free growth. Generally, the earlier you do your conversion the better. That said, Roth conversions are permanent, so be certain about your decision before making the change. It’s worth speaking with a qualified tax advisor to determine whether a Roth conversion is right for you. Invest your tax refund It might feel nice to receive a tax refund, but it usually means you’ve been overpaying your taxes throughout the year. That’s money you could have been investing! If you get a refund, consider investing it to make up for lost time. Depending on the size of your refund, you may want to resubmit your Form W-4 to your employer to adjust the amount of taxes withheld from each future paycheck. The IRS offers a Tax Withholding Estimator to help you get your refund closer to $0. Then you could increase your 401(k) contribution by that same amount. You won’t notice a difference in your paycheck, but it can really add up in your retirement account. Donate to charity It’s often said that it’s better to give than to receive. This is doubly true when charitable giving provides tax benefits in addition to the feeling of doing good. You can optimize your taxes while supporting your community or giving to causes you care about. To donate efficiently, consider giving away appreciated investments instead of cash. Then you avoid paying taxes on capital gains, and the gift is still tax deductible. You’ll have to itemize your deductions above the standard deduction, so you may want to consider “bunching” two to five years’ worth of charitable contributions. Betterment’s Charitable Giving can help streamline the donation process by automatically identifying the most appreciated long-term investments and partnering directly with highly-rated charities across a range of causes.

How to Save with Betterment Sep 13, 2022 12:11:25 PM Believe it or not, there is an art to saving money. Here are Betterment’s tips on how you can save effectively for your financial goals. Believe it or not, there’s an art to saving money. It’s not a static process with rigid guidelines. How much you need to save and how you do it changes with your circumstances. You react and adjust to life. But with the right techniques and tools, you can be equipped to make the choices that are best for you, whatever your situation. Here are some tips on how to effectively save for your financial goals with Betterment. In this guide, we’ll: Help you determine how much to save Walk you through the strategy behind making deposits Explain how Betterment is built to optimize your account Talk about how you can adapt to market conditions How Betterment determines how much you need to save Tell us the goal you want to reach, your target amount, and the date you want to reach it by (your time horizon), and we’ll show you how much we recommend saving each month to help get you there. That number acts as a starting point, but it’s flexible. We’ll provide you with a goal projection and forecaster to reflect the likelihood of hitting your goal, but we can’t predict the future. But that doesn’t mean you need to constantly change the amount you save. Instead, we recommend a simple strategy called a “savings ratchet.” A savings ratchet means you increase how much you save when you have to, but you don’t decrease it afterward. By ratcheting your savings rates, you may end up with greater final portfolio values. How to choose the right deposit strategy for your goals It may not seem like a big deal, but how and when you make deposits can affect your outcome and your experience. So it’s worth considering the options and their implications. Deposit types There’s more than one way to make a deposit in Betterment. Here’s what you can do: One-time deposits are exactly what they sound like. Choose the amount to transfer and where you want it to go, and the transfer happens once. This works well when you have extra cash to invest, but it isn’t ideal as a long-term strategy. Just imagine how much time you’d spend logging in and manually making transfers over the years! Recurring deposits eliminate the manual process. You set it up once, and we’ll automatically transfer the set amount from your bank account on the frequency of your choice: weekly, every other week, monthly, or on two set dates per month. Recurring deposits are a great option if you know how much you want to deposit on an ongoing basis. We’ll send a confirmation email before a scheduled recurring deposit, giving you a chance to skip the auto-deposit if needed. Deposit timing Setting up your deposits to occur the day after each paycheck is an effective auto-deposit strategy. The extra day gives your paycheck time to settle in your bank account before we start the transfer, but you’ll usually want that transfer to happen as quickly as possible. There are three main reasons for this: Paying yourself first. Scheduling your auto-deposits for right after you get paid lets you separate your paycheck into two categories: savings and spending. From a behavioral standpoint, this protects you from yourself. Your paycheck goes toward your financial goals first, and you’re free to use any remaining cash in your checking account for other spending needs. Avoiding idle cash. When your cash sits in a traditional bank account, it typically earns very little interest at best—often none at all. In times of inflation, which is most of the time, your cash is actually losing value. Letting it sit may also tempt you to try timing the market, holding on to it for even longer because of market activity. Idle cash could cause you to miss out on dividend payments or coupon income events too. Reducing your taxes. Regular and frequent deposits and dividends can help us rebalance your portfolio more tax-efficiently, keeping you at the appropriate risk level without realizing unnecessary capital gains taxes when possible. We use the incoming cash to buy investments in asset classes where you’re underweight, instead of selling investments in asset classes where you’re overweight. Even small amounts allow us to invest your money in fractional shares. To get started with auto-deposits on a web browser, first log in then head to New Transfers and choose the deposit option. Or on the mobile app, log in and choose the Deposit button that will appear at the bottom of the screen. How Betterment helps keep your goals on track Want to stay on track to reach your goals? Then your investments are going to need some maintenance. Betterment uses five strategies aimed to optimize your account and help you reach your goals. We can automatically adjust your allocations Generally speaking, the closer your goal is, the less risk you should take. There’s less time for the market to recover, so a sudden dip could set you back. This is why our auto-adjust feature is so valuable for some goals. Here’s how it works: When setting up a goal, you tell us your time horizon. We recommend an initial risk level. If auto-adjust is eligible and selected, we gradually decrease your risk level as your eligible goal approaches its end date. All investing includes some risk. Auto-adjust can’t entirely eliminate that, but it does help protect your portfolio by gradually shifting away from riskier investments (like stocks) into safer investments (like bonds). We recommended conservative savings amounts Once you’ve set up your goals and provided a target savings amount, we provide a recommended deposit amount and cadence, based on our projections for how the market may perform. To be on the safe side and give you a bit of a buffer, we base this contribution estimate on a below-average market outcome. More specifically, we aim for a 60% likelihood of reaching your goal by the end of the investment term. We help you plan for the worst-case scenario Sometimes you want extra certainty that you’ll reach your goal in time. This might be the case when: The goal’s time horizon is not flexible. The goal is very important to you. You prefer to be conservative with your finances. If any of these apply, you may want to look at our projection graphs to see how very poor markets might affect your goal. Hovering your cursor over the graph shows not just average expected performance, but also how your goal could fare depending on market performance. The very poor market outcome is indicated by the 90% chance of having at least that amount. Many investors want a 90% chance for reaching certain goals. In that case, you may want to consider increasing your savings amount. We send you reminders to update your goals Even when markets behave as expected, changing life circumstances may require you to update your goals. It’s best practice to periodically check in on your goals and see if you need to make adjustments. You should also review your financial profile to ensure your income level, tax bracket, marital status, and address are all correct. We tell you if your goals go off track Betterment makes it easy to see how your goals are doing and whether you should make changes. Based on your goal type, its time horizon and target amount, we can provide guidance on whether your goal is on track. If it’s not, we’ll show you what changes you can make to help fix it. How Betterment’s recommendations change with the market Even with the best strategies in place, sometimes the market just doesn’t perform the way we want it to. So what happens if you’re no longer on track to reach your goal? There’s no magic solution, but Betterment has some recommendations to help your goal get back on track: Delay your goal Some goals have timelines that are more flexible than others. Moving back your timeline can give your portfolio a chance to recover. It also gives you extra time to save more. You can use the Goal Forecaster within your goal to see how big of an impact the delay could have. Downsize your goal If a smaller target amount will still let you accomplish what you need to do, you may not need to change your timeline or take other actions. You can adjust the target amount to see what effect it will have on the timeline and recommended deposits for reaching your goal. This only works if you’re willing to accept a smaller target amount for your goal. Increase your savings amount Putting more toward your goal each month can help you catch up to your original target. You can increase your auto-deposit amount at any time. It’s easier said than done, but temporarily cutting back on discretionary spending may be the key to reaching your goal. For goals like emergency funds, where you don’t want to decrease your target amount and you want to reach it as soon as possible, the short-term sacrifice can be worth the long-term security. Divert money from other goals Transferring money from another account (like a goal that’s ahead of schedule) can help get you back on track. Just be careful you aren’t robbing your future self to fulfill your immediate needs. You can transfer money between non-IRA/non-401(k) investment goals from within your account by performing a goal-to-goal transfer. Just choose the goal you want to move money out of, click on “Transfer or Rollover,” and then click “Transfer to another goal.” You’ll sometimes need a combination of more than one—or even all—of these options. For example, if you can save an extra $100 per paycheck, delay your goal by three months, and also use some money from another goal, that may be your formula to get back on track.

How Betterment Manages Risks in Your Portfolio Sep 9, 2022 11:59:02 AM Betterment’s tools can keep you on track with the best chance of reaching your goals. Investing always involves some level of risk. But you should always have control over how much risk you take on. When your goals are decades away, it's easier to invest in riskier assets. The closer you get to reaching your goals, the more you may want to play it safe. Betterment’s tools can help manage risk and keep you on track toward your goals. In this guide, we’ll: Explain how Betterment provides allocation advice Talk about determining your personal risk level Walk through some of Betterment’s automated tools that help you manage risk Take a look at low-risk portfolios The key to managing your risk: asset allocation Risk is inherent to investing, and to some degree risk is good. High risk, high reward, right? What’s important is how you manage your risk. You want your investments to grow as the market fluctuates. One major way investors manage risk is through diversification. You’ve likely heard the old cliche, “Don’t put all your eggs in one basket.” This is the same reasoning investors use. We diversify our investments, putting our eggs in various baskets, so to speak. This way if one investment fails, we don’t lose everything. But how do you choose which baskets to put your eggs in? And how many eggs do you put in those baskets? Investors have a name for this process: asset allocation. Asset allocation involves splitting up your investment dollars across several types of financial assets (like stocks and bonds). Together these investments form your portfolio. A good portfolio will have your investment dollars in the right baskets: protecting you from extreme loss when the markets perform poorly, yet leaving you open to windfalls when the market does well. If that sounds complicated, there’s good news: Betterment will automatically recommend how to allocate your investments based on your individual goals. How Betterment provides allocation advice At Betterment, our recommendations start with your financial goals. Each of your financial goals—whether it’s a vacation or retirement—gets its own allocation of stocks and bonds. Next we look at your investment horizon, a fancy term for “when you need the money and how you’ll withdraw it.” It’s like a timeline. How long will you invest for? Will you take it out all at once, or a little bit at a time? For a down payment goal, you might withdraw the entire investment after 10 years once you’ve hit your savings mark. But when you retire, you’ll probably withdraw from your retirement account gradually over the course of years. What if you don’t have a defined goal? If you’re investing without a timeline or target amount, we’ll use your age to set your investment horizon with a default target date of your 65th birthday. We’ll assume you’ll withdraw from it like a retirement account, but maintain a slightly riskier portfolio even when you hit the target date, since you haven’t decided when you'll liquidate those investments. But you’re not a “default” person. So why would you want a default investment plan? That’s why you should have a goal. When we know your goal and time horizon, we can determine the best risk level by assessing possible outcomes across a range of bad to average markets. Our projection model includes many possible futures, weighted by how likely we believe each to be. By some standards, we err on the side of caution with a fairly conservative allocation model. Our mission is to help you get to your goal through steady saving and appropriate allocation, rather than taking on unnecessary risk. How much risk should you take on? Your investment horizon is one of the most important factors in determining your risk level. The more time you have to reach your investing goals, the more risk you can afford to safely take. So generally speaking, the closer you are to reaching your goal, the less risk your portfolio should be exposed to. This is why we use the Betterment auto-adjust—a glide path (aka formula) used for asset allocation that becomes more conservative as your target date approaches. We adjust the recommended allocation and portfolio weights of the glide path based on your specific goal and time horizon. Want to take a more aggressive approach? More conservative? That’s totally ok. You’re in control. You always have the final say on your allocation, and we can show you the likely outcomes. Our quantitative approach helps us establish a set of recommended risk ranges based on your goals. If you choose to deviate from our risk guidance, we’ll provide you with feedback on the potential implications. Take more risk than we recommend, and we’ll tell you we believe your approach is “too aggressive” given your goal and time horizon. Even if you care about the downsides less than the average outcome, we’ll still caution you against taking on more risk, because it can be very difficult to recover from losses in a portfolio flagged as “too aggressive.” On the other hand, if you choose a lower risk level than our “conservative” band, we'll label your choice “very conservative.” A downside to taking a lower risk level is you may need to save more. You should choose a level of risk that’s aligned with your ability to stay the course. An allocation is only optimal if you’re able to commit to it in both good markets and bad ones. To ensure you’re comfortable with the short-term risk in your portfolio, we present both extremely good and extremely poor return scenarios for your selection over a one-year period. How Betterment automatically optimizes your risk An advantage of investing with Betterment is that our technology works behind the scenes to automatically manage your risk in a variety of ways, including auto-adjusted allocation and rebalancing. Auto-adjusted allocation For most goals, the ideal allocation will change as you near your goal. We use automation to make those adjustments as efficient and tax-friendly as possible. Deposits, withdrawals, and dividends can help us guide your portfolio toward the target allocation, without having to sell any assets. If we do need to sell any of your investments, our tax-smart technology minimizes the potential tax impact. First we look for shares that have losses. These can offset other taxes. Then we sell shares with the smallest embedded gains (and smallest potential taxes). Betterment’s auto-adjusted allocation not only saves you time, but it also gives you a smooth, tax-efficient path from higher risk to lower risk. Rebalancing Over time, individual assets in a diversified portfolio move up and down in value, drifting away from the target weights that help achieve proper diversification. The difference between your target allocation and the actual weights in your current portfolio is called portfolio drift. A high drift may expose you to more (or less) risk than you intended when you set the target allocation. Betterment automatically monitors your account for rebalancing opportunities to reduce drift, although rebalancing will likely not occur at a lower account balance. There are several different methods depending on the circumstances: Cash flow rebalancing generally occurs when cash flows going into or out of the portfolio are already happening. We use inflows (like deposits and dividend reinvestments) to buy asset classes that are under-weight. This reduces the need to sell, which in turn reduces capital gains taxes. And we use outflows (like withdrawals) by seeking to first sell asset classes that are overweight. Sell/buy rebalancing reshuffles assets that are already in the portfolio. When cash flows can’t keep your portfolio’s drift within 3% percentage points (or 5% percentage points for portfolios that contain mutual funds), we try to sell just enough of overweight asset classes to buy underweight asset classes and reduce the drift to zero. A couple exceptions exist, and those are when we attempt to avoid realizing short term capital gains within taxable accounts or wash sales. Allocation change rebalancing occurs when you change your target allocation. This sells securities and could possibly realize capital gains, but we still utilize our tax minimization algorithm to help reduce the tax impact. We’ll let you know the potential tax impact before you confirm your allocation change. Once you confirm it, we’ll rebalance to your new target with minimized drift. How Betterment reduces risk in portfolios Short-term US treasuries and short-term high quality bonds can help reduce risk in portfolios. At a certain point, however, including assets such as these in a portfolio no longer improves returns for the amount of risk taken. For Betterment, this point is our 43% stock portfolio. Portfolios with a stock allocation of 43% or more don’t incorporate these exposures. We include our U.S. Ultra-Short Income ETF and our U.S. Short-Term Treasury Bond ETF in the portfolio at stock allocations below 43% for both the IRA and taxable versions of the Betterment Core portfolio strategy. If your portfolio includes no stocks (meaning you allocated 100% bonds), we can take the hint. You likely don’t want to worry about market volatility. So in that case, we recommend that you invest everything in these ETFs. At 100% bonds and 0% stocks, a Betterment Core portfolio consists of 80% U.S. short-term treasury bonds and 20% U.S. short-term high quality bonds. Increase the stock allocation in your portfolio, and we’ll decrease the allocation to these exposures. Reach the 43% stock allocation threshold, and we’ll remove these two funds from the recommended portfolio. At that allocation, they decrease expected returns given the desired risk of the overall portfolio. Short-term U.S. treasuries generally have lower volatility (any price swings are quite mild) and smaller drawdowns (shorter, less significant periods of loss). The same can be said for short-term high quality bonds, but they are slightly more volatile. It’s also worth noting that these two asset classes don’t always go down at exactly the same time. By combining the two, we’re able to produce a two-fund portfolio with a higher potential yield while maintaining relatively lower volatility. As with other assets, the returns for assets such as high quality bonds include both the possibility of price returns and income yield. Generally, price returns are expected to be minimal, with the primary form of returns coming from the income yield. The yields you receive from the ETFs in Betterment’s 100% bond portfolio are the actual yields of the underlying assets after fees. Since we’re investing directly in funds that are paying prevailing market rates, you can feel confident that the yield you receive is fair and in line with prevailing rates.

Investing in Your 50s: 4 Practical Tips for Retirement Planning Sep 8, 2022 12:00:00 AM In your 50s, assess your retirement plan, lifestyle, earnings, and support for family. Practice goal-based investing to help meet your objectives. As you enter your 50s, you may feel like your long-term goals are coming within reach, and it’s up to you to make sure those objectives are realized. Now is also a perfect time to see how your investments and retirement savings are shaping up. If you’ve cut back on savings to meet big expenses, such as home repairs and (if you have children) college tuition, you now have an opportunity to make up lost ground. You might also think about how you want to live after you retire. Will you relocate? Will you downsize or stay put? If you have children, how much are you willing to support them as they enter adulthood? These decisions all matter when deciding how to strategize your investments for this important decade of your life. Four Goals for Your 50s Your 50s can be a truly productive and efficient time for your investments. Focus on achieving these four key goals to make these years truly count in retirement. Goal 1: Assess Your Retirement Accounts If you’ve put retirement savings on the back burner, or just want to make a push for greater financial security—the good news is that you can make larger contributions toward employer retirement accounts (401(k), 403(b), etc.) at age 50 and over, thanks to the IRS rules on catch-up contributions. If you’re already contributing the maximum to your employer plans and still want to save more for retirement, consider opening a traditional or Roth IRA. These are individual retirement accounts that are subject to their own contribution limits, but also allow for a catch-up contribution at age 50 or older. You may also wish to simplify your investments by consolidating your retirement accounts with IRA rollovers. Doing so can help you get more organized, streamline recordkeeping and make it easier to implement an overall retirement strategy. Plus, by consolidating now, you can help avoid complications after age 72, when you’ll have to make Required Minimum Distributions from all the tax-deferred retirement accounts you own. Goal 2: Evaluate Your Lifestyle and Pre-Retirement Finances When you’re in your 50s, you may still be a ways from retirement, however you’ll want to consider how to support yourself when you do begin that stage of your life. If you’ve just begun calculating how much you’ll need to save for a comfortable retirement, consider the following tips and tools. Tips and Tools for Estimating Income Needs Make a rough estimate of how much you spend on housing, food, utilities, health care, clothing, and incidentals. Nowadays, tools such as Mint® and Prosper include budgeting features that can help you see these expenditures. Subtract what you can expect to receive from Social Security. You can estimate your benefit with this calculator. Subtract any defined pension plan benefits or other sources of income you expect to receive in retirement. Subtract what you can safely withdraw each year from your retirement savings. Consider robust retirement planning tools, which can help you understand how much you’ll need to save for a comfortable retirement based on current and future income from all sources, and even your location. If there’s a gap between your income needs and your anticipated retirement income, you may need to make adjustments in the form of cutting expenses, working more years before retiring, increasing the current amounts you’re investing for retirement, and re-evaluating your investment strategy. Think About Taxes Your income may peak in your 50s, which can also push you into higher tax brackets. This makes tax-saving strategies like these potentially more valuable than ever: Putting more into tax-advantaged investing vehicles like 401(k)s or traditional IRAs. Donating appreciated assets to charities. Implementing tax-efficient investment strategies within your investments, such as tax loss harvesting* and asset location. Betterment automates both of these strategies and offers features to customers with no additional management fee. Define Your Lifestyle Your 50s are a great time to think about your current and desired lifestyle. As you near retirement, you’ll want to continue doing the things you love to do, or perhaps be able to start doing more and build on those passions. Perhaps you know you’ll be traveling more frequently. If you are socially active and enjoy entertainment activities such as dining out and going to the theater, those interests likely won’t change. Instead, you’ll want to enjoy doing all the things you love to do, but with the peace of mind knowing that you won’t be infringing on your retirement reserves. Say you want to start a new business when you leave your job. You’re not alone; more than a third of new entrepreneurs starting businesses in 2021 were between the ages of 55 and 64 according to research by the Kauffman Foundation. To get ready, you’ll want to start building or leveraging your contacts, creating a business plan, and setting up a workspace. You may also wish to consider relocating during retirement. Living in a warmer part of the country or moving closer to family is certainly appealing. Downsizing to a smaller home or even an apartment could cut down on utilities, property taxes, and maintenance. You might need one car instead of two—or none at all—if you relocate to a neighborhood surrounded by amenities within walking distance. If you sell your primary home, you can take advantage of a break on capital gains —even if you don’t use the money to buy another one. If you’ve lived in the same house for at least two out of the last five years, you can exclude capital gains of up to $250,000 per individual and $500,000 per married couple from your income taxes, according to the IRS. Goal 3: Chart Your Pre-Retirement Investment Strategy After you’ve determined how much you’ll need for a comfortable retirement, now’s also a good time to begin thinking about how you’ll use the assets you’ve accumulated to generate income after you retire. If you have shorter-term financial objectives over the next two to five years—such as paying for your kids’ college tuition, or a major home repair—you’ll have to plan accordingly. For these milestones, consider goal-based investing, where each goal will have different exposure to market risk depending on the time allocated for reaching that goal. Goal-based investing matches your time horizon to your asset allocation, which means you take on an appropriate amount of risk for your respective goals. Investments for short-term goals may be better allocated to less volatile assets such as bonds, while longer-term goals have the ability to absorb greater risks but also achieve greater returns. When you misallocate, it can lead to saving too much or too little, missing out on returns with too conservative an allocation, or missing your goal if you take on too much risk. Setting long investment goals shouldn’t be taken lightly. This is a moment of self-evaluation. In order to invest for the future, you must cut back on spending your wealth now. That means tomorrow’s goals in retirement must outweigh the pleasures of today’s spending. If you’re a Betterment customer, it’s easy to get started with goal-based investing. Simply set up a goal with your desired time horizon and target balance and Betterment will recommend an investment approach tailored to this information. Goal 4: Set Clear Expectations with Children If you have children, there’s nothing more satisfying than watching your kids turn into motivated adults with passions to pursue. As a parent, you’ll naturally want to prepare them with everything you can to help them succeed in the world. You may be wrapping up paying for their college tuition, which is no easy feat given that these costs – even at public in-state universities – now average in the tens of thousands of dollars per year. As your kids move through college, take the time to have a serious discussion with them about what they plan to do after graduation. If graduate school is on the horizon, talk to them about how they’ll pay for it and how much help from you, if any, they can expect. Unlike undergraduate programs, graduate programs assess financial aid requirements by looking at only the student’s assets and incomes, not the parents’, so your finances won't be considered. You’ll also want to set expectations about other kinds of support—such as any help in paying for their health insurance premiums up to a certain age, or their mobile phone plan, or even whether toward major purchases like a home or car. It’s great to help out your children, but you’ll want to make sure you’re not jeopardizing your own security. Your 50s may demand a lot from you, but taking the time to properly assess your investments, personal financial situation, lifestyle, and, if applicable, your support for children, can be truly rewarding in your retirement years. By tackling these four goals now, you can help set yourself up to meet your current responsibilities and increase your chances of a more financially secure and comfortable life in the decades to come.

How Betterment Keeps Your Investments Safe Sep 7, 2022 3:02:05 PM Betterment uses a variety of protections to secure your investments and your overall account. Here’s the security you get with us. When you choose to invest it with us, that’s a responsibility we don’t take lightly. At Betterment, we’re proud to have a variety of protections in place to secure your investments and your overall account. In this guide, we’ll: Walk through our safety measures Talk about how two-factor authentication keeps your account secure Define SIPC insurance What safety measures does Betterment take? Betterment goes to great lengths to help keep your assets secure. Betterment is a regulated entity, and registered with the Securities and Exchange Commission (SEC) as an investment adviser. Many aspects of our operations, and all aspects of our advice, are subject to the SEC’s oversight. We make it easy to verify your investment holdings At Betterment, we believe in transparency. You can not only own independently-verifiable securities from companies like Vanguard and iShares, but you can view your precise positions in these investments at all times. Just log into your account from any device to view your previous day’s performance. Every day and after every trade, we disclose the precise number of shares of every ETF in which you’re invested. Our policy of transparency also extends to our dividends reports and tax statements. We not only show the transactions made on your behalf, but we also list each fractional share sold and the respective gross proceeds and cost basis for each. We regularly undergo review by the SEC and FINRA Betterment LLC, our SEC-registered investment advisor, provides investment advice and discretionary management of your account. Betterment’s affiliate, Betterment Securities, provides custody and execution services for Betterment’s client accounts. Betterment Securities is both a carrying and introducing broker-dealer registered with the Financial Industry Regulatory Authority (“FINRA”) and a member of the Securities Investor Protection Corporation (“SIPC”), whose sole purpose is to service Betterment’s clients and carry accounts that Betterment manages. Betterment Securities maintains books and records for all our customers' assets, and regulatory agencies routinely review those records. For example, Betterment is subject to rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Advisers Act”), which means we receive an annual surprise exam from an independent public accountant. We never know when it’ll happen. They just show up unannounced. The auditors verify our internal books and records. They reconcile every share and every dollar we say we have against our actual holdings. They spot check several hundred random customer accounts. They contact customers to verify that the account statements we issue match our internal records. And they ask questions if anything is even a penny off. But don’t just take our word for it! You can verify their audits yourself. Our partner clearing brokerage firm also keeps its own records of all of the assets we manage for our clients, and we reconcile our records to our clearing firm’s reports on a daily basis, providing an additional independent source of verification. We also undergo regular, rigorous, independent examination, both by the SEC and by FINRA, to ensure that we properly maintain our customer records and satisfy our capital requirements. Our regulators scrutinize our revenues, expenses, and available capital on a monthly basis. Three separate annual audits by our independent public accountants verify the adequacy of our financial condition, the safety of our operational controls, and the safekeeping of customer assets we custody. Each examination ensures that our records match up with the independently available records from our clearing firm. We never commingle funds No matter what investment adviser or brokerage firm you use, they should never mix your money with their firm’s operational funds. At Betterment, our operational funds are always 100% separate from customer funds held by Betterment Securities. Customer funds are kept apart by numerous firewalls—both digital and human-supervised. We built our software from the ground up to make any sort of commingling impossible, automating all of our trading and money movement. We also avoid risky financial operations that some other retail brokers engage in, such as proprietary trading with operating capital, or lending out customer assets. We only do one thing: manage your money. How does two-factor authentication keep your account secure? One of the most important ways we protect your investments is by making it difficult for someone else to gain access to your account. Passwords are notoriously easy to crack. That’s why our Betterment engineers implemented two-factor authentication across retail client accounts, simplifying and strengthening our authentication code in the process. As a side note, certain Advised client accounts and 401(k) participant accounts through our Betterment at Work offering don’t require mandatory 2FA at this time. Two-factor authentication (2FA) adds an extra level of security by requesting two separate pieces of evidence to verify a user’s identity. You’ve likely come across it before. Have you ever entered your password in an app or website, then been instructed to type in a code that was texted to your phone? That’s one form of two-factor authentication. Such text-based verification codes are actually less secure than some other forms of 2FA, but any form of 2FA is exponentially more secure than a password alone. At Betterment, we offer two forms of 2FA: The text-based verification codes you’re likely used to More secure time-based one-time passwords (TOTP) using an authenticator app like Google Authenticator or Authy While we hope you’ll consider taking advantage of the extra security that comes with TOTP, either form of 2FA will help keep your account well-protected. What is SIPC insurance? Much like other forms of insurance, the Securities Investor Protection Corporation (SIPC) provides a safety net in case of emergency. Betterment Securities, our affiliated broker-dealer, is a member of SIPC. Health insurance exists to cover your medical needs. Car insurance helps you get you back on the road after an accident. And SIPC insurance protects your investments in the event of a worst-case scenario such as brokerage firm insolvency, covering up to $500,000 of missing assets (securities and cash), including a maximum of $250,000 for cash claims. But unlike most insurance, you don’t have to seek out and pay for SIPC on your own. All brokers—including Betterment—are required to be SIPC members. SIPC insurance only protects against missing securities. It does not cover losses due to market volatility. How SIPC Insurance Works The $500,000 coverage limit applies individually to legally distinct accounts. If you have a taxable account, an IRA, and a trust, each one is eligible for its own $500,000 of coverage. And that coverage applies to what’s missing, not to the overall balance. Let’s say you have accounts with three different brokers, and each account holds $2 million in assets. Each of those accounts is covered separately by SIPC, up to $500,000. If one of those brokerage firms were to go bankrupt, a judge would appoint a trustee to sort through the broker’s books and distribute assets back to you and other clients. Here are some possible outcomes, with specific numbers to illustrate: The trustee recovers your original assets (your $2 million) from the insolvent broker-dealer. You are made whole and experience zero loss on your account. SIPC is not involved in this scenario. The trustee only recovers $1.5 million of your assets. The remaining $500,000 is covered by SIPC insurance, and you are made whole. The trustee only recovers $1 million. You are covered by SIPC insurance for $500,000 of the missing amount, but you incur a partial loss for the remaining $500,000. Why it’s unlikely you’ll need SIPC As important as this protection is, chances are, you won’t actually need it. Custodian broker-dealers are required to undergo a series of regulatory safety checks and audits everyday and report any problems. This elaborate set of guardrails helps ensure that SIPC remains a last resort. For example, brokers must segregate their own assets from their clients’ assets. If this segregation is properly maintained, account holders should be made whole in case of firm insolvency—no matter the account size. Brokers must also closely monitor their net capital cushion, providing similar protection. Because of all this, SIPC proceedings are very rare. Since the organization was established in 1971, there have only been 330 proceedings out of approximately 40,000 SIPC brokers. In the first four years, 109 proceedings were initiated, and since then, no year has had more than 13. Secure your investments with Betterment All investing comes with some risk. But your risk should be based on the market, not your broker. We can’t control every up and down of the market, but we can and do take every precaution to keep your assets secure. Betterment employs principles of transparency, simplicity, and verification from the ground up to provide you with state-of-the-art security. As a major financial institution, we’re required to keep a large capital cushion, maintain our own records, and undergo extensive examination by regulators and public accountants. But we never put our financial cushion at risk, and we never let customer assets out of our hands. That's why you can trust us to keep your investments safe.

Why Saving for Your Kid's College isn’t a Pass-Fail Proposition Sep 7, 2022 10:47:50 AM Investing even a modest amount now can make a noticeable difference down the road. In the long list of priorities during the early years of parenting, saving for your kid’s college may fall somewhere between achieving rock-hard abs and learning a foreign language. It’s not usually high on the list, in other words. And while the number of 529 plans, a tax-advantaged investing account designed for education expenses, continues to grow (15.7 million), that still makes for less than 1 plan for every 4 people under the age of 18 according to the latest U.S. Census numbers. The relative lack of saving in this space should come as no surprise when you factor in the financial commitments of early childhood—daycare alone can feel like a second mortgage—but the statistic also presents an opportunity. Start saving for college a few years earlier, or even at all, and that’s more time for compound interest to potentially work its magic. The stakes are high considering the skyrocketing costs of college. Before we dive into some practical budgeting tips to address this topic, let’s pour out some whole milk for the unique struggle that is saving while also supporting a family. A financial planner’s first-person account from the parenting front lines Bryan Stiger became the proud father of a baby girl last year. He also just so happens to be a Betterment Certified Financial Planner™. So he’s uniquely situated to talk about the money management challenges facing heads of households. “Since becoming a parent, it’s been a rollercoaster for me and my wife for sure,” says Bryan. “A few other things that feel like a rollercoaster when you become a parent are your expenses and your savings.” A big part of the problem is that kids create a financial double whammy, Bryan says. They appear suddenly and start demanding, among other things, a share of your limited money supply. At the same time, they introduce a series of potential new savings goals. Think not only a college education but more immediate big ticket items like braces. When you heap these goals on top of your pre-existing ones, it can quickly feel overwhelming. So how do you save for them all? Bryan suggests you don’t. Pick and prioritize only a handful, he advises, then define those goals more clearly. While this is a personal decision, his recommended order of importance for clients usually goes something like: Retirement (contribute just enough to get your employer’s full 401(k) match, assuming they offer one) Short-term, high-priority goals High-interest debt (any loans at 8% and above) Emergency fund (3-6 months’ worth of living expenses) Retirement (come back to your tax-advantaged 401(k) and/or IRA and work to max them out) Other (home, college, etc.) Your kid’s college fund, as you can see, shouldn’t come before your personal goals. That’s because you can usually finance an education, but few banks will finance your retirement. That doesn’t mean your hopes of helping your kid with college are doomed, however. The key, according to Bryan, is to first size up your priority goals. This involves crunching some numbers and answering “How much?” and “How soon?” for each goal. In the case of college, “How much” will depend on a few factors, decisions like private vs public, in-state vs out, etc. A calculator tool such as this one from calculator.net can help you with a rough estimate.     In terms of “How soon?”—or in finance-speak, your “time horizon”—we recommend using the year your kid turns 22. That’s because parents tend to continue saving for college while their kids are enrolled. Once you have a rough idea of these two numbers, Betterment’s tools can tell you how much you should contribute each month to help increase your likelihood of meeting your goal. Do this for each of your priorities, and you very well might find you don’t have enough cash flow to cover them all. This is normal! Bryan likes to remind clients in these moments that short-term goals, by nature, won’t soak up their cash flow forever, especially if they doggedly pursue them. Once met, you can redirect that money to other pursuits like a down payment on a house – or your kid’s college. Above all, forgive yourself if you fall short When it comes to saving for your child’s education, two things are true: You have precious few years from an investing perspective for compound growth to potentially work its magic. You may not be able to save as much as you’d like—or at all in the beginning—due to higher priorities. Given these realities, it’s okay to lower the bar. If you’re still working on high-interest debt and/or an emergency fund, set a goal of achieving those in 2-5 years so you can focus elsewhere afterwards. Or set up a seemingly small recurring deposit toward an education goal now. It could be $10, $25, or $50 a month. It can still make a difference down the road. If you ease your child’s student loan burden by even a little, you’ll have done them a huge favor. It’s a favor they probably won’t fully appreciate for a while, but since when was parenting anything but a thankless job?

How Betterment’s Tech Helps You Manage Your Money Sep 1, 2022 10:16:55 AM Our human experts harness the power of technology to help you reach your financial goals. Here’s how. When you’re trying to make the most of your money and plan for the future, financial advisors are really helpful. But there are some things humans simply can’t do as well as algorithms. And investing is an area where automation and digital tools can help improve your outcomes and make advanced strategies more accessible. Here at Betterment, we’re all about using technology—with human experts at the helm—to manage your money smarter and help you meet your financial goals. In this guide, we’ll Explore the concept of a “robo-advisor” Talk about Betterment’s human approach to technology Share how we help your investing avoid idle cash Share how our tech helps you plan for the future Show how you can access additional advice A quick primer on the rise of robo-advisors There’s a word for the investment firms who first used technology in new and exciting ways in the service of everyday investors: robo-advisors. By letting their human experts and technology do what each does best, robo-advisors provide some key benefits: Optimized time. Robo-advisors use algorithms and automation to do all the busy work, optimizing your investments faster than a human can. The result: you spend less time managing your finances and more time enjoying your life. Lower fees. Because of their efficiency, robo-advisors cost less to operate, which translates to savings for you. While the specific fees vary from one robo-advisor to the next, they all tend to be a fraction of what it costs to work with a traditional investment manager. Lower barriers to entry. Almost anyone with Internet access can use a robo-advisor. No special expertise required. And you don’t need a big minimum investment to get started. Personalized recommendations. Robo-advisors help you focus on your specific reasons for saving, adjusting your risk based on your timeline and target amount. Robo-advisors do the heavy lifting behind the scenes, managing all the data analysis and adapting investment expertise to fit your circumstances. All you need to do is fill in the gaps with details about your financial goals. If you have the time to research, implement and routinely manage your own investment strategy, you still can, but you don’t have to. That’s the beauty of working with a robo-advisor. The experience is as hands-on as you want it to be. Or you can relax in the knowledge your investments are in good hands, so you can simply live your life. How we combine human expertise with technology Automation is what we’re known for. But our team of financial experts is our secret sauce. They research, prototype, and implement all the advice and activity that you see in your account. Our algorithms and tools are built on the expertise of traders, quantitative researchers, tax experts, CFP® professionals, behavioral scientists, and more. Then we use technology to help accurately and consistently execute your investment strategy. Our automated processes manage your portfolio, monitoring for opportunities to rebalance and then rebalancing once accounts cross a $50 threshold if it drifts too far from your target allocation, and executing any tax strategies you’ve enabled. Technology also lets us put all of your deposits to work and avoid idle cash. Keep reading for more on that. How we automate to help you avoid the cost of idle cash Cash is an essential part of our financial lives. You can’t pay for this week’s groceries with stock, after all. And it may reassure you to keep your emergency fund in cash, although we’d politely point out you have other options to consider there. But there’s little benefit to letting cash sit idle in your investing accounts. That’s because it’s missing out on potential market returns, while at the same time losing value in times of inflation, which is most times. This double whammy can mean serious setbacks in achieving long-term investing success. That’s why we use technology to invest every penny of yours put toward a portfolio of ETFs. Here’s how: We automatically reinvest the dividends your investments pay out. Dividends are the cash earnings companies regularly distribute to shareholders. We purchase fractions of shares on your behalf, meaning if you deposit enough money to purchase 2 ⅔ shares of an ETF, that’s exactly how many shares you’ll get. For years, many investing firms would round up or down to the nearest whole share and leave the remaining cash idle in your account. Speaking of other brokerage firms, you may still have investing accounts with some. So what’s an investor to do in that case? Well, if you connect these external accounts to Betterment, we can highlight each of your external portfolio’s total idle cash. We hope this information is a starting point that helps you decide whether it’s worth it to transfer that money to a different firm. How we help you plan for the future Nobody knows the future. And that makes financial planning tough. Your situation can change at any time. And we can’t predict how external factors like markets, inflation, or tax rates may shift. But that doesn’t mean you should give up and stop planning. Our tools and advice can help you see how various changes could affect your goals. We show you a range of potential outcomes so you can make more informed decisions. We estimate how market performance may affect your investments Financial experts use many different methods to estimate future returns of a portfolio. Many financial calculators simply assume a constant average return. This is usually based on historical returns of a benchmark, like the S&P 500 index. But there are several problems with assumptions like this: You aren’t usually invested exactly like the benchmark. Different mixes of stocks and bonds or other assets in your portfolio will result in different ranges of outcomes. You probably have multiple financial goals, each with their own time horizons. The different risk allocations for each goal shouldn’t have the same returns assumption. Assumptions based on a historical estimate are sensitive to the time horizon used to calculate them. At Betterment, we’ve made three improvements to this method to make more accurate estimates: We use a return estimate for the specific portfolio you select for each goal. For example, our estimate for a 90% stock portfolio is different from our estimate for an 85% stock portfolio. Each is based on the asset classes you actually hold. We factor market volatility into our estimates. This produces the range of returns you see on the goal forecaster. For example, our savings estimates assume a somewhat conservative 40th percentile outcome (60% chance of success) rather than the simple average (50% chance of success). We assume that a risk-free component of expected returns can vary over time. When interest rates rise (or fall), so should your expected returns. We consider the impact of tax rates We may not be able to predict future tax rates, but we can be pretty sure that certain incomes and account types will be subject to some taxes. This becomes especially relevant in retirement planning, where taxes affect which account types are most valuable to you (such as a traditional IRA or Roth IRA) and your current and future income. Here’s how we estimate tax rates for your accounts: We use the latest tax data available. We always update federal tax information on January 1. State tax rate information is harder to come by, but we update it as soon as possible. Historically, that has been six to twelve months into the year. Tax bracket ranges are typically adjusted for inflation, so we assume that inflation by itself will not cause major changes to your tax rate. Your income will likely be different in the future, and that will affect your tax rate. So we use income increases due to inflation and typical salary growth to estimate what your future tax rate might be. We allow tax deduction and dependent overrides, which can affect your personal rate. We plan ahead for inflation We don’t know how inflation will change, but we can reference known historical ranges, as well as targets set by fiscal policy. The most important thing is to factor in some inflation—especially for long-term goals like retirement—because we know it won’t be zero. We currently assume a 2% inflation rate in our retirement planning advice and in our safe withdrawal advice, which is what the Fed currently targets. Getting additional advice At Betterment, we automate what we can, and leave the rest to humans. Machines are ideal for rule-based decisions, calculations at scale, and data-aggregation. But people are usually better at complex decisions, abstract thoughts, and flexibility in logic and inputs. Human advisors are much better at behavioral coaching, building advice models, and dealing with complex financial situations. So we complement our automated advice with access to our financial planning experts through advice packages or our Premium plan, which offers unlimited calls and emails with our team of CFP® professionals. Whether you need a one-time consultation or ongoing support, you can always discuss your unique financial situations with one of our licensed financial professionals. Managing your money with Betterment Our mission is to empower you to make the most of your money, so you can live better. Sometimes the best way to do that is with human creativity and critical thought. Sometimes it’s with machine automation and precision. Usually, it takes a healthy dose of both.

An Investor’s Guide To Diversification Sep 1, 2022 12:00:00 AM Diversification is an investing strategy that helps reduce risk by allocating investments across various financial assets. Here’s everything you need to know. In 1 minute When you invest too heavily in a single asset, type of asset, or market, your portfolio is more exposed to the risks that come with it. That’s why investors diversify. Diversification means spreading your investments across multiple assets, asset classes, or markets. This aims to do two things: Limit your exposure to specific risks Make your performance more consistent As the market fluctuates, a diverse portfolio generally remains stable. Extreme losses from one asset have less impact—because that asset doesn’t represent your entire portfolio. Maintaining a diversified portfolio forces you to see each asset in relation to the others. Is this asset increasing your exposure to a particular risk? Are you leaning too heavily on one company, industry, asset class, or market? In 5 minutes In this guide, we’ll: Define diversification Explain the benefits of diversification Discuss the potential disadvantages of diversification What is diversification? Financial assets gain or lose value based on different factors. Stocks depend on companies’ performance. Bonds depend on the borrower’s (companies, governments, etc.) ability to pay back loans. Commodities depend on public goods. Real estate depends on property. Entire industries can rise or fall based on government activity. What’s good or bad for one asset may have no effect on another. If you only invest in stocks, your portfolio’s value completely depends on the performance of the companies you invest in. With bonds, changing interest rates or loan defaults could hurt you. And commodities are directly tied to supply and demand. Diversification works to spread your investments across a variety of assets and asset classes, so no single weakness becomes your fatal flaw. The more unrelated your assets, the more diverse your portfolio. So you might invest in some stocks. Some bonds. Some fund commodities. And then if one company has a bad quarterly report, gets negative press, or even goes bankrupt, it won’t tank your entire portfolio. You can make your portfolio more diverse by investing in different assets of the same type—like buying stocks from separate companies. Better yet: companies in separate industries. You can even invest internationally, since foreign markets can potentially be less affected by local downturns. What are the benefits of diversification? There are two main reasons to diversify your portfolio: It can help reduce risk It can provide more consistent performance Here’s how it works. Lower risk Each type of financial asset comes with its own risks. The more you invest in a particular asset, the more vulnerable you are to its risks. Put everything into bonds, for example? Better hope interest rates hold. Distributing your assets distributes your risk. With a diversified portfolio, there are more factors that can negatively affect your performance, but they affect a smaller percentage of your portfolio, so your overall risk is much lower. If 100% of your investments are in a single company and it goes under, your portfolio tanks. But if only 10% of your investments are in that company? The same problem just got a whole lot smaller. Consistent performance The more assets you invest in, the less impact each one has on your portfolio. If your assets are unrelated, their gains and losses depend on different factors, so their performance is unrelated, too. When one loses value, that loss is mitigated by the other assets. And since they’re unrelated, some of your other assets may even increase in value at the same time. Watch the value of a single stock or commodity over time, and you’ll see its value fluctuate significantly. But watch two unrelated stocks or commodities—or one of each—and their collective value fluctuates less. They can offset each other. Diversification can make your portfolio performance less volatile. The gains and losses are smaller, and more predictable. Potential disadvantages of diversification While the benefits are clear, diversification can have a couple drawbacks: It creates a ceiling on potential short-term gains Diverse portfolios may require more maintenance Limits short-term gains Diversification usually means saying goodbye to extremes. Reducing your risk also reduces your potential for extreme short-term gains. Investing heavily in a single asset can mean you’ll see bigger gains over a short period. For some, this is the thrill of investing. With the right research, the right stock, and the right timing, you can strike it rich. But that’s not how it usually goes. Diversification is about playing the long game. You’re trading the all-or-nothing outcomes you can get with a single asset for steady, moderate returns. May require more maintenance As you buy and sell financial assets, diversification requires you (or a broker) to consider how each change affects your portfolio’s diversity. If you sell all of one asset and re-invest in another you already have, you increase the overall risk of your portfolio. Maintaining a diversified portfolio adds another layer to the decision-making process. You have to think about each piece in relation to the whole. A robo advisor or broker can do this for you, but if you’re managing your own portfolio, diversification may take a little more work.

5 Financial Steps To Take After Getting A Raise Sep 1, 2022 12:00:00 AM When you get a raise at work, consider how you can maximize your earnings to identify new financial opportunities. If you’ve recently received a raise, congratulations! You worked many long hours to deserve this, and now your hard work has paid off. Whether this pay increase was expected or whether it was a complete surprise, you may have many thoughts running through your mind, including calling your spouse or your Mom, deciding what restaurant you are dining at for a celebration, or how your new salary will give you more freedom to take that vacation you’ve been wanting to go on. While you should be excited, it’s important to take a step back to reassess your new pay and how it impacts your financial situation. Without doing so, you might find that your raise is more harmful than when you were making less money. To avoid having “raise regret”, consider these five tips. 5 Things To Do After Receiving A Raise 1. Understand your new salary. While you deserve to celebrate, you may want to hold off on making any large purchases that were unplanned and not saved for with your new cash flow. Unlike a bonus, where you receive a lump sum, your raise is going to be broken out across all pay periods. Additionally, your raise is going to be stated as an increase to your gross pay. In other words, if you receive a $5,000 annual raise, that does not mean that you are pocketing $5,000 over the course of the next year because we have to pay taxes. If you aren’t familiar with the amount of taxes you pay, it could be worthwhile to check your last few pay stubs to determine how much was going to taxes versus how much you were keeping. Also note that depending on the amount of your raise and the time of year, it may push you into a higher tax bracket. You may want to speak with your Human Resources and Payroll departments to discuss your tax withholding, as well as an accountant or qualified tax professional to see how your increased earnings could impact your personal tax situation. 2. Increase your retirement savings. If your employer offers a 401(k) plan and matches your contributions, you should consider contributing at least enough to get the full match amount. Even if you were already doing so, or your employer doesn't offer a match, increasing your retirement savings may still be a great option to consider. And, for those who are comfortable with their lifestyle prior to receiving a raise and don’t plan to make any changes, you can supercharge your savings rate at an equivalent rate. Determining how much you need to save for retirement will depend on several factors. Betterment offers retirement planning tools that can provide guidance on not only how much you should save, but the optimal accounts for you to do so based on your information. 3. Establish, or revisit, your emergency fund. Having an emergency fund is a very important financial savings goal, as it can help ensure a level of financial security for yourself and your family. An adequate emergency fund can help you cover truly large and unexpected expenses, and can also help cover your costs if you end up losing your job. It can even provide financial freedom in the case that you want to try your hand at a new career. Typically, Betterment advises that your emergency fund should cover three to six months’ worth of expenses. If you didn’t have one prior to your raise, now would be a great time to start. If you already have an emergency fund, you may need to reevaluate the amount needed if your spending does increase. 4. Pay off debt. If you have any debt, especially high interest debt, you may choose to use this new capital to pay off some of your loans quicker. You’d not only have the potential to shave years off the repayment process but save thousands of dollars in interest. Here’s a hypothetical to demonstrate. Let’s assume that you’re a single taxpayer, live in a state with no state income tax, and at the start of 2022 your pay went from $60,000 to $65,000. Assuming you don’t itemize, that would place you squarely in the 22% Federal tax bracket. If you get paid twice per month (24 times per year), your net paycheck would go from $1,950 to $2,112, an increase of $162. Now let’s say you put that extra cash to work on your hypothetical student loans, which total $50,000 at 7% interest paid over 10 years. Increasing your monthly loan payment by that $162 would allow you to pay off your loans almost three years faster, and also help you save almost $6,000 in interest payments! 5. Invest in yourself. Okay, let’s say you’re already on track with your retirement goals, have an emergency fund, and paid off your debt. What do you do then? Investing in yourself can have immense value. And the best part is, it can be done in many ways. Whether that’s taking a vacation to reset your mind after months of diligent work, taking a class to enhance your skills or learn a new one, or even making a material purchase that you feel will better your quality of life, investing in yourself can be a great way to reap the benefits of your hard earned work. If you plan on spending this extra money, just make sure that it’s within your means—don’t fall victim to lifestyle creep. Inherently, you may be a saver by nature. While it’s important to set goals, you may not have a specific goal for these additional savings—and that’s ok. By investing additional cash flow in a well-diversified portfolio, you give that money a chance to grow and be put to good use at some point down the line. Using a taxable investment account for a general investing goal, for example, will give you more flexibility relative to retirement investment accounts as to how and when these savings can be used.

Why Donating Shares Is A Smart Way To Give To Charity Aug 31, 2022 2:51:16 PM Donating shares lets you avoid paying taxes on capital gains, and you can still deduct the value of your gift on your tax return. In 1 minute There are many different ways for you to give back to your community. For example, giving directly to individuals in poverty, donating cash to charities, and volunteering your time are all well-known and worthwhile options. As an investor, you may have access to an option that comes with significant potential advantages: You can donate qualifying appreciated shares—or in other words, shares that are worth more today than when you acquired them. When you donate in the form of cash, you can deduct the value of that donation on your tax return. And that’s great! But by donating cash, you could be missing out on an additional tax incentive. Donate appreciated shares instead, and you could also avoid paying taxes on capital gains. That means your donation goes further while spending the same amount. And yes, you still get to deduct the value of those gifted shares on your tax return—as long as you’ve held them for at least a year. However, you should be aware that the deduction may not be exactly the same value. The IRS calculates the tax-deductible value of those shares as the average of the highest price and the lowest price on the day you made the transfer. Sometimes that means the deductible value ends up being slightly lower than the exact value you donated. Other times it ends up being slightly higher, giving you yet another benefit! But either way, the amount you save by avoiding the capital gains tax can exceed the differences in valuation. Boost your charitable giving by donating shares. In 5 minutes In this guide, we’ll: Explore donating shares instead of cash Explain how the IRS calculates these deductions Show you how Betterment makes donating shares easy You’ve been investing, planning for your future and becoming financially secure, and you’d like to pay it forward. That’s great! There are many ways to give back to your community. You might donate to charitable organizations. You might give cash directly to those in need. Or you might give of your time by volunteering. As an investor, you have a charitable super power. You can make your gifts go further and enjoy tax benefits at the same time. Why you should consider donating shares instead of cash When you have assets that have gained value, donating cash means you may not be making the most of your gift. Donations in the form of eligible shares offer two main advantages: You won’t pay capital gains taxes on the shares you donate You can deduct the value of your gift on your tax return Since you get more tax benefits, your money can stretch further. You have more left over to donate, invest, or use as you see fit. How the IRS calculates these deductions When you donate a share, you do so at a certain point in time, with an associated price. For greatest tax efficiency, you generally should only donate shares you’ve held for at least one year. At that point, the IRS lets you claim a deduction for the whole, appreciated value up to 30% of adjusted gross income. However, the price at the time of your gift isn’t necessarily the same value that’s deducted on your tax return. The IRS rules say the deductible amount for your tax filing must be the “fair market value.” And the IRS determines the fair market value by taking the average of the highest price and lowest price on the day of the transfer. Say you donate $1,000 worth of shares: 20 shares worth $50 each. During the day of your donation, the shares trade at a high price of $51 and a low of $47. The IRS will call the fair market value of all twenty shares $980. That $980 is the deductible value when you file your taxes for the year. So keep in mind that the value you plan to donate won’t necessarily match the exact value you can deduct on your taxes. However, while the numbers may be slightly lower or higher than you initially expect, the value of saving on capital gains tax by donating appreciated shares and then being able to deduct that value to lower your taxes even further, generally exceeds any differences in valuation during the day of transfer. Betterment makes donating shares easy We believe that donating securities should be as easy as donating cash. You’re trying to make a difference. You shouldn’t have to worry about math or forms. No snail mail. No walking into an office. So we streamlined the process. Here’s how: We track how much of your account is eligible to give to charity. Betterment automatically reports the amount eligible for donation, assessing which shares of your investments have been held for more than one year, and which of those have the most appreciation. We estimate the tax benefits of your gift. Before you complete a donation, we’ll let you know the expected deductible amount and potential capital gains taxes saved. We move assets from your account to a charitable organization’s account. No paperwork! With a traditional broker, your gift would have to move from your account to the organization’s brokerage account, which involves time and paperwork. But Betterment offers charities investment accounts with no advisory fees—on up to $1 million of assets—to make the gift process seamless. We provide a tax receipt once the donation is complete. We’ll email the receipt to you, and you’ll also be able to access it from your Betterment account at any time. Additionally, we take on most of the reporting for our partner charities, letting them devote their resources more efficiently to the causes you support, rather than to administrative tasks. We partner with highly-rated charities across a range of causes. These include nonprofits such as the World Wildlife Fund, Boys and Girls Clubs of America, and Givewell. Log in to your Betterment account to see the full list. Don’t see your preferred charity? Put in a request to add them! Gifting securities to charity, rather than donating cash, is a strategy that wealthy philanthropists have been employing for decades to save on capital gains taxes. We hope to democratize these benefits by helping everyday Americans use the same exact tax-saving method. Join our community of altruistic investors today and make the most of your charitable donations! If you’re already a Betterment customer, log in to donate your appreciated shares.

How to Choose the Right Investment Accounts for Your Financial Goals Aug 31, 2022 9:51:05 AM From 401(k)s to 529s, investment accounts vary in purpose. Learn the differences and which are better suited for your different long-term financial goals. Investment accounts are valuable tools for reaching your long-term financial goals. But they’re not all the same. Choosing the right investment account – or mix of multiple account types – could mean reaching your goal ahead of schedule, or having more finances to work with. But choosing the wrong account type could mean your money isn’t available when you need it. The right investment account depends on your plans for the future. Maybe you’re thinking about retirement or saving for your child’s college education. Perhaps you’re trying to pass on as much of your assets to your loved ones as possible. Or you might just be trying to earn more interest than you could expect from a traditional savings account or certificate of deposit (CD). Knowing your goal is the first step to choosing the right investment account. In general, you’ll end up with one of five basic types of investment account: IRAs, which are tax-advantaged accounts used by individuals and married couples to save for retirement. 401(k)s, which are accounts offered by employers that have a similar goal (retirement) and tax advantages as IRAs but relatively higher contribution limits. Health Savings Accounts (HSAs), which enjoy triple the tax advantages and can be used for retirement under the right circumstances. Individual (or Joint) Brokerage Accounts, which lack tax advantages but are available to virtually anyone for any investment purpose. 529 plans, which are tax-advantaged accounts that let individuals save for their own or a loved one’s education expenses. Each of these investment accounts is designed with different objectives in mind. Some are more liquid than others, giving you greater flexibility to withdraw money when you need it. Some come with tax advantages. Some have rules and restrictions for when (and how much) you can contribute to them. Or eligibility requirements that determine who can contribute to them. But you don’t have to have an MBA or work in finance to understand the different choices you have. In this guide, we’ll show you how identifying your goal helps narrow your options. Focus first on your investment goal Investment accounts come in many different forms, but you don’t have to learn the intricacies of them all. Before you choose where to put your money, you should have a clear understanding of what you’re trying to do with it. Starting with a financial goal in mind immediately narrows your options and keeps your decision rooted in your desired outcome. Here are some of the most common goals people have when opening an investment account. Planning for retirement When it comes to retirement planning, there are two main types of specialized retirement accounts to consider: IRAs and 401(k)s. HSAs can also be repurposed for retirement with some special considerations, which we’ll preview later. Retirement accounts offer unique tax advantages that can put you in a better position when you retire. However, you’ll usually incur penalties if you withdraw from these accounts before you reach retirement age. With either account type, you can control the ratio of securities (stocks, bonds, etc.) in the account, investment strategy, and more. Within each of these account types, there are also two main kinds to consider: Roth or traditional. First let’s talk about the difference between a 401(k) and an IRA, then we’ll look at Roth vs. traditional options. 401(k) A 401(k) is a retirement plan offered by your employer, also known as an employer-sponsored retirement account. If you invest in a 401(k), your contributions will be automatically deducted from your paycheck. One of the biggest advantages of a 401(k) is that employers will sometimes match a percentage of your contribution as an added benefit of employment, giving you money you wouldn’t otherwise have. If your employer offers to match 401(k) contributions and you don’t take advantage of that, you’re leaving money on the table and choosing to receive fewer benefits than some of your coworkers. 401(k)s also have higher contribution limits than IRAs. Every year, you can legally contribute more than three times as much to a 401(k) as you can into an IRA—up to $22,500 in 2023 if you’re under 50—helping you reach retirement goals sooner. When you leave your employer, you have to decide whether to leave your 401(k) funds with their provider, or roll them over to an IRA or a 401(k) offered by your new employer. Individual Retirement Account (IRA) An IRA works similarly to a 401(k), but your contributions don’t automatically come from your paycheck, and the annual contribution limits are lower ($6,500 if you’re under 50). Since an IRA isn’t offered through your employer, your employer won’t match your contributions to it. If your employer doesn’t offer a 401(k) or doesn’t match your contributions, an IRA can be an excellent choice to start retirement saving. Some investors choose to have both a 401(k) and an IRA to contribute as much as possible toward retirement through tax-advantaged means. The contribution limits are separate, so you can max out a 401(k) and an IRA if you can and are comfortable setting that much money aside every year. Roth vs. traditional The tax advantages of 401(k)s and IRAs come in two flavors: Roth and traditional. Contributions to Roth accounts are made with post-tax dollars, meaning Uncle Sam has already taken a cut. Contributions to traditional accounts, on the other hand, are usually made with pre-tax dollars. These two options effectively determine whether you pay taxes on this money now or later. Here’s another way of looking at it: Say you make $50,000 a year and contribute $5,000 to a Traditional retirement account, your taxable income is $45,000. You’re reaping the tax benefits of your retirement account now—and investing more than you may have been able to otherwise— in exchange for paying taxes on that money later. When you start withdrawing from your account, you’ll generally pay taxes on everything you withdraw, not just your original income. As a side note for high earners, the IRS limits deductions for Traditional IRAs based on income With a Roth account, you pay taxes on your contributions up front– meaning you potentially have less money to invest with–but enjoy the tax advantages later. If you make $50,000 a year and contribute $5,000, your taxable income is still $50,000. The earnings you accrue through a Roth 401(k) or Roth IRA are generally tax-free, so when you reach retirement age and start making withdrawals, you don’t have to pay taxes. As a side note for high earners, the IRS limits eligibility for Roth IRAs based on income. So, which is better, Roth or Traditional? The answer depends on how much money you expect to live on during retirement. If you think you’ll be in a higher tax bracket when you retire (because you’ll be withdrawing more than you currently make each month), then paying taxes now with a Roth account can keep more in your pocket. But if you expect to be in the same or lower tax bracket when you retire, then pushing your tax bill down the road via a Traditional retirement account may actually be the better route. Regardless, you should always consult a licensed tax advisor for the best information on your unique circumstances. HSA Designed primarily to help individuals pay for health care costs, HSAs can be an overlooked and underrated investing vehicle. That’s because your HSA contributions, potential earnings, and withdrawals (with a few key stipulations) are tax-free. This is what we mean when we say HSAs enjoy “triple” the tax advantages of IRAs and 401(k)s. In the case of those other two popular investment vehicles, you can catch a tax break on money coming in or going out, but not both. Learn more about how to use your HSA for retirement. Earning more from your savings Some people use investment accounts to simply help maximize the value of their unused income, or to save for major purchases down the road, like a home purchase or car. While a Cash Reserve account can work well for short-term financial goals, a general brokerage account lets you purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds, and other financial assets that come with greater risk and the potential for greater returns. With a brokerage account, you need to decide if you want an individual or joint account. This choice basically comes down to who you want to have control over this account and what you’d like to happen with it when you pass away. It’s common for married couples to use a joint account to consolidate their resources and avoid the hassle of managing multiple accounts. But if you select a joint account, it’s important that you completely trust the other person, as their decisions and even their credit can significantly alter your financial assets. Creditors can sometimes claim funds from a joint investment account, even if the other person hasn’t contributed a dime. While general brokerage accounts offer a lot more flexibility than other investment accounts, they don’t provide tax advantages. If there are account types specialized toward your goal (like how IRAs are built for saving for retirement), they will likely have advantages over a general brokerage account. Saving for your own or a loved one’s education There are a lot of ways to save for education. But if you’re trying to make the most of your money, a 529 plan is an ideal choice because its earnings are tax-free, as long as you use them for qualified education costs. Your 529 plan doesn’t have to sit for a fixed period for you to start using it. As long as it’s applied to education-related expenses (tuition, room and board, books, student loan payments, etc.) for the beneficiary, you can withdraw from the plan as needed. The tax advantages and usage flexibility usually make 529 plans far more suitable for education planning than a simple savings account or a general brokerage account.

How To Decide If You Should Switch Financial Firms Aug 30, 2022 12:15:35 PM Taking your assets to a different firm can have a big impact on your long-term investments. Here’s how to consider if it’s worth it. In 1 minute Thinking about switching financial firms? Whether high fees are hurting your returns or your portfolio isn’t performing as well as you hoped, there can be plenty of good reasons to consider transferring your investments to a new firm. The right financial firm can help you reach your goals and feel more comfortable with your investments. Thankfully, no matter how much you have invested, you’re never “stuck” with a strategy that isn’t a good fit or no longer appropriate for your goals. Start with your financial goals. Are they decades away, or are you going to reach them in a couple years? For short-term goals, transferring isn’t always worth it. But with long-term investments, lower costs, increased tax efficiency, and automation could have an impact on long-term returns. Before you make a decision, ask yourself these five questions: Will transferring allow you to invest in better assets? If other investment options may give you higher returns, transferring could be a smart move. Is your portfolio automated? Automation can help you avoid common investor mistakes, help keep your portfolio balanced, and may offer tools to maximize potential opportunities to save on taxes. Could you pay less in fees? Fees can be harder to notice than taxes, but they vary widely from one firm to another, and they can take a big bite out of your portfolio every year. How easy is it to adjust your asset allocation and keep your portfolio up-to-date with your goals? Your assets should fit the goals you’re trying to achieve. Some firms (like Betterment) are designed to take the guesswork out of asset allocation by recommending the appropriate risk level for your goals and keep you on track via automatic rebalancing and auto-adjust features if certain criteria are met. Do you own mutual funds in a taxable account that pay capital gain distributions? Even when a mutual fund’s performance is down, you may have to pay additional taxes from capital gain distributions. Depending on how you answer those questions, you may want to consider transferring your investments. In 5 minutes In this guide we’ll: Discuss the main concerns with switching financial firms Explain situations where it could be smart to move Help you calculate the impact of transferring your assets When you’re driving, sometimes it just makes sense to change lanes. The same can be true with investing. Sometimes the firm you’ve invested with has high fees and other costs that hold you back from reaching your financial goals. Or their guidance has led to lower performance than you expected. In the right circumstances, transferring your investments could help you reach your goals sooner. But it’s not always the best strategy. Before you transfer, it helps to think through all the variables. Let’s see if switching financial firms could be a smart move for you. What’s your timeline to reach your goals? If you plan on reaching your financial goals in the next couple years, transferring may not be the best choice. You may end up paying taxes, and your portfolio won’t be spending much time at the new firm anyway. The longer you plan to hold your assets, the more valuable a transfer could be. Which is worse: taxes or fees? While qualified retirement accounts can generally be moved to a new provider without penalties or taxes, that’s not always the case for taxable accounts. One of the main barriers that keeps investors from transferring their taxable assets is that your new provider may invest in a portfolio that has different assets in it than your old provider. This forces you to sell some or all of these assets. If these investments are trading at a large gain—way above what you originally bought them for—then there may be significant tax implications of making the switch. Over a long enough timeline, annual fees can hurt your investments more than taxes. But it can be hard to think of it that way. Some fees usually kick in before returns ever hit your accounts—you may be losing money you’ve never even seen. But when you transfer your assets, capital gains taxes put a dent in funds you already possess. The decision boils down to paying more upfront in taxes to enable a switch versus staying put in a less optimal portfolio with higher expenses. Keep in mind: unless you gift your portfolio to someone else, you have to pay capital gains taxes someday anyway. But a difference in fees could quietly shave off value from your accounts every year. Tax deferral is worth something, but how much? Could you invest in better assets? Take a hard look at your returns in your current investments. Could they be better? For example, index funds tend to perform better over time than actively-managed funds. Those better returns could increase your account balance over time. Are your investments automated? If you or someone else has to manually maintain your portfolio, you can miss opportunities to improve performance. Betterment maintains your investments with features like rebalancing, dividend reinvestment, portfolio diversification, tax-efficient options, and more, that can be automated. Automation can also help you avoid reacting to market volatility and losing sight of your goal. Could you pay less in fees? Every financial institution has a different fee structure, and some cost much more than others. Between your annual advisory fees, trading fees, and other costs, you could be losing a lot more than you have to. How easy is it to adjust your allocation? As your goals change, you get closer to reaching them, or the market becomes more volatile, you may want to adjust your asset allocation. But how that works and how easy it is to do varies from one firm to another. At Betterment, you can easily make adjustments in the app, and we’ll even help you choose an appropriate allocation for your goals. Some firms allow you to manage your account yourself and choose from thousands of investment options, but it can be challenging or time consuming to do so. Others offer managed accounts with limited options and flexibility and they may have transaction and commission fees. If your firm makes it difficult or confusing to change your allocation, you may want to consider switching to a firm that provides a better experience. Do you own mutual funds in a taxable account that pay capital gains distributions? Mutual funds invest in individual stocks and bonds. When a mutual fund manager sells investments in the fund, they may realize capital gains, which they’ll pass to individual shareholders—investors like you. You pay taxes on these distributions. Less ideal: mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year. If the taxes you’d owe from selling your investments are lower than the taxes you’d pay on the annual, and likely ongoing, capital gain distribution from the fund, it could be wise to sell your shares before the distribution is paid out.

How To Avoid Common Investor Mistakes Aug 30, 2022 7:00:00 AM People often make financial decisions based on impulses and market shifts—here’s another way to do it. Investing mistakes are often rooted in our natural reactions. Let’s face it: We don’t always react the right way to information. And when enough investors have poor reactions, it can affect the entire market.  Behavioral finance is a field of study that looks at how psychology affects financial decisions. It helps us understand why investors make common mistakes, so it’s easier to avoid them. But don’t worry—it doesn’t have to be complicated. Some of the most important lessons from this field are surprisingly simple. Try to invest with a goal in mind Investing can be one of the smartest financial decisions you can make. But a lot of investors start without knowing what they’re working toward—and that’s, well, less smart. When you don’t know why you’re building a financial portfolio, it’s a lot harder to know how to structure your investments. Instead, start with why. What do you want to be able to spend money on in the future? When are you going to use that money? These aren’t just stocks and bonds. Your investment is a future downpayment on a house. Your dream car. Retirement. College. Real things and experiences you want to be able to afford. Having a goal can help take the guesswork out of investing. You can calculate exactly how much you need to invest based on the range of potential outcomes. It’s also easier to decide where to put your investments. Retiring in 40 years? You might consider taking on more risk and allocating more in stocks. Hitting your goal next year? Play it safe. When you know how much you need to invest, break it into monthly chunks and automate your deposits. With recurring deposits, you're basically “paying yourself first” before worrying about other expenses. That way, you won’t talk yourself into skipping a month. (Which turns into two months, then three, and—oops, it’s been a year.) Focus on the long-term When you invest, you’ll likely have short-term losses here and there. It’s inevitable. And most times, it can be a mistake to make adjustments when your portfolio loses value. You can’t predict tomorrow’s performance based on yesterday’s. Even during the last ten years of steady growth, investors had to endure short-term losses at some point every year. Given enough time, the market trends upwards. And investments that perform poorly one day can easily make up for it the next. But that’s not what people tend to think about when they see their portfolio lose 15% of its value. They can panic. They make sweeping changes, reinvesting in funds and stocks that had short-term gains. And those big emotional decisions can do more harm than good. Investing is about long-term gains. Short-term losses are simply part of the process, so don’t panic every time there’s a loss. Watch out for “lifestyle creep” You don’t have to live frugally to be a successful investor. It helps, but the bigger issue is making sure that as your income increases, you stay in control of your lifestyle and spending. Most people see small pay increases over the course of their lives. 3% here. 8% there. When your regular spending increases with your income, it’s known as “lifestyle creep.” It can easily get in the way of saving enough to achieve your goals. If you have a lower income, it makes sense that more of your money goes toward basic necessities. But lifestyle creep happens when you gradually spend more on things you don’t need. Entertainment. Hobbies. Take out.  Every time you increase your regular spending, your lifestyle costs more to maintain. You’ll likely need to save more for retirement. Your emergency fund may need to grow, too. Lifestyle creep is an even bigger problem if you started investing with the expectation that you’d invest more later. Some people feel intimidated by their goals, so they plan to increase the amount they invest when they start making more money. That’s fine—as long as you actually do it. Temporary increases in spending are OK. But as you make more money, don’t let a more extravagant lifestyle sabotage your goals. Five ways Betterment helps improve your investing behavior We help you see the big picture Our non-traditional portfolio presentation helps discourage investors from focusing on daily market movements. We show the constituents of your portfolio as the parts of a whole, but never the return of each individual component. This helps reduce the temptation to constantly adjust your allocation and make your portfolio less diverse. We encourage optimized deposit settings Setting up recurring deposits for the day after you get paid can set you up for success in a number of ways. First, it removes the constant temptation to pocket the cash instead. Second, it gives your paycheck just enough time to settle without letting that cash idle for long. And third, it can help rebalance your portfolio more tax-efficiently. We keep the focus on the future Our design helps you focus on decisions that matter—the ones about the future. Our minds assign a disproportionate significance to daily volatility, but it rarely impacts our long-term outlook. So instead of emphasizing daily market movements, we simply keep you updated on whether you’re on-track to reach your goals. We give you the information you need Conventional wisdom says advisors should proactively contact their customers when the market drops. This can create undue anxiety, and it can even prompt negative behaviors, such as making large unnecessary withdrawals. Instead, we carefully target our emails and in-app notifications, using active engagement as a filter. We show you the potential tax impact of transactions We display the estimated tax impact of an allocation change or withdrawal before you finalize the transaction. This estimate is not only useful information in its own right, but it’s also intended to help drive better investing behavior by reducing the number of unnecessary changes.

An Investor's Guide To Market Volatility Aug 30, 2022 12:00:00 AM Knowing what to do during a market downturn can be especially difficult in the moment. Here’s how to plan ahead. In 1 minute When the prices in financial markets change, that’s market volatility. More volatility means greater potential for both gains or losses. In investing, market volatility comes with the territory. Some days the market is up, and other days it’s down. It’s OK to be anxious during a dip, but preparing for market volatility can help you avoid making decisions out of fear. Two of the biggest ways you can prepare for volatility: Diversify your portfolio Build an emergency fund Diversification helps protect your portfolio by spreading out your risk. A diversified portfolio may not gain as much as some individual assets, but it likely won’t lose as much as others. An emergency fund is a financial safety net. If market volatility negatively impacts your investments, your emergency fund can help cover your expenses until the economy recovers. During a downturn, we recommend resisting the urge to change your investments. Give your portfolio time to recover. But if you can’t do that, try to keep changes small, like lowering your stock allocation so that it’s more consistent with a more conservative risk tolerance level. In general, you should invest for the long-term, but at the same time you’ll likely want a diversified portfolio that you’re comfortable holding on to even when things in the market get bad. This can increase the odds you remain in the market when it ultimately recovers and continues on its path of expected long-term growth. Still not satisfying the itch to act? High management fees or capital gains distributions (from a mutual fund) could make that market volatility more uncomfortable. Or perhaps your financial advisor isn’t sticking to your target allocation as your portfolio experiences gains and losses. In these situations, a lower-fee robo-advisor like Betterment can help alleviate that discomfort. In 5 minutes In this guide, we’ll cover: What market volatility is How to prepare for it What to do about it Nobody likes to see their finances take a nosedive. But in a volatile market, dips happen often. Market volatility refers to fluctuations in the price of investments. Some markets—like the stock market—fluctuate more than others. And in times of economic stress, markets tend to be even more volatile, so you might see some big ups and downs. It’s tempting to sell everything and bail out during dips, but that often does more harm than good. Selling your assets could lock-in losses before they have a chance to rebound from the dip, and it’s nearly impossible to predict the market’s high points and low points. Reacting to market drawdowns by moving to cash is like selling your clothes because you gained a few pounds. Sure, they may feel a little snug, but you could find yourself with a bare closet if and when your weight fluctuates the other way. Historically, the stock market has had plenty of bad days. In any given decade, you’re bound to see many drawdowns, where investment values dip frightfully low. But when you step back and look at the big picture, the market has trended upward over time. So far, the global stock market, and by extension the U.S. stock market, has always recovered from economic downturns. And while nothing in life is guaranteed, those are some pretty good odds. History shows us that experiencing short-term losses is part of the path to long-term gains. The key for investors is to expect market volatility. It’s inevitable. And that means you need to prepare for it—not simply react to it. How to prepare for market volatility Market volatility can occur at any time. So you want to be ready for it now and in the future. The main thing you can do to prepare is diversify your portfolio. Having a balance of different assets decreases your overall level of risk. While some of your assets momentarily struggle, for example, others may hold steady or even thrive. The goal is your portfolio will hopefully feel less like a rollercoaster and more like a fun hike up wealth mountain. Beyond that, you’ll want to strongly consider building an emergency fund. A good starting point is having enough to cover three to six months of expenses. This is money you want on hand if market volatility takes a turn for the worse. Even if you don’t depend on your investments for income, major economic downturns can affect your life in other ways. The poor economy could lead to layoffs, bankruptcies, and other situations that impact your job stability. Or if you have rental properties, the real estate market could be adversely affected as well. All the more reason to have an emergency fund and ride out that turbulence if the need arises. What investors should do during downturns Caught in a downturn? Don’t panic. Seriously, when the market looks grim, the best reaction is usually to do nothing. Selling off your portfolio to prevent further losses is a common investor mistake that does two things: It locks-in those losses It takes away your chance to rebound with the market Scratching an itch usually won’t prevent it from recurring. The same goes for reacting to short-term losses in your portfolio. As much as you can, you want to resist the urge to react. Still, sometimes you may feel like you have to make a change. If that’s you, the first thing to do is make sure you’re comfortable with the level of risk you’re taking. Some asset classes, like stocks, are more volatile than others. The more weighted your portfolio is toward these assets, the more vulnerable it is to changes in the market. You’ll also want to confirm that your time horizon (when you need the money) is still correct. Think of this like checking your pulse, or taking a few deep breaths. You’re making sure your investments look right—that everything is working like it’s supposed to. If you’re still feeling tempted to do something drastic like withdraw all your investments, you probably should reduce your level of risk. Even if everything looks right for your goals, making a small adjustment now could prevent you from making a bigger mistake out of panic later. Your pulse is too high. Your breaths are too rapid. Sitting at 90% stocks and 10% bonds? You might try dialing it down to 75% stocks and 25% bonds. The time may be ripe to consider a Roth conversion Our investing advice of doing nothing and staying the course is generally the direction we try to nudge you toward when markets are down. While drops in global markets can be stressful, they also provide opportunities that can be beneficial for future you. One of those strategies is implementing a Roth conversion. A Roth conversion allows you to transfer, or convert, funds from a traditional IRA to a Roth IRA. You will typically owe income taxes on the amount you convert in the year of conversion, but the tradeoff is that once inside the Roth IRA future growth and withdrawals are generally tax-free. You can take a look at other pros and cons of Roth conversions in our Help Center.  Here are a couple of reasons why you may want to consider converting your IRA when the market is down:  The balance of your Traditional IRA has dropped significantly. When the balance of your Traditional IRA drops, you’re able to convert the same number of shares at lower market prices. This means you may pay less in taxes than if you converted those same number of shares at higher market prices. Growth from a global market recovery can be better in a Roth IRA than a Traditional IRA. As global markets recover over time, the value of your converted holdings may increase. This increase in value will now take place in your Roth IRA. Down the line, when you start taking withdrawals out of your Roth IRA in retirement, you’ll be able to do so without incurring any taxes. To understand how a Roth conversion may impact your personal financial situation, we strongly recommend consulting a tax advisor and IRS Publication 590. Betterment is not a licensed tax advisor and cannot provide tax advice. Reassess where you invest Depending on your situation, another option might be to shift your investments to a financial institution like Betterment. This could save you money in other ways, which might make your current risk level feel more comfortable. Some signs this might be the right move for you: 1. Your accounts have higher management fees You can’t control how the market performs, but you don’t have to be stuck with higher fees. Switching to a lower-fee institution like Betterment could lead to less of a drag on your long-term returns. 2. Your allocation is incorrect The sooner you need to use your money, the less risk you should take. Not sure what level of risk is right for you? When you set up a financial goal with Betterment, we’ll recommend a risk level based on your time horizon and target amount. 3. You own mutual funds that pay capital gains distributions When a mutual fund manager sells underlying investments in the fund, they may make a profit (capital gains), which are then passed on to individual shareholders like you. These distributions are taxable. Even worse: mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year. So in a volatile market, your portfolio could lose value and you may still pay taxes on gains within the fund. In contrast, most exchange traded funds (ETFs) are more tax efficient.

How To Compare Financial Advisors Aug 29, 2022 4:35:08 PM Think fiduciary first—and don’t settle for surface-level answers to questions on investing philosophy, performance and personalization. In 1 minute “Financial advisor” is kind of a gray area in the professional world. Many different types of professionals share this title, despite having very different qualifications, regulations, and motives. Bottom line: you want a financial advisor who is also a fiduciary. Fiduciaries are legally bound to act in your best interest and disclose conflicts of interest upfront. But even then, it’s worth taking time to learn about their approach to financial advice. What’s their philosophy? What tools do they use to help you reach your goals? How do your goals affect their decisions? Some financial advisors are more accessible than others, too. Ask what you should expect from your interactions with them. How often can you adjust your portfolio? Will they adjust your risk as you get closer to your goal? Every financial advisor should be able to talk you through how they measure performance and what you should expect from them. But don’t settle for surface-level answers. Challenge them to tell you about performance at different levels of risk, using time-weighted returns. Ultimately, you want a financial advisor you can trust to help you reach your goals. In 5 minutes In this guide, we’ll explain: Financial advisor fees Approaches to financial advice Evaluating investment performance Tax advisors You want to make the most of your finances. And you probably have some financial goals you’d like to accomplish. A financial advisor helps with both of these things. But choose the wrong advisor, and you may find yourself going backward, with your goals getting further away. (At the very least, you won’t make as much progress.) Many people focus on historical performance as they compare potential advisors. That‘s understandable. But unless you’re looking at decades of performance data and net investor returns, you’re not getting a good look at what to expect over time. And there are plenty of other factors that affect which advisor is right for you. For starters, let’s talk fees. Take a closer look at their fees Fees can have a major impact on how much money you actually take away. And it’s not just management fees that you need to consider. There could be fees for every trade. Or additional costs for trades within a fund. Plus you’ll want to look at expense ratios—the percentage of your investment that goes toward all the fund’s expenses. These costs can vary widely between robo-advisors, traditional advisors, do-it-yourself ETFs, and mutual funds. And you have to pay them every year. Basically what it comes down to is: how does your financial advisor get paid? Put another way, how will you have to pay for their services? Compare their qualifications Unfortunately, “financial advisor” is a bit of a catch-all term. It describes professionals who may have a variety of certifications and backgrounds. Not everyone who calls themselves a financial advisor has the same regulations, expertise, motivation, or approach. In fact, some aren’t even legally required to act in your best interest! They can choose the investments that benefit them the most instead of the ones that are most likely to help you reach your goals. A fiduciary, however, is a type of financial advisor that’s legally obligated to do two things: Make decisions based on what’s in your best interest Tell you if there’s ever a conflict of interest If you’re going to work with a traditional advisor, you should ask them about their qualifications. At Betterment, we recommend engaging with a fiduciary who is a Certified Financial Planner™ (CFP®), a designation that has requirements for years of experience and continuing education – and has a high standard in quality and ethical financial planning advice. Consider their approach to financial advice and investing There’s more than one school of thought when it comes to investing and financial planning. And there are many different investment vehicles a financial advisor could use to manage your money. So two excellent fiduciaries may have very different ideas of what’s in your best interest. For example, hedge funds work well for some investors, but they’re too risky and expensive for many people. The main thing is to find an advisor whose approach aligns with your goals. How do they ensure that your risk level fits your timeline? How do they diversify your portfolio to help protect your finances? How do they respond to market volatility as prices rise and fall? You want an advisor who makes decisions based on what you’re trying to accomplish, not what’s best for some cookie-cutter investment strategy. It’s also important to learn more about what working with them looks like. How often will you interact? How frequently can you review and modify your account? What ongoing actions do you need to take? The answers to these questions will vary depending on advisor service levels, so make sure they sound realistic to you. For example, Betterment recommends you check-in on your investment allocations once per quarter. If you feel more comfortable with having an in-depth relationship, you can opt for our Premium plan, which offers unlimited calls and emails with our team of CFP® professionals. Evaluate portfolio performance Financial advisors should be transparent about performance. They should have clear explanations for discrepancies between expected and actual returns of an investment. But if you only ask generic questions about what a portfolio returns, the numbers may sound better than they actually are. Ask each financial advisor to walk you through the returns associated with portfolios at various levels of risk. Additionally, consider using time-weighted return statistics when comparing investments. Time-weighted returns aren’t affected by the amount and timing of deposits and withdrawals. The harder an advisor makes it to understand performance (and your net returns), the less likely it is that your investments will meet your expectations. What about tax advisors? A good financial advisor should also be able to structure your investments in a tax-efficient manner. As a few examples, Betterment offers strategies such as tax loss harvesting, HSAs, municipal bonds, Roth IRA conversions, and more. However, there is a distinction between a tax-savvy financial advisor and an actual licensed tax professional. Most financial advisors are not trained or licensed to actually file your taxes for you, or to give advice on all areas of the tax code. For that level of detail, you would be wise to consider working with a true tax professional in addition to your financial advisor. When searching for a tax professional, the designations to look out for include a CPA, Enrolled Agent or a licensed tax attorney. Lastly, your financial advisor and your tax professional should be transparent with one another. You want to ensure both are on the same page and aren’t catching one another by surprise. For example, if your financial advisor is tax loss harvesting for you, it’s probably wise to inform your tax professional about that. Financial expertise you can trust At Betterment, our investing experts and technology help clients build a diversified portfolio that’s right for them, then keep it optimized all year long. To top it all off, we’re a fiduciary—we always focus on your best interest. While our technology combines automation with personalization, you can also get one-on-one advice from our financial experts with an advice package or our Premium plan.

The Keys to Understanding Investment Performance Aug 29, 2022 12:00:00 AM Ignore the headlines, think global, and crunch these three often-overlooked numbers. Regardless of how long you’ve been in the market, at some point you’ll likely want to know how your portfolio is doing and whether you’re on track to reach your goals. Or in another scenario, you may be shopping around for investment managers and comparing their portfolios. In this guide, we’ll help you think through either situation and share our philosophy on performance along the way. How to evaluate your investment performance Investors want to make wise financial decisions, and those decisions, for better or worse, tend to be influenced by media coverage of the market. So before we share some ways to more accurately crunch performance numbers, here’s a heads up on two common fallacies that might be skewing your perspective: The Dow Fallacy Benchmarks like the Dow Jones Industrial Average are popular, but they don’t actually tell you much about the stock market. The Dow only represents 30 US stocks. And even larger benchmarks like the S&P 500 don’t give you a full picture of the US market—let alone the global market. We’ll share a more comprehensive benchmark below. The Points Fallacy It’s common to hear reporters and investors talk about how many points a benchmark has dropped. Headlines like “Dow loses 500 points” sound pretty unsettling. But points alone don’t tell you much. It’s far more valuable to look at the percentage. If the Dow is at 35,000 points, a 500 point drop is less than 2 percent. That’s not something long-term investors generally need to worry about. With those out of the way, how do you actually get a clearer picture of an investment’s performance? Unfortunately, you can’t just look at your earnings. Accurately measuring your progress means adjusting for three crucial variables: Dividends, aka the earnings companies share with stockholders Inflation Taxes Reinvested dividends can make a big impact over time, so make sure you’re taking those into account. The Federal Reserve publishes inflation data, so you can adjust your total returns based on annual inflation. And taxes vary by individual and account type. All these factors make a big difference when it comes to measuring performance. If you want to know how you’re performing relative to the market, that begs the question, “Which market?” Many of our portfolios are globally-diversified. In that case, your best bet is to benchmark against the MSCI All Country World Index. It’s a much better representation of how the entire market is doing. How Betterment simplifies performance Manually crunching the numbers in your portfolio/s can be a hassle. As a Betterment customer, we simplify the process by showing you: The sum of the parts. We pull together all the accounts inside a specific goal and show their performance as one number. Zooming in to the account level, we also summarize the value of the portfolio itself. Your total returns. These include price changes and dividends together, instead of breaking them out separately. Changes in the prices of assets in your portfolio are more volatile than total returns and don’t show the overall picture. The big picture. We show your performance over as long a period as possible to help keep you focused on the long-term and minimize short-term stress. We don’t encourage frequent monitoring of performance, but if you do want to review performance, you have the tools necessary to do so. Two of those tools are time-weighted return (TWR) and individual rate of return (IRR). Time-Weighted Return When you invest, you often do it a little bit at a time. A contribution here, a contribution there – or even better, contributions made on a consistent schedule via auto-deposit. The time-weighted return imagines that all the contributions you’ve made to date happened all at once on Day 1. This way of crunching returns takes deposits and withdrawals out of the equation when evaluating your portfolio performance. Why would you want to do this? Because cash coming in and out of your portfolio at different times can distort and complicate your returns due to the nature of the constantly-fluctuating stock market. Also, if you were comparing returns across two different accounts with two different cash flow patterns, you couldn’t be sure if the difference was due to the investments or due to the timing of the cash flows. The time-weighted return can refer to a price-only return, or a total return. Price return reflects only the change in price of the asset, while total return reflects both price and reinvested income. By default, Betterment displays total return for a more comprehensive view of performance. Individual Rate of Return The individual rate of return, on the other hand, is affected by each and every instance of cash flow that goes in and out of your portfolio. Cash flows at Betterment can include deposits, withdrawals, dividends, and fees. IRR does a better job of answering the question, “What are the average returns on the dollars I personally deposited into Betterment?” as opposed to “How well does Betterment design and manage the portfolios I have with them?” Look beyond performance when sizing up investment managers Make no mistake, the construction and performance of a portfolio is important, but it’s not the only thing you should consider when sizing up the services of an investment manager. We recommend a more comprehensive set of criteria: Monetary costs such as commissions, trade fees, and assets under management (AUM) fees. These can create a drag on your returns. Non-money costs like the amount of time and effort required of you. Does a service come with a high time or stress cost for you to get the most out of it? Investing philosophy and whether it aligns with your values. Some funds, for example, try to deviate from an index and may cost more as a result. Tax efficiencies such as tax loss harvesting and asset location. Your stated returns likely won’t take into account any potential value these tools may have added. When choosing an investment manager, the key isn’t to focus solely on investment performance; it’s to focus on service, fit, and investor returns.

How Socially Responsible Investing Connects to Your Values Aug 26, 2022 11:49:28 AM Learn more about this increasingly-popular category of investments and our approach to it. Socially responsible investing—or SRI for short—is an increasingly popular option for people looking to invest in companies that are striving to create a positive social and environmental impact on the world. With SRI, everyday investors can influence markets and invest in the change they want to see. This category of investing is booming with a total of $35 trillion in assets according to Bloomberg—and it goes by many names: Environmental, Social, and Governance (ESG) investing Sustainable investing Values-based investing No matter what it’s called, though, SRI is built on the same idea. It considers both a company’s returns and its impact on the world. In this guide, we’ll summarize our approach to SRI as well as address questions on the performance of the category in general. Meet our SRI portfolios How the $VOTE fund is shaking up shareholder activism How SRI’s performance stacks up Meet our SRI portfolios Using the principles of SRI, you can buy into like-minded organizations via hundreds or even thousands of stocks, funds, and portfolios. But we try to make investing simple at Betterment. So we did the legwork for you and built three impact-focused SRI portfolios to choose from, one designed for a broad impact and two others tuned specifically to climate and social criteria. All three are diversified, cost-efficient, and built for the long-term, just like our Core portfolio. Broad Impact A popular choice for anyone interested in overall change, Broad Impact increases your exposure to companies that rank highly on all ESG criteria. We use the Core Portfolio as a foundation and replace the market capitalization funds (standard funds based on the size of companies) with SRI alternatives in four classes: U.S. Stocks; Emerging Market Stocks; Developed Market Stocks; U.S. High Quality Bonds and U.S. Corporate Bonds. We also increase the proportion of stocks of companies deemed to have strong social responsibility practices, brands you might recognize such as Intel, Cisco, and Disney. Climate Impact The portfolio for the eco-conscious investor, Climate Impact, uses funds that include stocks with more climate-conscious alternatives and divest from owners of fossil fuel reserves. A global green bond fund is also included in the construction of this portfolio. This puts the focus on companies working to lower carbon emissions and fund green projects. Social Impact The portfolio for the equality-minded investor, Social Impact, uses Broad Impact as a foundation while adding two funds, one focused on gender diversity ($SHE) and another on minority empowerment ($NACP). These two funds are some of the only ones of their kind. The NACP fund, in fact, is the only ETF of its kind. We won’t go into the full methodology of these portfolios here. To sum up our approach, we analyze hundreds of low-cost ETFs and choose funds that have an ESG mandate. These funds may, for example, be focused on selecting companies that rank highly on ESG factor scores from a data provider such as MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years. The funds that are incorporated into Betterment’s SRI portfolios not only meet these criteria but also maintain our signature diversification and cost considerations. Finally, our team of investing experts is never satisfied. It’s why Betterment’s SRI offering continues to evolve since we first introduced it in 2017. We continue to search for new funds and updated standards that increase impact and deliver better performance. For an example of this evolution, look no further than $VOTE, a groundbreaking fund that’s included in all of our SRI portfolios. How the $VOTE fund is shaking up shareholder activism On the surface, the $VOTE ETF looks a lot like a garden variety index fund tracking the S&P 500. Behind the scenes, however, it represents an innovative approach to pushing companies toward environmental and social practices. How? Through a process called “proxy voting.” Purchasing stock in a company grants you not just a share of its potential profits, but also the right to vote on certain aspects of its decision-making at annual shareholder meetings. If you hold stock of a company through an index fund, however, the fund technically holds this right. The rise of index fund investing has meant a lot of this power goes untapped. That started to change in 2021, when the investment firm Engine No. 1 launched $VOTE with the aim of harnessing indexes for shareholder activism. The firm stunned the corporate world that year by persuading a majority of ExxonMobile shareholders—despite only holding just .02% of the company’s shares itself—to install three new board members in the name of reducing the energy company’s carbon footprint. With each new investment in $VOTE, the potential for more headlines grows. By tracking the highest-valued companies proportionately (aka market cap weighted) and charging a management fee of only .05%—among the lowest in the industry—$VOTE is designed for mass adoption. How SRI’s performance stacks up Speaking of performance, it’s a frequently asked and totally reasonable question when it comes to socially responsible investing in general. Does trying to do right by the world through your investments limit their potential for growth? The answer is becoming increasingly clear: not likely. According to a survey of 1,141 peer-reviewed papers and other similar meta-reviews, the performance of SRI funds has “on average been indistinguishable from conventional investing.” And while the researchers note that “finance is not a static field, so it is likely that these propositions will evolve,” they also found evidence that socially responsible investing may offer “downside” protection in times of social or economic crisis such as pandemics. Investing in a better world There was a time when SRI was barely on the radar of everyday investors. If you did know about it, you likely had one of two options: Spend a good amount of time researching individual stocks for a DIY SRI portfolio. Spend a handsome amount to buy into one of the few funds on the market. Thankfully, those days are in the past. It’s never been easier and is becoming more affordable to express your values through your investing. And we’re proud to help to make it possible. At Betterment, there’s no separate tier of access for our SRI portfolios. All of our customers can choose socially responsible investing at the same simplified management fee. If you’re ready to give socially responsible investing a try, we’re ready.

3 Low-Risk Ways To Earn Interest Aug 26, 2022 9:00:00 AM Earning interest usually means taking on risk. But with bonds and cash accounts—and investing’s potential for compound interest—you can minimize that risk. In 1 minute When you don’t have much time to reach your goal, you can’t afford to make a risky investment. Thankfully, you can earn interest without putting everything on the line. Here’s how. Bonds Bonds are one of the most common types of financial assets. They represent loans, which a business or the government uses to pay for projects and other costs. Just as you pay interest when you take out a loan, bonds pay investors interest. You’ll typically see lower returns than you might with stocks, but the risk is generally lower, too. Cash accounts Cash accounts are similar to traditional savings accounts, only they are typically designed to earn more interest (and may come with more restrictions). These are great when you need your money to be readily available to you, but still want to earn some interest. And to top it off, many cash accounts are offered at or through banks so your deposits are FDIC insured, so there’s minimal risk. Compound interest In addition to bonds and cash accounts, there’s one more way to earn interest—investing and earning compound interest, which is the interest generated from previous rounds of interest itself. That’s right. As you accrue interest on your underlying investing funds, that interest makes money and that money in turn makes more money. The longer and more frequently your interest compounds, the more you can earn. In 5 minutes Want to earn interest? You usually have to take some risk which means you could lose some money. Financial assets can gain or lose value over time. And investments that have the potential to earn greater interest often come with the risk of greater losses. But there are ways to lower your risk. If you have a short-term financial goal or you’re just cautious, you can still earn interest. It might not be much, but it will be more than you’d get keeping cash under your mattress (don’t do that). In this guide, we’ll look at: Bonds Cash accounts Compound interest Bonds Bonds are basically loans. Companies and governments use loans to fund their operations or special projects. A bond lets investors help fund (and reap the financial benefits of) these loans. They’re known as a “fixed income” asset because your investment earns interest based on a schedule and matures on a specific date. Bonds are generally lower-risk investments than stocks. The main risks associated with bonds are that interest rates can change, and companies can go bankrupt. Still, these are typically fairly stable investments (depending on the type of bond and credit quality of the issuer), making them a good option for short-term goals. With municipal bonds, you can earn tax-free interest. These bonds fund government projects, and in return for the favor, the government doesn’t tax them. Invest in your own state, and you could avoid federal and state taxes. Even when your goal is years away, including bonds in your investment portfolio can be a smart way to lower your risk and diversify your investments. Cash accounts Cash accounts seek to earn more interest than a standard savings or checking account, and they’re federally insured by the FDIC or NCUA. (This is usually the case but depends on the institution housing your deposits (i.e., banks or credit unions). Check to make sure your account is insured before depositing any money.) In most cases, there’s little risk of losing your principal. Your interest is based on the annual percentage yield (APY) promised by the bank or financial institution you open the account with. One of the great perks of a cash account is that it’s highly liquid—so you can use your money when you want. It won’t earn as much interest as an investment, but it won’t be as tied up when you need it. For short-term financial goals, a cash account works just fine. The key is to choose an account that meets your needs. Pay attention to things like minimum deposits, transaction limits, fees, and compound frequency (that’s often how it accrues interest). These differences affect how fast your savings will actually grow and how freely you can use it. Compound interest Compound interest refers to two things: The interest your investments or savings earn The interest your interest earns It’s your money making more money. If you want to build wealth for the long-term, investing and allowing your interest to compound is one of the smartest moves you can make. The sooner you invest and put your money to work, the more opportunity your money has to earn compound interest. Compound interest starts small, but can grow exponentially. Your investment has the potential to grow faster because your interest starts earning interest, too. If you start young, you have a huge advantage: time is on your side! While compound interest accrues with minimal risk, investing in the market involves varying levels of risk.

How to Build an Emergency Fund Aug 26, 2022 5:30:00 AM An emergency fund keeps you afloat when your regular income can’t. Learn how to start one and grow it. In 10 seconds An emergency fund keeps you afloat when your regular income can’t. Try saving at least three months’ worth of expenses, so your finances can handle a sudden job loss or medical emergency. In 1 minute An emergency fund helps protect you from the most common financial crises. It helps cover unexpected expenses that don’t fit into your regular budget, and buys time to find a new job or manage a transition. For most people, the goal is to have enough funds set aside to pay for at least three months of living expenses, including food, housing, and other essential costs. But exactly how much you need depends on your situation. If you have more dependents or greater risks, you may need more than that to feel comfortable. Ideally, you should automate deposits into your emergency fund to make sure it grows each month until it reaches an appropriate size. You may also want to put this money into a cash account or low-risk investment account to help it grow faster, as long as you are ok with taking on this risk. Betterment makes both of these options easy, and with recurring deposits, you can make steady progress toward your goal. In 5 minutes In this guide we’ll cover: Why you should build an emergency fund How much you should save How to grow your emergency fund You can’t anticipate every financial disaster. But with an emergency fund, you can reduce their impact on your life. It’s a special account you don’t touch until you absolutely need to. If you’re like most people, this is one of your first and most important financial goals. Without an emergency fund, you could find yourself taking on high-interest debt to avoid losing your home. Or unable to meet basic needs, you may have to make hard choices about which necessities to live without.  So, how much should you save? What should you do with the money you set aside? And what counts as “an emergency”? Your emergency fund is personal. It needs to fit your life, your needs, and your risks. Some may only need a few thousand dollars. Others may need tens of thousands. It all depends on your regular expenses and how prepared you want to be. How large should your emergency fund be? For most people, the goal is to have enough to cover at least three months of expenses. That’s rent or mortgage, utilities, food, and anything else you pay every month. If you unexpectedly lost your job or had a medical crisis, your emergency fund should be enough to help you through most transitions.  Some folks should save more. If you’re a single parent or the only person with income in your household, a sudden loss of income would have a greater impact. If you work in an industry with high turnover, or you have a serious medical condition, you’re more likely to need these funds, so you may want to save more, such as six months of your monthly expenses. It may help to think of your emergency fund as time. This isn’t just a target dollar amount. It’s months of time. How long would you like to keep the bills paid without a job? How much would it take to do that? That’s the amount you should save. There’s no magic number that’s right for every person. And since it’s based on your current cost of living, the amount you’ll want to save will change with your expenses. Live more frugally, and you may be more comfortable with a smaller emergency fund. Get a bigger house or apartment, add a family member, or spend more on basic needs, and you’ll need a bigger emergency fund. How to build an emergency fund The hardest part of building an emergency fund is figuring out how saving fits into your life. It helps to work backward from your goal. Once you know how much you need to save, decide when you want to save it by. The sooner the better, but choose a timeline that makes sense for you. Then break your goal into chunks—how much do you need to save each month or each paycheck to get there on time? The last part is easy. Make your savings automatic with recurring deposits. You make the commitment once, then see steady progress toward your goal. You don’t have to think about it anymore. Set up a Safety Net goal with Betterment, and we’ll take care of this for you. Set how much you want to save and when you want to save it by, then decide how much you can put toward that goal each month. Create a recurring deposit, and you’ll start saving automatically. This video sums it all up. Where should you put your emergency fund? A lot of people put their emergency fund in a savings account at a bank. It keeps their money liquid, and it’s federally insured by the FDIC. So there’s little risk of losing what you’ve saved. Obviously, you want your emergency fund to be there when you need it, so it’s understandable why so many people are drawn to savings accounts. But it may not be the best way to grow your fund, either. Most savings accounts generate so little interest that they’re basically cash. It’s a step above putting money under your mattress. And like cash, savings accounts will usually lose value over time due to inflation. Thankfully, you have options. You can generate more interest without taking on much more risk. Here are some alternative places to put your emergency fund. High Yield Cash Account Like a regular savings account, most cash accounts are federally insured. But unlike a traditional savings account, these can generate meaningful interest. A high yield account takes your money further, and it’s still highly liquid. Certificate of Deposit (CD) A certificate of deposit, or CD, is basically a short-term investment. It lasts for a fixed duration, such as 12 months or 5 years. At the end of this period, the CD “matures,” and you typically earn more interest than you would with a high yield cash account. CDs are federally insured and still low-risk, but until your CD matures, it’s not liquid unless you pay a penalty to get out of the CD early. This makes it a little riskier for an emergency fund, since you never know when you’ll find yourself in a crisis. Low-Risk Investment Account Investment accounts can offer greater growth potential in exchange for taking on more risk. While stocks are considered volatile because they frequently change in value, bonds are generally more stable. An investment portfolio consisting of all bonds can still outpace a CD, a high yield account, and inflation, while putting your emergency fund at significantly less risk when compared to a portfolio consisting entirely of stocks. If you feel investing is the right move for you, Betterment recommends giving yourself a bigger buffer, adding 30% to your target amount. That way your money can grow faster, but it’s also protected against potential losses.

Setting and Prioritizing Your Financial Goals Aug 19, 2022 3:55:00 PM When you have more than one, think in terms of importance, timeline, and the amount you need In 1 minute Saving for big financial goals like retirement doesn’t have to mean letting go of your other goals. But prioritizing them is tough. How are you supposed to weigh something like a distant retirement versus a more immediate financial goal, like a honeymoon? Or a down payment on a home? Start by identifying all of the things you’d like to achieve. They might be big-ticket items you want to buy, experiences you want to have, or expenses you want to be prepared for. Once you’ve named them, estimate how much you’d need to reach each goal, and how soon you’d like to reach them. After you’ve clearly defined the goals you could save for, it’s time to choose which ones matter most to you. You might rank every goal or just narrow the list down to your top five to ten. Then you can calculate how much you’d have to save each month to reach these goals based on your timeline. From there, turn to your budget. Decide how much you can afford to save each month and apply it to your biggest goals first. We highly recommend turning on auto-deposit so you won’t be tempted to stop working toward your goals. Your financial goals don’t have to be set in stone, and neither does your plan. Over time, you may find that you can save more—or that you can’t save as much as you thought. Maybe it’ll take more or less to reach your goal. Or your priorities might change. That’s OK. With Betterment, it’s easy to set, automate, and adjust your goals. In 5 minutes In this guide, we’ll cover: Defining your financial goals Prioritizing your goals Deciding how to allocate your money Adjusting goals as needed Financial goals help you plan for the things you’d like to do with your money, but can’t afford to do right now. Like retiring. Buying a house. Sending your kids to college. Getting that dream car. Remodeling your kitchen. When you know what you want to do, you can estimate how much you need and when you need it. Knowing your goals also helps you choose the right financial accounts, so you can reach them sooner. But what happens when you have multiple financial goals? All of a sudden, it’s harder to know how much to put toward each goal. Thankfully, working toward one goal doesn’t mean you can’t reach another. Here’s how to set and prioritize your financial goals. Define your financial goals If you sit down and think about all of the things you’d like to do with your money, you can probably create a much longer list than you’d expect. Do it. It’s worth taking the time to write down every goal—because you might be forgetting something important! Some of your goals could be as simple as saving up for holiday gifts, as important as building a safety net, or as big as planning for retirement or long-term care. If it’s on your mind, put it on the list.  Part of this process should involve estimating how much you’d need to save to reach each goal and when you’d like to reach it. Is it months away? Years? Decades? Will it take hundreds of dollars or hundreds of thousands? Each goal should have a timeline and amount. At Betterment, it’s easy to add this information every time you set up a goal. (And you can change it at any time.) Prioritize what matters to you Your financial goals are yours. This isn’t about what your parents want or what your friends expect from you. Whatever your goals are, prioritize them based on how important they are to you. Remember that ranking your goals doesn’t mean you won’t reach the ones on the bottom. For example, you shouldn’t be afraid to pay down debt and invest at the same time. This is just to help you think about which goals you care about the most. Once you’ve ranked your goals, your list might look like this: Pay off medical debt Build emergency fund Save for retirement Put a down payment on a house Remodel the bathroom You can include as many goals as you want. And in Betterment, you can add each goal to your account, whether you put anything toward it or not. Apply your budget to your list Now that you know how much you need to save, when you need to save it by, and which goals are most important to you, it’s time to see what you can actually accomplish.  Using your estimated amount and your timeline (in investing, this is called your “time horizon”), calculate how much you need to save each month to reach each goal. It’s OK if this is more than you can afford to save right now. Putting the numbers in front of you with an ordered list helps you ask questions like, “Can I reach all of these goals on these timelines?” and “Which goal(s) am I willing to delay in order to make progress on the others? If you plan on investing to reach your goal, you should also consider how much you can expect to earn toward these goals with an investment account. Every time you set up a goal in Betterment, we’ll handle this part for you. You can see how achievable your goal is based on how much you put toward it. Automate your financial goals The best way to make sure you reach your goals? Automate them. Don’t make the mistake of putting your goals on pause. Set up recurring deposits for each goal with the amount you’ve set aside for them, and the right amount automatically goes to the right goal. This makes it easy to budget around your goals, and you won’t accidentally miss a month. The strategy is often called “paying yourself first” because you’re putting money toward your highest priorities before spending it on anything else. Want to start working toward your financial goals? Set up a goal with Betterment, and see what you can achieve.

Retail Investors and ESG: Assessing the Landscape Jun 15, 2022 7:45:00 AM Individuals are increasingly examining every aspect of their civic and financial lives for opportunities to play a role in shaping the world of tomorrow.  As climate change and its implications for the future of the economy and society continues its rise as the dominant issue of our time, individuals are increasingly examining every aspect of their civic and financial lives for opportunities to play a role in shaping the world of tomorrow.  Betterment surveyed 1,000 U.S. investors to examine their level of understanding and interest in environmental, social and corporate governance (ESG) investments, what might make them interested in learning more or investing, as well as the role employers and advisors play in educating individuals on ESG. 

Tax Loss Harvesting+ Methodology Sep 7, 2021 2:19:00 AM Tax loss harvesting is a sophisticated technique to get more value from your investments—but doing it well requires expertise. TABLE OF CONTENTS Navigating the Wash Sale Rule The Betterment Solution TLH+ Model Calibration TLH+ Results Best Practices for TLH+ Conclusion Tax loss harvesting is a sophisticated technique to help you get more value from your investments—but doing it well requires expertise. There are many ways to get your investments to work harder for you—better diversification, downside risk management, and the right mix of asset classes for your risk level. Betterment does all of this automatically via its low-cost index fund ETF portfolio. But there is another way to get even more out of your portfolio—using investment losses to improve your after-tax returns with a method called tax loss harvesting. In this white paper, we introduce Betterment’s Tax Loss Harvesting+™ (TLH+™): a sophisticated, fully automated service for Betterment customers. Betterment’s TLH+ service scans portfolios regularly for opportunities (temporary dips that result from market volatility) to realize losses which can be valuable come tax time. While the concept of tax loss harvesting is not new for wealthy investors, TLH+ utilizes a number of innovations that typical implementations may lack. It takes a holistic approach to tax-efficiency, seeking to optimize every user-initiated transaction in addition to adding value through automated activity, such as rebalances. TLH+ not only improves on this powerful tax-saving strategy, but also makes tax loss harvesting available to more investors than ever before. What is tax loss harvesting? Capital losses can lower your tax bill by offsetting gains, but the only way to realize a loss is to sell the depreciated asset. However, in a well-allocated portfolio, each asset plays an essential role in providing a piece of total market exposure. For that reason, an investor should not want to give up the expected returns associated with each asset just to realize a loss. At its most basic level, tax loss harvesting is selling a security that has experienced a loss—and then buying a correlated asset (i.e. one that provides similar exposure) to replace it. The strategy has two benefits: it allows the investor to “harvest” a valuable loss, and it keeps the portfolio balanced at the desired allocation. How does it lower your tax bill? Capital losses can be used to offset capital gains you’ve realized in other transactions over the course of a year—gains on which you would otherwise owe tax. Then, if there are losses left over (or if there were no gains to offset), you can offset up to $3,000 of ordinary income for the year. If any losses still remain, they can be carried forward indefinitely. Tax loss harvesting is primarily a tax deferral strategy, and its benefit depends entirely on individual circumstances. Over the long run, it can add value through some combination of these distinct benefits that it seeks to provide: Tax deferral: Losses harvested can be used to offset unavoidable gains in the portfolio, or capital gains elsewhere (e.g., from selling real estate), deferring the tax owed. Savings that are invested may grow,  assuming a conservative growth rate of 5% over a 10-year period, a dollar of tax deferred would be worth $1.63. Even after belatedly parting with the dollar, and paying tax on the $0.63 of growth, you’re ahead. Pushing capital gains into a lower tax rate: If you’ve realized short-term capital gains (STCG) this year, they’ll generally be taxed at your highest rate. However, if you’ve harvested losses to offset them, the corresponding gain you owe in the future could be long-term capital gain (LTCG). You’ve effectively turned a gain that would have been taxed up to 50% today into a gain that will be taxed more lightly in the future (up to 30%). Converting ordinary income into long-term capital gains: A variation on the above: offsetting up to $3,000 from your ordinary income shields that amount from your top marginal rate, but the offsetting future gain will likely be taxed at the LTCG rate. Permanent tax avoidance in certain circumstances: Tax loss harvesting provides benefits now in exchange for increasing built-in gains, subject to tax later. However, under certain circumstances (charitable donation, bequest to heirs), these gains may avoid taxation entirely. Navigating the Wash Sale Rule Summary: Wash sale rule management is at the core of any tax loss harvesting strategy. Unsophisticated approaches can detract from the value of the harvest or place constraints on customer cash flows in order to function. If all it takes to realize a loss is to sell a security, it would seem that maintaining your asset allocation is as simple as immediately repurchasing it. However, the IRS limits a taxpayer’s ability to deduct a loss when it deems the transaction to have been without substance. At a high level, the so-called “wash sale rule” disallows a loss from selling a security if a “substantially identical” security is purchased 30 days after or before the sale. The rationale is that a taxpayer should not enjoy the benefit of deducting a loss if he did not truly dispose of the security. The wash sale rule applies not just to situations when a “substantially identical” purchase is made in the same account, but also when the purchase is made in the individual’s IRA/401(k) account, or even in a spouse’s account. This broad application of the wash sale rule seeks to ensure that investors cannot utilize nominally different accounts to maintain their ownership, and still benefit from the loss. A wash sale involving an IRA/401(k) account is particularly unfavorable. Generally, a “washed” loss is postponed until the replacement is sold, but if the replacement is purchased in an IRA/401(k) account, the loss is permanently disallowed. If not managed correctly, wash sales can undermine tax loss harvesting. Handling proceeds from the harvest is not the sole concern—any deposits made in the following 30 days (whether into the same account, or into the individual’s IRA/401(k)) also need to be allocated with care. Avoiding the wash The simplest way to avoid triggering a wash sale is to avoid purchasing any security at all for the 30 days following the harvest, keeping the proceeds (and any inflows during that period) in cash. This approach, however, would systematically keep a portion of the portfolio out of the market. Over the long term, this “cash drag” could hurt the portfolio’s performance. More advanced strategies repurchase an asset with similar exposure to the harvested security that is not “substantially identical” for purposes of the wash sale rule. In the case of an individual stock, it is clear that repurchasing stock of that same company would violate the rule. Less clear is the treatment of two index funds from different issuers (e.g., Vanguard and Schwab) that track the same index. While the IRS has not issued any guidance to suggest that such two funds are “substantially identical,” a more conservative approach when dealing with an index fund portfolio would be to repurchase a fund whose performance correlates closely with that of the harvested fund, but tracks a different index.¹ Selecting a viable replacement security, however, is just one piece of the accounting and optimization puzzle. Manually implementing a tax loss harvesting strategy is feasible with a handful of securities, little to no cash flows, and infrequent harvests. However, assets will often dip in value but recover by the end of the year, so annual strategies leave many losses on the table. The wash sale management and tax lot accounting necessary to support more frequent (and thus more effective) harvesting quickly become overwhelming in a multi-asset portfolio—especially with regular deposits, dividends, and rebalancing. Software is ideally suited for this complex task. But automation, while necessary, is not sufficient. The problem can get so complex that basic tax loss harvesting algorithms may choose to keep new deposits and dividends in cash for the 30 days following a harvest, rather than tackle the challenge of always maintaining full exposure at the desired allocation. An effective loss harvesting algorithm should be able to maximize harvesting opportunities across a full range of volatility scenarios, without sacrificing the investor’s precisely tuned global asset allocation. It should reinvest harvest proceeds into closely correlated alternate assets, all while handling unforeseen cash inflows from the investor without ever resorting to cash positions. It should also be able to monitor each tax lot individually, harvesting individual lots at an opportune time, which may depend on the volatility of the asset. And most of all, it should do everything to avoid leaving a taxpayer worse off. TLH+ was created because no available implementations seemed to solve all of these problems. Existing strategies and their limitations Every tax loss harvesting strategy shares the same basic goal: to maximize a portfolio’s after-tax returns by realizing built-in losses while minimizing the negative impact of wash sales. Approaches to tax loss harvesting differ primarily in how they handle the proceeds of the harvest to avoid a wash sale. Below are the three strategies commonly employed by manual and algorithmic implementations. After selling a security that has experienced a loss, existing strategies would likely have you… Existing strategy Problem Delay reinvesting the proceeds of a harvest for 30 days, thereby ensuring that the repurchase will not trigger a wash sale. While it’s the easiest method to implement, it has a major drawback: no market exposure—also called cash drag. Cash drag hurts portfolio returns over the long term, and could offset any potential benefit from tax loss harvesting. Reallocate the cash into one or more entirely different asset classes in the portfolio. This method throws off an investor’s desired asset allocation. Additionally, such purchases may block other harvests over the next 30 days by setting up potential wash sales in those other asset classes. Switch back to original security after 30 days from the replacement security. Common manual approach, also used by some automated investing services. A switchback can trigger short-term capital gains when selling the replacement security, reducing the tax benefit of the harvest. Even worse, this strategy can leave an investor owing more tax than if it did nothing. The hazards of switchbacks In the 30 days leading up to the switchback, two things can happen: the replacement security can drop further, or go up. If it goes down, the switchback will realize an additional loss. However, if it goes up, which is what any asset with a positive expected return is expected to do over any given period, the switchback will realize short-term capital gains (STCG)—kryptonite to a tax-efficient portfolio management strategy. To be sure, the harvested loss should offset all (or at least some) of this subsequent gain, but it is easy to see that the result is a lower-yielding harvest. Like a faulty valve, this mechanism pumps out tax benefit, only to let some of it leak back. An algorithm that expects to switch back unconditionally must deal with the possibility that the resulting gain could exceed the harvested loss, leaving the taxpayer worse off. An attempt to mitigate this risk could be setting a higher threshold based on volatility of the asset class—only harvesting when the loss is so deep, that the asset is unlikely to entirely recover in 30 days. Of course, there is still no guarantee that it will not, and the price paid for this buffer is that your lower-yielding harvests will also be less frequent than they could be with a more sophisticated strategy. Examples of negative tax arbitrage Let’s look at how an automatic 30-day switchback can destroy the value of the harvested loss, and even increase tax owed, rather than reduce it. Below is actual performance for Emerging Markets—a relatively volatile asset class that’s expected to offer some of the biggest harvesting opportunities in a global portfolio. We assume a position in VWO, purchased prior to January 1, 2013. With no harvesting, it would have looked like this: No Tax Loss Harvesting Emerging Markets, 1/2/2014 – 5/21/2014 See visual of No Tax Loss Harvesting A substantial drop in February presented an excellent opportunity to sell the entire position and harvest a $331 long-term loss. The proceeds were re-invested into IEMG, a highly correlated replacement (tracking a different index). By March, however, the dip proved temporary, and 30 days after the sale, the asset class more than recovered. The switchback sale results in STCG in excess of the loss that was harvested, and actually leaves the investor owing tax, whereas without the harvest, he would have owed nothing. TLH with 30-day Switchbacks Emerging Markets, 1/2/2014 - 5/21/2014 See TLH with 30-day Switchbacks visual Under certain circumstances, it can get even worse. Due to a technical nuance in the way gains and losses are netted, the 30-day switchback can result in negative tax arbitrage, by effectively pushing existing gains into a higher tax rate. When adding up gains and losses for the year, the rules require netting of like against like first. If any long-term capital gain (LTCG) is present for the year, you must net a long-term capital loss (LTCL) against that first, and only then against any STCG. In the scenario above, the harvested $331 LTCL was used to offset the $360 STCG from the switchback; long can be used to offset short, if we assume no LTCG for the year. Negative tax arbitrage when unrelated long-term gains are present Now let’s assume that in addition to the transactions above, the taxpayer also realized a LTCG of exactly $331 (from selling some other, unrelated asset). If no harvest takes place, the investor will owe tax on $331 at the lower LTCG rate. However, if you add the harvest and switchback trades, the rules now require that the harvested $331 LTCL is applied first against the unrelated $331 LTCG. The harvested LTCL gets used up entirely, exposing the entire $360 STCG from the switchback as taxable. Instead of sheltering the highly taxed gain on the switchback, the harvested loss got used up sheltering a lower-taxed gain, creating far greater tax liability than if no harvest had taken place. Tax Strategy STCG Realized LTCG Realized Taxes Owed No TLH $0 $331 $109 TLH with 30-day switchbacks $360 ($331-$331) $0 net $187 Tax Strategy STCG Realized LTCG Realized Taxes Owed No TLH $0 $331 $109 TLH with 30-day switchbacks $360 ($331-$331) $0 net $187 In the presence of unrelated transactions, unsophisticated harvesting can effectively convert existing LTCG into STCG. Some investors regularly generate significant LTCG (for instance, by gradually diversifying out of a highly appreciated position in a single stock). It’s these investors, in fact, who would benefit the most from effective tax loss harvesting. However, if their portfolios are harvested with unconditional 30-day switchbacks over the years, it’s not a question of “if” the switchbacks will convert some LTCG into STCG, but “when” and “how much.” Negative tax arbitrage with dividends Yet another instance of negative tax arbitrage can result in connection with dividend payments. If certain conditions are met, some ETF distributions are treated as “qualified dividends”, taxed at lower rates. One condition is holding the security for more than 60 days. If the dividend is paid while the position is in the replacement security, it will not get this favorable treatment: under a rigid 30-day switchback, the condition can never be met. As a result, up to 20% of the dividend is lost to tax (the difference between the higher and lower rate). The Betterment Solution Summary: Betterment believes TLH+ can substantially improve upon existing strategies by managing parallel positions within each asset class indefinitely, as tax considerations dictate. It approaches tax-efficiency holistically, seeking to optimize every transaction, including customer activity. The fundamental advance of Betterment’s TLH+ is that tax-optimal decision making should not be limited to the harvest itself—the algorithm should remain vigilant with respect to every transaction. An unconditional 30-day switchback, whatever the cost, is plainly suboptimal, and could even leave the investor owing more tax that year—unacceptable for an automated strategy that seeks to lower tax liability. Intelligently managing a bifurcated asset class following the harvest is every bit as crucial to maximizing tax alpha as the harvest itself. The innovations TLH+ seeks to deliver, include: No exposure to short-term capital gains in an attempt to harvest losses. Through our proprietary Parallel Position Management system, a dual-security asset class approach enforces preference for one security without needlessly triggering capital gains in an attempt to harvest losses, all without putting constraints on customer cash flows. No negative tax arbitrage traps associated with less sophisticated harvesting strategies (e.g., 30-day switchback), making TLH+ especially suited for those generating large long-term capital gains on an ongoing basis. Zero cash drag at all times. With fractional shares and seamless handling of all inflows during wash sale windows, every dollar of your ETF portfolio is invested at the desired allocation risk level. Dynamic trigger thresholds for each asset-class, ensuring that both high- and low-volatility assets can be harvested at an opportune time to increase the chances of large tax offsets. Tax loss preservation logic extended to user-realized losses, not just harvested losses, automatically protecting both from the wash sale rule. In short, user withdrawals always sell any losses first. No disallowed losses through overlap with a Betterment IRA/401(k). We use a tertiary ticker system to eliminate the possibility of permanently disallowed losses triggered by subsequent IRA/401(k) activity.² This makes TLH+ ideal for those who invest in both taxable and tax-advantaged accounts. Harvests also take the opportunity to rebalance across all asset classes, rather than re-invest solely within the same asset class. This further reduces the need to rebalance during volatile stretches, which means fewer realized gains, and higher tax alpha. Through these innovations, TLH+ creates significant value over manually-serviced or less sophisticated algorithmic implementations. TLH+ is accessible to investors —fully automated, effective, and at no additional cost. Parallel securities To ensure that each asset class is supported by optimal securities in both primary and alternate positions, we screened by expense ratio, liquidity (bid-ask spread), tracking error vs. benchmark, and most importantly, covariance of the alternate with the primary.³ While there are small cost differences between the primary and alternate securities, the cost of negative tax arbitrage from tax-agnostic switching vastly outweighs the cost of maintaining a dual position within an asset class. For a 70% stock portfolio composed only of primary securities, the average underlying expense ratio is 0.075%. If each asset class consisted of a 50/50 split between primary and alternate, that cost would be 0.090%—a difference of less than two basis points. Of the 13 asset classes in Betterment’s core taxable portfolio, nine were assigned alternate tickers. Short-term Treasuries (GBIL),Inflation-protected Bonds (VTIP), U.S. Short-term Investment Grade Bonds (JPST), U.S. High Quality Bonds (AGG), and International Developed Bonds (BNDX)  are insufficiently volatile to be viable harvesting candidates. Take a look at the primary and alternate securities in the Betterment portfolio. Additionally, TLH+ features a special mechanism for coordination with IRAs/401(k)s that required us to pick a third security in each harvestable asset class (except in municipal bonds, which are not in the IRA/401(k) portfolio). While these have a higher cost than the primary and alternate, they are not expected to be utilized often, and even then, for short durations (more below in IRA/401(k) protection). Parallel Position Management As demonstrated, the unconditional 30-day switchback to the primary security is problematic for a number of reasons. To fix those problems, we engineered a platform to support TLH+, which seeks to tax-optimize every user and system-initiated transaction: the Parallel Position Management (PPM) system. PPM allows each asset class to be comprised of two closely correlated securities indefinitely, should that result in a better after-tax outcome. Here’s how a portfolio with PPM looks to a Betterment customer. PPM provides several improvements over the switchback strategy. First, unnecessary gains are minimized if not totally avoided. Second, the parallel security (could be primary or alternate) serves as a safe harbor to minimize wash sales—not just from harvest proceeds, but any cash inflows. Third, the mechanism seeks to protect not just harvested losses, but losses realized by the customer as well. PPM not only facilitates effective opportunities for tax loss harvesting, but also extends maximum tax-efficiency to customer-initiated transactions. Every customer withdrawal is a potential harvest (losses are sold first). And every customer deposit and dividend is routed to the parallel position that would minimize wash sales, while shoring up the target allocation. PPM has a preference for the primary security when rebalancing and for all cash flow events—but always subject to tax considerations. This is how PPM behaves under various conditions: Transaction PPM behavior Withdrawals and sales from rebalancing Sales default out of the alternate position (if such a position exists), but not at the expense of triggering STCG—in that case, PPM will sell lots of the primary security first. Rebalancing will always stop short of realizing STCG. Taxable gains are minimized at every decision point—STCG tax lots are the last to be sold on a user withdrawal. Deposits, buys from rebalancing, and dividend reinvestments PPM directs inflows to underweight asset classes, and within each asset class, into the primary, unless doing so incurs greater wash sale costs than buying the alternate. Harvest events TLH+ harvests can come out of the primary into the alternate, or vice versa, depending on which harvest has a greater expected value. After an initial harvest, it could make sense at some point to harvest back into the primary, to harvest more of the remaining primary into the alternate, or to do nothing. Harvests that would cause more washed losses than gained losses are minimized if not totally avoided. PPM eliminates the negative tax arbitrage issues previously discussed, while leaving open significantly more flexibility to engage in harvesting opportunities. TLH+ is able to harvest more frequently, and can safely realize smaller losses, all without putting any constraints on user cash flows. Let’s return to the Emerging Markets example from above, demonstrating how TLH+ harvests the loss, but remains in the appreciated alternate position (IEMG), thereby avoiding STCG. Smarter Harvesting - Avoid the Switchback Emerging Markets, 1/2/2014 - 5/21/2014 See TLH Switchbacks visual Better wash sale management Managing cash flows across both taxable and IRA/401(k) accounts without needlessly washing realized losses is a complex problem. TLH+ operates without constraining the way that customers prefer contributing to their portfolios, and without resorting to cash positions. With the benefit of parallel positions, it weighs wash sale implications of every deposit and withdrawal and dividend reinvestment, and seeks to systematically choose the optimal investment strategy. This system protects not just harvested losses, but also losses realized through withdrawals. IRA/401(k) protection The wash sale rule applies when a “substantially identical” replacement is purchased in an IRA/401(k) account. Taxpayers must calculate such wash sales, but brokers are not required to report them. Even the largest ones leave this task to their customers.⁴ This is administratively complicated for taxpayers and leads to tax issues. At Betterment, we felt we could do more than the bare minimum. Being equipped to perform this calculation, we do it so that our customers don’t have to. Because IRA/401(k) wash sales are particularly unfavorable—the loss is disallowed permanently—TLH+ goes another step further, and seeks to ensure that no loss realized in the taxable account is washed by a subsequent deposit into a Betterment IRA/401(k). In doing so, TLH+ always maintains target allocation in the IRA/401(k), without cash drag. No harvesting is done in an IRA/401(k), so if it weren’t for the potential interaction with taxable transactions, there would be no need for IRA/401(k) alternate securities. However, on the day of an IRA/401(k) inflow, both the primary and the alternate security in the taxable account could have realized losses in the prior 30 days. Accordingly, each asset class supports a third correlated security (tracking a third index). The tertiary security is only utilized to hold IRA/401(k) deposits within the wash window temporarily. Let’s look at an example of how TLH+ handles a potentially disruptive IRA inflow when there are realized losses to protect, using real market data for the Developed Markets asset class. The customer starts with a position in VEA, the primary security, in both the taxable and IRA accounts. We then harvest a loss by selling the entire taxable position, and repurchase the alternate security, SCHF. Loss Harvested in VEA Two weeks pass, and the customer makes a withdrawal from the taxable account (the entire position, for simplicity), intending to fund the IRA. In those two weeks, the asset class dropped more, so the sale of SCHF also realizes a loss. The VEA position in the IRA remains unchanged. Customer Withdrawal Sells SCHF at a Loss A few days later, the customer contributes to his IRA, and $1,000 is allocated to the Developed Markets asset class, which already contains some VEA. Despite the fact that the customer no longer holds any VEA or SCHF in his taxable account, buying either one in the IRA would permanently wash a valuable realized loss. The Tertiary Ticker System automatically allocates the inflow into the third option for developed markets, IEFA. IRA Deposit into Tertiary Ticker Both losses have been preserved, and the customer now holds VEA and IEFA in his IRA, maintaining desired allocation at all times. Because no capital gains are realized in an IRA/401(k), there is no harm in switching out of the IEFA position and consolidating the entire asset class in VEA when there is no danger of a wash sale. The result: Customers using TLH+ who also have their IRA/401(k) assets with Betterment can know that Betterment will seek to protect valuable realized losses whenever they deposit into their IRA/401(k), whether it’s lump rollover, auto-deposits or even dividend reinvestments. Smart rebalancing Lastly, TLH+ directs the proceeds of every harvest to rebalance the entire portfolio, the same way that a Betterment account handles any incoming cash flow (deposit, dividend). Most of the cash is expected to stay in that asset class and be reinvested into the parallel asset, but some of it may not. Recognizing every harvest as a rebalancing opportunity further reduces the need for additional selling in times of volatility, further reducing tax liability. As always, fractional shares allow the inflows to be allocated with perfect precision. TLH+ Model Calibration Summary: To make harvesting decisions, TLH+ optimizes around multiple inputs, derived from rigorous Monte Carlo simulations. The decision to harvest is made when the benefit, net of cost, exceeds a certain threshold. The potential benefit of a harvest is discussed in detail below (“Results”). Unlike a 30-day switchback strategy, TLH+ does not incur the expected STCG cost of the switchback trade. Therefore, “cost” consists of three components: trading expense, execution expense, and increased cost of ownership for the replacement asset (if any). All trades are free for Betterment customers. TLH+ is engineered to factor in the other two components, configurable at the asset level, and the resulting cost approaches negligible. Bid-ask spreads for the bulk of harvestable assets are extremely narrow. Expense ratios for the major primary/alternate ETF pairs are extremely close, and in the case where a harvest back to the primary ticker is being evaluated, that difference is actually a benefit, not a cost. A harder cost to quantify could result from what can be thought of as an “overly itchy TLH trigger finger.” Without the STCG switchback limitation, even very small losses appear to be worth harvesting, but only in a vacuum. Harvesting a loss “too early” could mean passing up a bigger (temporary) loss—made unavailable due to wash sale constraints stemming from the first harvest. This is especially true for more volatile assets, where a static TLH trigger could mean that the asset is being harvested at a fraction of the benefit that could be achieved by harvesting just a few days later, after a larger decline. Optimizing the thresholds to maximize loss yield becomes a statistical problem, ripe for an exhaustive simulation. There are two general approaches to testing a model’s performance: historical backtesting and forward-looking simulation. Optimizing a system to deliver the best results for only past historical periods is relatively trivial, but doing so would be a classic instance of data snooping bias. The maturation of the global ETF market is a relatively recent phenomenon. Relying solely on a historical backtest of a portfolio composed of ETFs that allow for 10 to 20 years of reliable data when designing a system intended to provide 40 to 50 years of benefit would mean making a number of indefensible assumptions about general market behavior. The superset of decision variables driving TLH+ is beyond the scope of this paper—optimizing around these variables required exhaustive analysis. TLH+ was calibrated via Betterment’s rigorous Monte Carlo simulation framework, spinning up thousands of server instances in the cloud to run through tens of thousands of forward-looking scenarios testing model performance. Best Practices for TLH+ Summary: Tax loss harvesting can add some value for most investors, but high earners with a combination of long time horizons, ongoing realized gains, and plans for some charitable disposition will reap the largest benefits. This is a good point to reiterate that tax loss harvesting delivers value primarily due to tax deferral, not tax avoidance. A harvested loss can be beneficial in the current tax year to varying degrees, but harvesting that loss generally means creating an offsetting gain at some point in the future. If and when the portfolio is liquidated, the gain realized will be higher than if the harvest never took place. Let’s look at an example: Year 1: Buy asset A for $100. Year 2: Asset A drops to $90. Harvest $10 loss, repurchase similar Asset B for $90. Year 20: Asset B is worth $500 and is liquidated. Gains of $410 realized (sale price minus cost basis of $90) Had the harvest never happened, we’d be selling A with a basis of $100, and gains realized would only be $400 (assuming similar performance from the two correlated assets.) Harvesting the $10 loss allows us to offset some unrelated $10 gain today, but at a price of an offsetting $10 gain at some point in the future. The value of a harvest largely depends on two things. First, what income, if any, is available for offset? Second, how much time will elapse before the portfolio is liquidated? As the deferral period grows, so does the benefit—the reinvested savings from the tax deferral have more time to grow. While nothing herein should be interpreted as tax advice, examining some sample investor profiles is a good way to appreciate the nature of the benefit of TLH+. Who benefits most? The Bottomless Gains Investor A capital loss is only as valuable as the tax saved on the gain it offsets. Some investors may incur substantial capital gains every year from selling highly appreciated assets—other securities, or perhaps real estate. These investors can immediately use all the harvested losses, offsetting gains and generating substantial tax savings. The High Income Earner Harvesting can have real benefit even in the absence of gains. Each year, up to $3,000 of capital losses can be deducted from ordinary income. Earners in high income tax states (such as New York or California) could be subject to a combined marginal tax bracket of up to 50%. Taking the full deduction, these investors could save $1,500 on their tax bill that year. What’s more, this deduction could benefit from positive rate arbitrage. The offsetting gain is likely to be LTCG, taxed at around 30% for the high earner—less than $1,000—a real tax savings of over $500, on top of any deferral value. The Steady Saver An initial investment may present some harvesting opportunities in the first few years, but over the long term, it’s increasingly unlikely that the value of an asset drops below the initial purchase price, even in down years. Regular deposits create multiple price points, which may create more harvesting opportunities over time. (This is not a rationale for keeping money out of the market and dripping it in over time—tax loss harvesting is an optimization around returns, not a substitute for market exposure.) The Philanthropist In each scenario above, any benefit is amplified by the length of the deferral period before the offsetting gains are eventually realized. However, if the appreciated securities are donated to charity or passed down to heirs, the tax can be avoided entirely. When coupled with this outcome, the scenarios above deliver the maximum benefit of TLH+. Wealthy investors have long used the dual strategy of loss harvesting and charitable giving. Even if an investor expects to mostly liquidate, any gifting will unlock some of this benefit. Using losses today, in exchange for built-in gains, offers the partial philanthropist a number of tax-efficient options later in life. Who benefits least? The Aspiring Tax Bracket Climber Tax deferral is undesirable if your future tax bracket will be higher than your current. If you expect to achieve (or return to) substantially higher income in the future, tax loss harvesting may be exactly the wrong strategy—it may, in fact, make sense to harvest gains, not losses. In particular, we do not advise you to use TLH+ if you can currently realize capital gains at a 0% tax rate. Under 2021 tax brackets, this may be the case if your taxable income is below $40,400 as a single filer or $80,800 if you are married filing jointly. See the IRS website for more details. Graduate students, those taking parental leave, or just starting out in their careers should ask “What tax rate am I offsetting today” versus “What rate can I reasonably expect to pay in the future?” The Scattered Portfolio TLH+ is carefully calibrated to manage wash sales across all assets managed by Betterment, including IRA assets. However, the algorithms cannot take into account information that is not available. To the extent that a Betterment customer’s holdings (or a spouse’s holdings) in another account overlap with the Betterment portfolio, there can be no guarantee that TLH+ activity will not conflict with sales and purchases in those other accounts (including dividend reinvestments), and result in unforeseen wash sales that reverse some or all of the benefits of TLH+. We do not recommend TLH+ to a customer who holds (or whose spouse holds) any of the ETFs in the Betterment portfolio in non-Betterment accounts. You can ask Betterment to coordinate TLH+ with your spouse’s account at Betterment. You’ll be asked for your spouse’s account information after you enable TLH+ so that we can help optimize your investments across your accounts. The Portfolio Strategy Collector Electing different portfolio strategies for multiple Betterment goals may cause TLH+ to identify fewer opportunities to harvest losses than it might if you elect the same portfolio strategy for all of your Betterment goals. The Rapid Liquidator What happens if all of the additional gains due to harvesting are realized over the course of a single year? In a full liquidation of a long-standing portfolio, the additional gains due to harvesting could push the taxpayer into a higher LTCG bracket, potentially reversing the benefit of TLH+. For those who expect to draw down with more flexibility, smart automation will be there to help optimize the tax consequences. The Imminent Withdrawal The harvesting of tax losses resets the one-year holding period that is used to distinguish between LTCG and STCG. For most investors, this isn’t an issue: by the time that they sell the impacted investments, the one-year holding period has elapsed and they pay taxes at the lower LTCG rate. This is particularly true for Betterment customers because our TaxMin feature automatically realizes LTCG ahead of STCG in response to a withdrawal request. However, if you are planning to withdraw a large portion of your taxable assets in the next 12 months, you should wait to turn on TLH+ until after the withdrawal is complete to reduce the possibility of realizing STCG. Other Impacts to Consider Investors with assets held in different portfolio strategies should understand how it impacts the operation of TLH. To learn more, please see Betterment’s SRI disclosures, Flexible portfolio disclosures,  the Goldman Sachs smart beta disclosures, and the BlackRock target income portfolio disclosures for further detail. Clients in Advisor-designed custom portfolios through Betterment for Advisors should consult their Advisors to understand the limitations of TLH with respect to any custom portfolio. Additionally, as described above, electing one portfolio strategy for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities for TLH to harvest losses due to wash sale avoidance. Due to Betterment’s new monthly cadence for billing fees for advisory services, through the liquidation of securities, tax loss harvesting opportunities may be adversely affected for customers with particularly high stock allocations, third party portfolios, or flexible portfolios. As a result of assessing fees on a monthly cadence for a customer with only equity security exposure, which tends to be more opportunistic for tax loss harvesting, certain securities may be sold that could have been used to tax loss harvest at a later date, thereby delaying the harvesting opportunity into the future. This delay would be due to avoidance of triggering the wash sale rule, which forbids a security from being sold only to be replaced with a “substantially similar” security within a 30-day period. See Betterment’s TLH disclosures for further detail. Conclusion Summary: Tax loss harvesting can be a highly effective way to improve your investor returns without taking additional downside risk. Tax loss harvesting may get the spotlight, but under the hood, our algorithms labor to minimize taxes on every transaction, in every conceivable way. Historically, tax loss harvesting has only been available to extremely high net worth clients. Betterment is able to take advantage of economies of scale with technology and provide this service to all qualified customers while striving to: Do no harm: we regularly work to avoid triggering short-term capital gains (others often do, through unsophisticated automation). Do it holistically: we don’t just look for opportunities to harvest regularly—we seek to make every transaction tax efficient—withdrawals, deposits, rebalancing, and more. Coordinate wash sale management across both taxable and IRA/401(k) accounts as seamlessly as possible.

Should You Create a Trust Fund? It Could Help You Preserve Wealth Dec 4, 2019 12:00:00 AM Weigh the costs and benefits of establishing a trust as part of your estate planning. For those who have assets to leave as a legacy, a trust can be a strategic part of estate planning. Trust assets can include everything from a life insurance settlement and real estate to investments and cash. However, not all trusts are the same—there are many variations, each with specific benefits and restraints. In the past, establishing a trust was largely viewed as a tool for very high net worth individuals looking to preserve wealth across generations. But these days, easily accessible low-cost investing accounts help us all take advantage of the value that creating a trust can provide for our assets. One of the benefits of trusts is that they can shield assets from lawsuits and probate costs. Many are interested in these benefits regardless of their net worth. With the emergence of automated investing services, like Betterment, setting up and managing a trust account of any size is easier than ever. Selecting the right type of trust for your needs will be something to discuss with an estate planning specialist, such as a financial advisor, accountant, or estate planning attorney.1 However, there are some general benefits that most trusts offer. Below is a summary to help you decide whether a trust may be right for you. Privacy and Protection After an individual’s death, an estate typically goes through probate, where the will is open for public scrutiny and assets may be used to pay off creditors. If assets are held in multiple states (real estate, for example), probate will take place in every state—adding substantial costs to settling an estate. The costs associated with probate could reduce the estate by 3% to 7% on average—and that’s not including additional estate taxes and income taxes that may be due. These additional costs mean significantly less assets are given to the intended beneficiaries. With certain types of trusts, all assets that have been placed in the trust are considered property of that trust, and thus they are off limits to creditors, they’re kept out of public record, and they can avoid probate. Trusts are also a useful way to shield and protect assets for people who are at higher risk of litigation, such as doctors. Placing assets in a trust may also reduce the potential for lawsuits between heirs. Taxes Different types of trusts provide different tax advantages. For example, an irrevocable life insurance trust shelters any life insurance death benefit proceeds from estate taxes. The most popular type of trust is a revocable living trust, which is a trust that can be modified once it is established. It’s created during the grantor’s (the person who funds the trust) lifetime. On its own, a revocable living trust doesn’t provide specific tax benefits, but additional provisions can be added to these trusts to help reduce estate taxes. There are about nine commonly used trust types. Speaking with an estate planner and tax advisor will help you determine how to maximize tax advantages and establish the right type of trust for your needs. Distribution Control Not all beneficiaries need the same thing. A trust can establish guidelines for how and when funds are distributed. Rather than simply naming the person who will inherit your assets, you can add provisions that specify how the trust assets can be used. By adding these provisions to your trust, you can help your assets last longer, since you decrease the risk of a beneficiary draining the account for frivolous expenses. For example, funds might be earmarked for education, for special medical needs, or for distribution only after the beneficiary has reached a certain age. In addition, a trust can ensure—through its guidelines—that money is distributed in a specific way to a specific entity, rather than an individual. This might mean a charity, a religious institution, or your alma mater. Sound Investment Strategy A trustee is the person(s) named in a trust document who is responsible for making decisions regarding the trust. By law, a trustee has a fiduciary responsibility to oversee the funds entrusted to them. Regulation, such as the Uniform Prudent Investor Act, states that a trustee must act “prudently” when administering a trust, which means holding the investments in a sound interest-bearing account, as well as assessing the risk, return, and diversification of assets. Trustees can be an investment firm or an individual. Trustees should ensure trust assets are invested wisely to fulfil the specific aims of the trust.  Automated investment services like Betterment provide trustees with an easy, low-cost way to manage a trust. Consider the Benefits Whether you are looking for asset protection, privacy, tax minimization, control over how your beneficiaries use their inheritance, or a combination of each of these things—establishing and managing a trust has never been easier. After speaking with your estate planning specialist and determining which type of trust is best for you, check out our FAQ on what we offer for trust accounts here at Betterment. 1Note that Betterment is not a tax advisor and nothing in this blog post should be construed as specific advice—please consult a tax advisor regarding your specific circumstances.