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Self-directed investing, the Betterment way

What’s an IRA and how does it work?

What’s an IRA and how does it work? Nov 7, 2025 7:00:00 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 2025 is $7,000 if you’re under 50, or $8,000 if you’re 50 or older. For a 401(k), the contribution limit for 2025 is $23,500 if you’re under 50, or $31,000 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. And as a side note for those 50 or older, starting in 2026, 401(k) catch-up contributions must go into a Roth 401(k) specifically if you received more than $145,000 in FICA wages (salaries, commissions, etc.) the prior year. 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.

Betterment’s trading execution methodology

Betterment’s trading execution methodology Nov 3, 2025 3:55:00 PM Enhancing execution quality through managed trading Betterment already manages rebalancing and tax optimization at scale—but there’s another layer of value working behind the scenes: execution. This paper focuses on how Betterment improves trade execution through intelligent design and infrastructure. Our system doesn’t just serve one segment of users; it applies equally across the platform, enabling everyone to tap into scalable benefits that were once reserved for institutions. One key aspect is our use of marketable limit orders—orders placed near or slightly better than the current market price so they can execute immediately. This type of order is designed to strike a balance between speed and price control: it seeks a fast execution while placing a guardrail on how far the price can drift. For clients, this means greater protection during periods of market volatility—helping ensure that trades don’t fill at prices significantly worse than expected. Another foundational element is our use of an omnibus trading structure. Rather than executing each individual order separately, Betterment aggregates client trades allowing us to batch and route them more efficiently. This method helps us access deeper liquidity and potentially reduce overall execution costs. Through features like scheduled trade windows, omnibus aggregation, and a design that favors round-lot execution, Betterment helps minimize structural trading disadvantages, reduce exposure to adverse selection, and increase the potential for improved pricing. These execution benefits compound with scale and are embedded directly into the trading experience. The result is greater fairness, efficiency, and cost-effectiveness for every investor on the platform. The challenge in retail execution Retail trading has evolved significantly in recent years, fueled by technological innovation and increased market accessibility. However, key structural disadvantages persist for individual investors, especially when it comes to small, odd-lot orders and immediate execution strategies. Betterment’s managed execution framework—aggregating and scheduling trades throughout the day—offers a powerful and scalable alternative designed to reduce costs, mitigate execution risk, and better align with the realities of market structure. While trades are scheduled into structured windows, they are executed multiple times during the trading day to balance timeliness with the opportunity for aggregations. Betterment does not net opposing orders; each trade is routed externally to our clearing partner. Market structure and the importance of round lots In equity markets, trade size plays a critical role in determining execution quality. A round lot—currently defined as 100 shares for the majority of tickers—is the standard unit recognized by exchanges and market makers. These trades are included in the National Best Bid and Offer (NBBO), prioritized in routing decisions, and eligible for execution in institutional venues. Even mixed-lot orders that include at least one round lot (e.g., 105 shares) benefit from this visibility, often improving pricing for the entire trade. In contrast, odd lots—any order smaller than a round lot—are excluded from the NBBO and typically experience lower priority, reduced transparency, and worse pricing. These orders dominate retail investor flows and often result in less favorable execution. Legal scholar Robert P. Bartlett III analyzed more than 3 billion U.S. equity trades in his 2021 paper and found that odd-lot orders received roughly 10% less price improvement than round lots. This is due to reduced visibility, exclusion from public quotes, and lower priority by execution venues. Trades of 99 shares were particularly disadvantaged compared to trades of 100, even when both were placed simultaneously. High-volume stocks like Amazon (AMZN) illustrated this disparity clearly—Bartlett estimated that over 30% of odd-lot trades in AMZN could have received better pricing if executed as round lots. Betterment’s managed trading approach is designed to help mitigate these penalties by systematically aggregating client flows to reach round-lot thresholds, increasing the likelihood of more favorable outcomes. Quantifying the impact: price discrepancies between lot sizes A core feature of Betterment’s execution strategy is aggregating client orders to cross the round-lot threshold wherever possible. This is not just a preference; it is a response to well-documented execution disadvantages that odd-lot orders face. To illustrate what that kind of pricing difference could mean in dollar terms, consider VTI, a highly liquid security frequently traded by Betterment clients. We selected VTI because it shares characteristics with AMZN—both are heavily traded by retail investors, benefit from high liquidity, and are broadly popular. As of May 2025, VTI trades at approximately $280 per share. If an odd-lot trade receives even just 2 basis points worse pricing than a round lot, this translates to a cost penalty of approximately $0.14 per share for odd-lot executions. For a 15-share odd-lot trade: this means a $2.10 higher cost. For someone investing $5k/month, this means roughly $30 a year in higher costs. Over a 30-year period, this could equate to more than $3,400 in missed gains, assuming 8% yearly growth. The pricing examples presented in this paper are based on internally derived simulations that reflect market behavior consistent with the cited peer-reviewed research. These examples are intended for illustrative purposes only, are not meant to communicate potential performance of any investment strategy, and are not predictive of execution outcomes for any individual trade. This pricing inefficiency compounds quickly and has significant implications when managing client assets at scale. Betterment’s execution engine is designed to help reduce this cost by structurally creating opportunities to aggregate orders into round lots. In line with our regulatory obligations, we aim to achieve best execution—a regulatory standard that requires seeking the most favorable terms reasonably available under prevailing market conditions. This includes evaluating factors such as price, speed, likelihood of execution and settlement, and overall cost. Betterment does not delay trades to form round lots, but it uses a system of time-based trade windows and an omnibus aggregation strategy to opportunistically cross the round-lot threshold when client order flow naturally aligns. This allows us to systematically access the more favorable pricing conditions typically associated with round-lot trades—potentially reducing cost and improving execution outcomes for clients. While our model is designed to improve execution quality in the aggregate, individual trade outcomes may vary depending on market volatility, order size, and venue-specific factors. Trade windows as a mechanism for better execution Most retail brokers execute trades continuously, immediately passing orders to the market. While this appears fast and transparent, it exposes clients to harmful microstructure dynamics. High-frequency traders (HFTs), for example, exploit real-time signals to capture spread value, often at the expense of slower retail flows. Betterment mitigates this by batching trades into scheduled trade windows. These windows operate throughout the day and function similarly to frequent call auctions—a concept studied by Budish, Cramton, and Shim (2015). Their research shows that batched execution reduces the arms race in trading latency, promotes fairness, and narrows spreads. Though Betterment does not run formal batch auctions, our windows are intended to serve a similar purpose: reducing predictability, concealing intent, and improving average execution. This design also lowers market impact by consolidating demand. Liquidity providers can see larger, more regular flows instead of a noisy, fragmented stream. A single larger order is more likely to attract competitive pricing because it signals meaningful interest and is easier for liquidity providers to match against existing supply. For example, multiple clients buying SPY over the same trade window are combined into one order, reducing slippage—the difference between the expected price and the actual execution price—and improving fills, or the likelihood that the entire order will be completed promptly at a desirable price. Execution in practice: Betterment’s strategy At Betterment, trades are executed in windows throughout the day. Each window consolidates similar trades—buy or sell, same ticker—into a single order, executed through an omnibus structure. Trades are routed through Apex, our clearing and trading partner, to venues offering a competitive combination of price, liquidity, and fill reliability, with round-lot opportunities prioritized. We work to achieve best execution in all trades routed through this process. This structure introduces flexibility without sacrificing fairness. Betterment does not delay execution for the sake of creating a round lot, but we design the system to allow aggregation when practical. If immediacy is necessary—such as at day-end—we will execute whatever lots are available.1 We also monitor managed accounts for rebalancing and tax-loss harvesting (TLH) opportunities. When Betterment’s trading algorithm evaluates client accounts for tax loss harvesting and rebalancing opportunities, it generally prioritizes identifying potential tax loss harvests ahead of potential rebalancing opportunities. This activity also plays a meaningful role in how we strive to optimize outcomes alongside our execution practices. When clients’ orders align, aggregation and scheduling increase the likelihood of a favorable outcome. 1Betterment reserves the right to delay trading under certain circumstances; more information about our trading practices and policies is available in our Form ADV. To support oversight of Betterment's execution quality, Betterment has established a formal Best Execution Committee tasked with oversight of execution quality. This committee performs a regular and rigorous review of trading outcomes, assessing execution quality across market centers using key metrics such as basis point deviation from market price at placement (placement strike), routing behavior, peer comparisons, and arrival price analysis. Evaluations are made across ticker, order size, and timeframes. Aggregation in action: a comparative scenario To further illustrate how aggregation leads to better execution, consider this example where three clients submit small trades around the same time. When routed individually, these odd-lot orders are exposed to the same disadvantages outlined earlier—such as worse pricing due to exclusion from the NBBO. But when aggregated into a single round-lot trade, the order gains visibility and priority, increasing the likelihood of receiving better pricing. Client Orders Without Aggregation With Aggregation Alice: Buy 35 shares Executed at $135.02 = $4,725.70 100 shares executed at $135.00 = $13,500.00 Bob: Buy 40 shares Executed at $135.01 = $5,400.40 Carol: Buy 25 shares Executed at $135.03 = $3,375.75 Total Cost Impact Total: $13,501.85 (varied, higher prices) Total: $13,500.00 (uniform, better pricing) Illustrative purposes only. Prices shown do not reflect actual client execution results. This example reinforces the earlier point about execution quality differences between odd-lot and round-lot trades—such as the estimated 2 basis point disadvantage found in high-volume stocks like VTI. A consolidated 100-share order, like the one shown here, is more likely to attract competitive pricing from liquidity providers because it is easier to match against existing supply and signals meaningful demand. This example illustrates a core insight: retail investors are disadvantaged when fragmented. But when they act collectively—via an automated platform like Betterment—they gain access to efficiencies normally reserved for large institutional traders. Delivering institutional benefits to retail investors Betterment’s model is designed to translate institutional market advantages into a retail context. Institutional desks execute trades strategically—splitting orders, timing placements, and waiting for liquidity. These techniques aren’t usually available to individuals, but Betterment’s platform replicates many of them algorithmically. By aggregating trades to reach round lots, using structured time-based execution, and accessing liquidity intelligently, Betterment customers may benefit from pricing and execution quality similar to what’s typically associated with institutional standards. This parity is especially powerful in volatile or illiquid conditions, where fragmented execution can be costly. Conclusion and client-centric outcomes Managed trading, as implemented by Betterment, is a deliberate, research-driven strategy to overcome the inherent flaws in retail execution. We combine trade scheduling, order aggregation, and a neutral fee structure to deliver meaningful advantages to individual investors. Our model does not guarantee better execution on every trade, but in the aggregate, it enhances pricing, reduces slippage, and levels the playing field. Betterment believes that balancing immediacy and opportunity is key. Betterment may wait to aggregate trades to seek improved execution, which we believe is a rational tradeoff. Betterment clients are not sacrificing control—they’re gaining efficiency. Over time, this system is designed to create small but consistent enhancements in return, aligning with our core mission: helping clients make the most of their money. References Bartlett, R. P. III. (2021). Modernizing Odd Lot Trading. Columbia Business Law Review. Budish, E., Cramton, P., & Shim, J. (2015). The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response. Quarterly Journal of Economics. American Economic Association. Research and publications on equity market structure and trading practices. NYU Stern School of Business. Faculty research on market microstructure and fairness. Australian Centre for Financial Research (ACFR). Market design and equity structure studies.

How SIPC insurance protects against the loss of cash and securities

How SIPC insurance protects against the loss of cash and securities Nov 3, 2025 11:45:22 AM And how this one backstop helps build trust across markets. Key takeaways Investors across the industry benefit from SIPC insurance, which provides coverage in the event of a broker-dealer failure, not market losses. All brokers (including Betterment) are required to be SIPC members. Industry safeguards like audits and asset segregation make SIPC claims exceptionally rare. Trust makes the world go round, and the same goes for markets. So when more than a million customers place their trust in us—along with $63 billion in assets—we don’t take it lightly. We put multiple measures in place to help safeguard their assets. Beyond these, investors also benefit from one industry-wide backstop—SIPC insurance. Though rarely called upon, it reinforces confidence across markets. So let’s break down what it is, why it matters, and why you’ll likely never need it. An explanatory brochure is also available upon request or at sipc.org. SIPC insurance comes into play when securities go missing One of the biggest misconceptions about this type of insurance relates to what it actually safeguards you from. It doesn’t protect against market losses (wouldn’t that be nice). Instead, it insures against broker failure. SIPC insurance protects against the loss of cash and securities held by a customer at a financially-troubled SIPC-member broker. Congress created it after the “paperwork crunch” crisis of the late 1960s, when outdated technology and a surge in trading volume led to backlogs at several brokers. When a market crash then caused many of those same brokers to go belly-up, they weren’t able to account for all their customers' securities. So similar to when the bank failures of the Great Depression led to FDIC insurance, legislators created the SIPC and its related guarantee to restore confidence in the financial system. Unlike the FDIC and banks, however, all brokers (including Betterment) are required to be SIPC members. How SIPC insurance works Okay, let’s talk numbers. SIPC insurance protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). But crucially, this limit applies to each account with a “separate capacity” at each SIPC-member broker. Examples of separate capacities include: individual accounts joint accounts accounts for a corporation accounts for a trust created under state law IRAs Roth IRAs accounts held by an executor for an estate accounts held by a guardian for a ward or minor In the event that a broker goes bankrupt, a judge appoints a trustee to sort through their books and distribute assets back to their clients. SIPC insurance only comes into play if assets can’t be recovered and returned to their owners. Why it’s highly unlikely you’ll need it As important as this protection is, chances are, you won’t actually need it. That’s because brokers are required to abide by a series of regulations that seek to stabilize and strengthen securities markets. They must segregate their own assets from their clients’ assets, for example, making it less likely that securities get lost in the fray. This separation is also important because it protects your securities from creditors. Because of guardrails like these, SIPC proceedings have been increasingly rare since the dust settled from the “paperwork crunch” of the late 60s, in spite of there having been roughly 40,000 brokers and SIPC members since its inception. Usage has faded even more in the recent past, with no cases in the last 7 years, and fewer than two cases per year since the turn of the century. Invest with confidence at Betterment Every investment carries some level of risk—but that risk should come from market movement, not from your broker. That’s why the brokerage industry operates under clear safeguards: firms must segregate customer assets, maintain sufficient capital, and undergo regular oversight. Betterment follows these same standards—helping you stay focused on your goals, backed by the same protections that support confidence across U.S. markets.

The proactive strategy behind passive investing

The proactive strategy behind passive investing Oct 13, 2025 11:35:02 AM And when actively-managed funds may give your portfolio an edge. Key takeaways Passive and active investing strategies both require proactive planning while differing in their end goals. Passive investing seeks to match market returns, typically by way of index or exchange traded funds that closely mirror a market. Passive funds cost significantly less on average and often perform better in more efficient asset classes like U.S. Large Cap stocks. Active investing aims to beat the market by selecting the specific securities you or a manager believe will outperform relative to their peers. Active funds cost 10x more on average, but tend to perform better in less efficient classes such as U.S. core bonds. Many institutional investors—Betterment included—employ a mix of both strategies. Of all the confusing ‘this or that’s’ of investing, few are more misleading than the choice between ‘active’ and ‘passive’ strategies. Passive sounds hands-off—but in practice, it’s anything but. Take our automated investing offering. While it uses a blend of both strategies, it falls more on the passive end of the spectrum. Yet on any given trading day, we’re … Scanning for tax loss harvesting opportunities by the minute Executing thousands of trades to keep customers’ portfolios humming Researching dozens of new funds, slotting in new options quarterly to improve our portfolios’ desired exposures at lower cost And every year, we refresh the asset weights of all our portfolios, making sure they align with the latest global market environment and long-term projections. Pretty lively for a passive strategy, no? So if passive investing is a bit of a misnomer, what exactly sets it apart from more "active" approaches? And which situations are each best suited for? For those helpful distinctions, let’s start with their respective mission statements. Two missions, two mindsets Both passive and active investing involve someone, sometimes a “retail” investor such as yourself, sometimes a single professional or an entire firm, making decisions on what to invest in. The key difference boils down to their objectives and related costs: With active investing, you're aiming to beat the market by selecting the specific securities you believe will outperform their peers. While the costs of actively-managed funds are trending downward, they’re still 10x more expensive on average than that of their passively-indexed peers. With passive investing, you're seeking to simply match a market’s returns. A lower bar, for sure, but also at a lower cost. The fees or “expense ratios” charged by passive funds often fall below 0.10%. Which is better? Well, beating the market is easier said than done, especially in the long run. Consider the S&P 500, for example, the most popular pick in the market for U.S. Large Cap stocks. Fewer than 15% of similar actively-managed funds have outperformed it for stretches of five years or longer. But that doesn't mean there’s no role to play for active investing, even for the long-term, risk-averse investor. Some markets aren't as accurately priced or “efficient” as the S&P. With the right expertise and right access to information, there’s relatively more value to be had in smaller markets like those in developing countries, and even more so in bond markets. The question then becomes, who’s the best at sniffing out those deals? When investing in an actively-managed fund, you’re investing in the team behind it as much as the securities themselves. Conducting due diligence on the team and their track record is critical. That’s why when using these types of ETFs in our portfolios, we use a robust quantitative and qualitative research approach to size up the teams behind them. There’s also the matter of niche markets, and whether a passive index fund is even available. One such example is the Academy Veteran Bond ETF (VETZ), one of the newest actively-managed funds we’ve brought on board. VETZ mainly invests in loans to active and retired U.S. service members and the survivors of fallen veterans, making it ideal for both active management and our Socially Responsible Investing’s Social Impact portfolio. Lastly, a lot of everyday investors simply enjoy directing some portion of their investing themselves. When we surveyed Betterment customers about their overall investing habits, ¾ of them said they mix in some self-directed investing alongside their managed portfolios. There’s nothing wrong with a little responsible fun like this. Picking your own securities—even alongside a managed portfolio—can be exciting and educational. And all that choice naturally leads to the next big difference between active and passive investing. The building blocks of a portfolio Some of the active/passive split can be seen in a given portfolio’s pieces, and how granular the investor gets. Do you want to start at the individual security level, picking single stocks and bonds yourself, or paying someone to do that for you? Or would you rather zoom out and start with funds that track a predetermined list or “index” of said securities? These can cover entire asset classes, like treasury bonds, or represent a “sub-asset” slice of a market, like short-term treasury bonds. Stock indexes are weighted by the current value of the companies within them. These market "capitalizations" ebb and flow, of course, so the makeup of indexes and the funds that track them naturally evolve over time. They're "self-cleansing" in that sense. Lower performers make up less and less of the index over time, just as higher performers become bigger slices. It's why the bulk of the S&P 500 today looks very different than it did 20 years ago. The shape-shifting S&P (top companies by market valuation) 2025 2005 1. Nvidia Corp (NVDA) 1. GE Aerospace (GE) 2. Microsoft Corp (MSFT) 2. Exxon Mobil Corp (XOM) 3. Apple Inc (AAPL) 3. Microsoft Corp (MSFT) 4. Alphabet Inc (GOOG) 4. Citigroup Inc (C) 5. Amazon.com Inc (AMZN) 5. Walmart Inc (WMT) Source: FactSet There's also the hybrid “smart beta” approach to index fund investing. Here, a fund manager starts with a preset index before actively tailoring it based on a set of quantitative investment factors. We offer one such option in the form of the Goldman Sachs Smart Beta portfolio, which invests more heavily in companies with at least one of the following factors: They’re cheap relative to their accounting value. They tend to be sustainably profitable over time. Their returns are relatively low in volatility. They’ve been trending strongly upward in price. Use the right tool for the job All of this may be a lot to take in. But we can simplify things by bringing it all back to the big picture. Active investing seeks to beat the market. It’s typically higher-cost, and comes with relatively higher risk. In specific use cases, however, an experienced team can outperform related indexes. Passive investing aims to replicate market returns at a lower cost, often over the long-term. It starts with the building block of funds instead of individual securities. As is so often the case with investing, this isn’t an either/or proposition. We use both strategies—and sometimes a blend—at Betterment, because each has a role to play in building wealth. Regardless of whose hands are guiding your investing, we give you the tools to grow your money with confidence.

Traditional vs. Roth: Should you take your tax break now, or later?

Traditional vs. Roth: Should you take your tax break now, or later? Sep 23, 2025 12:15:12 PM Picking up where the standard guidance leaves off There can be endless decisions to make when investing. Chief among them: Whether to save for retirement through a traditional IRA and/or 401(k), or the Roth variety. With traditional accounts, you typically invest with pre-tax money, then pay taxes on withdrawals later in retirement. This lowers your taxes today and frees up more money to invest. With Roth accounts, you contribute money that's already been taxed, then enjoy tax-free withdrawals once you turn 59½, with no required minimum distributions. When it comes to which is better, here’s the advice you’ll often hear: Traditionals make more sense if your current tax bracket is higher than where you expect it to be in retirement. And vice versa with Roths. It's a start, but not always helpful in practice. Tax brackets can be confusing, for one, and nobody knows what they'll look like decades from now. People's incomes also ebb and flow with age, as do their tax brackets. Luckily, data from the U.S. Bureau of Labor Statistics can help us eyeball these shifts and plot out when each account type tends to shine brightest. The upward and downward slopes of spending When we look at American's average spending by age, we see it often peaks in middle age and declines as we approach our traditional retirement years. Connecting the dots, this means that traditional contributions often make more sense during the middle portion of workers’ careers. They’re likely earning and paying more in taxes than they will in retirement, so it makes sense to shift some of that tax obligation to a lower bracket down the road. For those with lower incomes, pairing those tax-deductible deposits with the standard deduction can also help squeeze more of their taxable income into the 12% tax bracket. The next bracket takes a big step up to 22%. As one’s income rises, however, another wrinkle may come into play. The IRA income limit exception If your income grows to a certain point (see the table below), you’ll face one of those so-called “champagne problems”: the tax deductions of a traditional IRA will begin to phase out, meaning it’s Roth or nothing if you want at least a partial tax break. Earn even more, and your Roth access will eventually dry up too, although there’s a handy “backdoor” option that’s worth checking out. A 401(k), as a side note, has no income restrictions for either contribution type. 2025 IRA income limits Traditional IRA* Modified Adjusted Gross Income (MAGI) Roth IRA Modified Adjusted Gross Income (MAGI) Full tax deduction $0-$79,000 (single) Full contribution $0-$149,999 (single) $0-$126,000 (married) $0-$235,999 (married) Partial tax deduction $79,001-$88,999 (single) Partial contribution $150,000-$164,999 (single) $126,001-$145,999 (married) $236,000-$245,999 (married) No tax deduction** $89,000 and up (single) No contribution $165,000 and up (single) $146,000 and up (married) $246,000 and up (married) *If covered by a retirement plan at work **Anyone is eligible to make taxable contributions to a traditional IRA Source: IRS This is why blanket statements like “Roths are better” don’t hold much water. The decision boils down to your personal income situation, and that’s subject to change. With Betterment, however, our Forecaster tool does much of the work for you. Simply scroll down to its “How to save” section, and we’ll use your self-reported financial information to suggest not only the optimal order of retirement account types, but whether traditional or Roth contributions make more sense based on your projected future tax bracket. Just be sure to update your info as needed (raises, marital status, etc.) for the most accurate estimates. Now or later? Now that’s one less call to make The traditional vs Roth debate will likely rage on for years. But between content like this, and tools like Forecaster, we do our best to help you quickly clear this common investing hurdle. If your income is trending anything like the averages above, traditional deposits may make more sense, but the advantage will be slight, and it never hurts to hedge. Having both Roth and traditional funds gives you more flexibility when managing your income in retirement. Plus, you can spend less time stressing over the two, and more time building momentum toward your goal.