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Handpick your holdings with a Custom portfolio. We’ll handle the rest. Start from scratch or from a Betterment template. Either way, you can now build a portfolio yourself without sacrificing the best of Betterment’s automation. Key takeaways Custom portfolios let you edit a Betterment template—fund-by-fund, stock-by-stock—or start from scratch. We handle the day-to-day management and tax optimization, instead of you being stuck doing it by hand. Powerful analysis tools help you kick the tires on your portfolio picks before you buy them. Custom portfolios are available now in individual taxable accounts, with joint and trust accounts and IRAs following in the months to come. Betterment-built portfolios start from the same research-backed foundation: a globally-diversified mix of low-cost funds, adjusted for your goals, risk tolerance, and interests. And while they work for many investors right off the shelf, some want a little more say in the mix. The ability to slot in a specific fund, strategy, or stock, for example, right alongside our Investing team’s picks. In practice, that could mean hedging with gold, tilting toward real estate, or prioritizing dividends. All three examples differ from our approach to asset allocation, yet they’re all reasonable calls an investor can make. That’s where a Custom portfolio comes into play. A custom fit, without all the fuss Until now, getting this granular with your investing meant dealing with the hassle of managing your assets by hand. Not just the routine maintenance of rebalancing your allocations and reinvesting dividends, but tax-saving strategies like harvesting losses and locating assets in the optimal accounts. Now, a Custom portfolio offers the best of both worlds: Customization down to a specific ETF or single stock All the added value of Betterment’s low-cost automated investing Tax-loss harvesting shines here in particular. The tax-deferral strategy works best when someone's watching closely for a window worth acting on. Betterment's tech does exactly that in the background. It’s the kind of optimization that's hard to replicate by hand. And Custom portfolios take it one step further, pairing your ETF picks with similar funds when available to unlock new harvesting opportunities. Image is illustrative Take the wheel, with guidance at every turn The customizing starts by searching our library of 5,500+ ETFs and individual stocks1. See any that you currently hold with another provider? Connect with a Betterment transfer specialist at transfers@betterment.com to explore bringing them into the fold, which could help you benefit even more from our automation and simplify your investing life in the process. You can also change your current Betterment portfolio strategy to a Custom portfolio assuming Custom portfolios are available in all of the underlying accounts (e.g. taxable, IRA, etc.). Once your Custom portfolio’s holdings start taking shape, you’ll see the sort of robust, real-time analysis that can guide your decision-making and help you customize with confidence. At a high level, there’s asset classes, the big buckets of U.S. and international markets that your stocks and/or bonds fall into. But dive deeper and you can break things down by sector and country. And coming soon, you’ll get additional tools like forward-looking projections and historical backtesting of your portfolio. Image is illustrative This is the sort of research many self-directed investors already do on the side, but scattered across spreadsheets and bookmarks. Having it all built into the portfolio you're actively building, updating in real-time as you adjust weights, means you're making the decision with more information in front of you, not lost somewhere in a sea of browser tabs. And it’s only the beginning. Coming next: direct indexing Custom portfolios will continue to evolve, and they’ll soon be joined by similar offerings. Direct indexing will let you own the individual stocks that make up an index rather than a fund that tracks it. More room to customize your holdings, more opportunities to harvest losses. Because just like with a Custom portfolio, the choice isn't customization or convenience. It's both. So open a Custom portfolio—or switch your existing Betterment investing to one. Swap one holding for another, then see the analysis play out in real-time. The fun part is yours. The upkeep and optimization isn't.

Betterment's tax-loss harvesting methodology 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 Tax-loss harvesting model calibration Best practices for TLH How we calculate the value of tax-loss harvesting Your personalized Estimated Tax Savings tool Conclusion There are many ways to get your investments to work harder for you— diversification, downside risk management, and an appropriate mix of asset classes tailored to your recommended allocation. Betterment does this automatically via its ETF portfolios. But there is another way to help you get more out of your portfolio—using investment losses to improve your after-tax returns with a method called tax-loss harvesting. In this article, we introduce Betterment’s tax-loss harvesting (TLH): a sophisticated, fully automated tool that Betterment customers can choose to enable. Betterment’s tax-loss harvesting 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, tax-loss harvesting utilizes a number of innovations that typical implementations may lack. It takes a holistic approach to tax-efficiency, seeking to optimize user-initiated transactions in addition to adding value through automated activity, such as rebalances. 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 potential 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 can 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. 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 they 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. Minimizing 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. More advanced strategies primarily 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. Tax-loss harvesting is generally designed around this index-based logic and generally seeks to reduce wash sales, although it cannot avoid potential wash sales arising from transactions in tickers that track the same index where one of the tickers is not currently a primary, secondary, or tertiary ticker (as those terms are defined in this white paper). This situation could arise, for example, when other tickers are transferred to Betterment or where they were previously a primary, secondary, or tertiary ticker. Additionally, for some portfolios constructed by third parties (e.g., Vanguard, Blackrock, or Goldman Sachs), certain secondary and tertiary tickers track the same index. Certain asset classes (including those in certain Betterment-constructed portfolios and portfolios constructed by third parties, such as Vanguard, Blackrock, or Goldman Sachs) do not have tertiary tickers, such that permanently disallowed losses could occur if there were overlapping holdings in taxable and tax-advantaged accounts. Betterment’s TLH feature may also permit wash sales where the anticipated tax benefit of the overall harvest transaction sufficiently outweighs the impact of expected washed losses. Selecting a viable replacement security 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. Assets may however dip in value but potentially recover by the end of the year, therefore annual strategies or infrequent harvests may leave many losses on the table. The wash sale management and tax lot accounting necessary to support more frequent harvesting quickly becomes overwhelming in a multi-asset portfolio—especially with regular deposits, dividends, and rebalancing. In short, an effective loss harvesting algorithm should be able to maximize harvesting opportunities across a full range of volatility scenarios, without sacrificing the investor’s global asset allocation. 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. This hurts portfolio returns over the long term, and could offset any potential benefit from tax-loss harvesting. Reallocate the cash entirely into one or more 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. 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 Negative tax arbitrage with automatic 30-day switchback An automatic 30-day switchback can destroy the value of the harvested loss, and even increase tax owed, rather than reduce it. A substantial dip presents an excellent opportunity to sell an entire position and harvest a long-term loss. Proceeds will then be re-invested in a highly correlated replacement (tracking a different index). 30 days after the sale, the dip proved temporary and 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, they would have owed nothing. 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. Negative tax arbitrage when unrelated long-term gains are present Now let’s assume the taxpayer realized a LTCG. If no harvest takes place, the investor will owe tax on the gain at the lower LTCG rate. However, if you add the LTCL harvest and STCG switchback trades, the rules now require that the harvested LTCL is applied first against the unrelated LTCG. The harvested LTCL gets used up entirely, exposing the entire 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. 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. Negative tax arbitrage with dividends 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. The Betterment solution Summary: Betterment’s tax-loss harvesting approaches tax-efficiency holistically, seeking to optimize transactions, including customer activity. The benefits tax-loss harvesting seeks to deliver, include: No exposure to short-term capital gains in an attempt to harvest losses. Through our proprietary Parallel Position Management (PPM) 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 tax-loss harvesting especially suited for those generating large long-term capital gains on an ongoing basis. 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. Minimize disallowed losses through overlap with a Betterment IRA/401(k). We generally use a tertiary ticker system to eliminate the possibility of permanently disallowed losses triggered by subsequent IRA/401(k) activity. 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, tax-loss harvesting creates significant value over manually-serviced or less sophisticated algorithmic implementations. Tax-loss harvesting 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 (secondary) positions, we screened by expense ratio, liquidity (bid-ask spread), tracking error vs. benchmark, and most importantly, covariance of the alternate with the primary.1 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. Tax-loss harvesting features a special mechanism for coordination with IRAs/401(k)s where we pick a third (tertiary) security in each harvestable asset class where possible. 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). However, if no suitable tertiary exists beyond the secondary used in the taxable version of the portfolio strategy, certain security groups in Betterment-constructed portfolios will not have tertiary tickers assigned in the tax-advantaged strategy. While Betterment generally constructs portfolios to minimize this risk, clients should be aware that in this scenario, rebalancing can result in wash sales, and that if the replacement purchase occurs in an IRA account, the loss is permanently disallowed. 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 tax-loss harvesting, which seeks to tax-optimize user and system-initiated transactions: the Parallel Position Management (PPM) system. PPM allows each asset class to contain a primary security to represent the desired exposure while maintaining alternate and tertiary securities that are closely correlated securities, should that result in a better after-tax outcome. PPM provides several improvements over the switchback strategy. First, unnecessary gains are minimized. Second, the parallel security (could be primary or alternate) serves as a safe harbor to reduce potential 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). Deposits and dividends are used to rebalance your portfolio. When available cash is reinvested, it is generally routed to the parallel position that would reduce wash sales, while working toward 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 attempt to 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. Wash sale management Managing cash flows across both taxable and IRA/401(k) accounts without washing realized losses is a complex problem. Tax-loss harvesting operates without constraining the way that customers prefer contributing to their portfolios. With the benefit of parallel positions, Betterment weighs wash sale implications of deposits, withdrawals and dividend reinvestment. This system protects not just harvested losses, but also losses realized through withdrawals. Minimizing wash sale through tertiary tickers in IRA/401(k) Because IRA/401(k) wash sales are particularly unfavorable—the loss is disallowed permanently—tax-loss harvesting uses a tertiary ticker system to seek to prevent losses realized in the taxable account from being washed by subsequent deposits into an IRA/401(k) where possible. Let’s look at an example of how tax-loss harvesting handles a potentially disruptive IRA inflow with a tertiary ticker when there are realized losses to protect, using real market data for a Developed Markets asset class. The customer starts with a position in VEA, the primary security, in both the taxable and IRA accounts. We harvest a loss by selling the entire taxable position, and then repurchasing the alternate security, SCHF. Loss harvested in VEA Two weeks pass, and the customer makes a withdrawal from the taxable account (the entire SCHF position, for simplicity), intending to fund the IRA. In those two weeks, the asset class dropped more, so the sale of SCHF also realized 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, tax-loss harvesting 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). For portfolios with a cash allocation, if cash is below its target allocation at the time of the TLH transaction, proceeds will first be applied to increase cash up to target, and only any remaining available cash is invested in securities; if cash is above its target, the excess cash above target will be invested in securities along with the harvest proceeds as part of the TLH transaction. 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 precision. Tax-loss harvesting model calibration Summary: To make harvesting decisions, tax-loss harvesting 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, tax-loss harvesting 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). Trading costs are included in the wrap fee paid by Betterment customers. Tax-loss harvesting 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 narrow. We seek funds with expense ratios for the major primary/alternate ETF pairs that are 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. 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. 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 tax-loss harvesting is beyond the scope of this paper—optimizing around these variables required exhaustive analysis. Tax-loss harvesting 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. We have calibrated tax-loss harvesting in a way that we believe optimizes its effectiveness given expected future returns and volatility, but other optimizations could result in more frequent harvests or better results depending on actual market conditions. Best practices for tax-loss harvesting 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 tax-loss harvesting. 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 benefits 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 tax-loss harvesting if you can currently realize capital gains at a 0% tax rate. 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: Tax-loss harvesting 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 tax-loss harvesting 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 tax-loss harvesting. We do not recommend tax-loss harvesting 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 tax-loss harvesting with your spouse’s account at Betterment. You’ll be asked for your spouse’s account information after you enable tax-loss harvesting 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 tax-loss harvesting 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 tax-loss harvesting. 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 tax-loss harvesting 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 tax-loss harvesting. To learn more, please see the respective disclosures for the following Betterment and third-party portfolios: Socially Responsible Investing, Custom portfolio, Innovative Technology, Value Tilt, Crypto ETF, Goldman Sachs Tax-Smart Bonds, Goldman Sachs Smart Beta, Target Income built with BlackRock, as well as the disclosure Betterment Advisor Solutions Model Marketplace. Clients in Advisor-designed custom portfolios through Betterment for Advisors should consult their Advisors to understand the limitations of tax-loss harvesting 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, as TLH is calibrated to seek to reduce wash sales. Due to Betterment’s 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 Custom 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 the TLH tool’s effort to reduce instances 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. Factors which will determine the actual benefit of tax-loss harvesting include, but are not limited to, market performance, the size of the portfolio, the stock exposure of the portfolio, the frequency and size of deposits into the portfolio, the availability of capital gains and income which can be offset by losses harvested, the tax rates applicable to the investor in a given tax year and in future years, the extent to which relevant assets in the portfolio are donated to charity or bequeathed to heirs, and the time elapsed before liquidation of any assets that are not disposed of in this manner. All of Betterment’s trading decisions are discretionary and Betterment may decide to limit or postpone TLH trading on any given day or on consecutive days, either with respect to a single account or across multiple accounts. Tax-loss harvesting is not suitable for all investors. Nothing herein should be interpreted as tax advice, and Betterment does not represent in any manner that the tax consequences described herein will be obtained, or that any Betterment product will result in any particular tax consequence. Please consult your personal tax advisor as to whether TLH is a suitable strategy for you, given your particular circumstances. The tax consequences of tax-loss harvesting are complex and uncertain and may be challenged by the IRS. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. Betterment assumes no responsibility for the tax consequences to any client of any transaction. See Betterment’s tax-loss harvesting disclosures for further detail. How we calculate the value of tax-loss harvesting Over 2022 and 2023, we calculated that 69% of Betterment customers who employed the strategy saw potential savings in excess of the Betterment fees charged on their taxable accounts for the year. To reach this conclusion, we first identified the accounts to consider, defined as taxable investing accounts that had a positive balance and tax-loss harvesting turned on throughout 2022 and 2023. We excluded trust accounts because their tax treatments can be highly-specific and they made up less than 1% of the data. For each account’s taxpayer, we pulled the short and long term capital gain/loss in the relevant accounts realized in 2022 and 2023 using our trading and tax records. We then divided the gain/loss into those caused by a TLH transaction and those not caused by a TLH transaction. Then, for each tax year, we calculated the short-term gains offset by taking the greater of the short-term loss realized by tax-loss harvesting and the short-term gain caused by other transactions. We did the same for long-term gain/loss. If there were any losses leftover, we calculated the amount of ordinary income that could be offset by taking the greater of the customer’s reported income and $3,000 ($1,500 if the customer is married filing separately) and then taking the greater of that number and the sum of the remaining long-term and short-term losses (after first subtracting any non-tax-loss harvesting losses from ordinary income). If there were any losses leftover in 2022 after all that, we carried those losses forward to 2023. At this point, we had for each customer the amount of short-term gains, long-term gains and ordinary income offset by tax-loss harvesting for each tax year. We then calculated the short-term and long-term capital gains rates using the federal tax brackets for 2022 and 2023 and the reported income of the taxpayer, their reported tax filing status, and their reported number of dependents. We assumed the standard deduction and conservatively did not include state capital gains taxes because some states do not have capital gains tax. We calculated the ordinary income rate including federal taxes, state taxes, and Medicare and Social Security taxes using the user’s reported income, filing status, number of dependents, assumed standard deduction, and age (assuming Medicare and Social Security taxes cease at the retirement age of 67). We then applied these tax rates respectively to the offsets to get the tax bill reduction from each type of offset and summed them up to get the total tax reduction. Then, we pulled the total fees charged to the users on the account in question that were accrued in 2022 and 2023 from our fee accrual records and compared that to the tax bill reduction. If the tax bill reduction was greater than the fees, we considered tax-loss harvesting to have indirectly paid for the fees in the account in question for the taxpayer in question. This was the case for 69% of customers. Your personalized Estimated Tax Savings tool Overview: Betterment’s TLH Estimated Tax Savings Tool is found in your online account and designed to quantify the tax-saving potential of our tax-loss harvesting (TLH) feature. By leveraging both transactional data from Betterment accounts and your self-reported demographic and financial profile information, the tool generates dynamic estimates of realized and potential tax savings. These calculations provide both current-year and cumulative ("all-time") tax savings estimates. Client-centric tax modeling: To personalize estimates, the tool takes into account client financial profile information: your self-reported annual pre-tax income, state of residence, tax filing status (e.g. individual, married filing jointly), and number of dependents. This information helps Betterment create a comprehensive tax profile, estimating your federal and state income tax rates, long-term capital gains (LTCG) rates, and applicable standard deductions. Betterment’s estimated tax savings methodology also incorporates the IRS' cap on ordinary income offsets for capital losses—$3,000 for most individuals or $1,500 if married filing separately, and also incorporates any available carryforward losses. Tax lot analysis and offsetting hierarchy: At the heart of Betterment’s estimated tax savings tool is a detailed analysis of tax-lot level trading data. Betterment tallys TLH-triggered losses (short- and long-term) from other realized capital gains or losses, grouping them by year, and calculates your potential tax benefit by offsetting losses and gains by type according to IRS rules, and allowing excess losses to offset other income types or carry forward to future years. The IRS offset order is applied: Short-term losses offset short-term gains Long-term losses offset long-term gains Remaining short-term losses offset long-term gains Remaining long-term losses offset short-term gains Remaining short-term losses offset ordinary income Remaining long-term losses offset ordinary income Any further losses are carried forward Current year estimated tax savings: Betterment calculates your current year estimated tax savings from TLH based on the IRS numbered offset list above, which is the sum of: Short-term offset represents the tax savings from subtracting your short-term harvested losses and cross-offset long-term harvested losses from current-year short-term capital gains (numbers 1 and 4 above), then multiplying by your estimated federal plus state tax rate. Long-term offset represents the savings from subtracting long-term harvested losses and cross-offset short-term harvested losses from current-year long-term capital gains (numbers 2 and 3 above), multiplied by your estimated long-term capital gains rate. Ordinary income offset captures the savings from applying any remaining harvested losses to your ordinary income up to the allowable limit (numbers 5 and 6 above), multiplied by your estimated federal plus state tax rate. Both short-term and long-term harvested losses may include banked losses from prior years that couldn’t be used at the time. These carryforward losses (number 7 above) are applied in the same way as current-year harvested losses when calculating your tax savings. For the tool, Harvested Losses are all time short- and long-term harvested losses i.e., all harvested losses to date through TLH. Savings from the Short-term offset, long-term offset, and ordinary income offset are summed to yield the current year estimated tax savings. All-time estimated tax savings : Betterment calculates your all-time estimated tax savings from TLH based on the sum of: All-time Long-term harvested losses × LTCG rate All-time Short-term harvested losses × (Federal + State tax rate) For the all-time estimated tax figure, the all-time figures used are all your harvested losses through Betterment’s TLH feature to the present date, and rather than calculate offsets, Betterment assumes that you are able to fully offset your long-term harvested losses and short-term harvested losses with gains. Therefore, we apply the long term capital gains rates and marginal ordinary income rate (which is the sum of your federal and state tax rates) by your total long-term harvested losses and short-term losses, respectively. There is no ordinary income offset in the All-Time Estimate. This simplification does not track when the loss occurred, and therefore, assumes current estimated tax rates were applicable throughout prior years. Assumptions: While this tool provides a powerful estimate of your potential tax benefits from tax-loss harvesting, it is important to understand the assumptions and limitations underlying the estimated tax savings calculations. Estimated tax savings figures presented are estimates—not guarantees—and rely on the information you’ve provided to Betterment. Actual tax outcomes may vary based on your actual tax return and situation when filing. The tool evaluates only the activity within your Betterment accounts and does not take into account any investment activity from external accounts. For the current year calculation, the tool also assumes that you have sufficient ordinary income to fully benefit from capital loss offsets, and for the all-time calculation, the tool provides a tax-dollar estimate of all harvested losses, based on type (short- or long-term) and current tax rates. Additionally, the estimated tax savings calculation simplifies the treatment of certain entities; for example, trusts, business accounts, or other specialized tax structures are not handled distinctly. State-level tax estimates exclude city tax rates and municipal taxes, which may also affect your overall tax situation. The “all-time estimate” shown reflects an approximation of the total tax impact of harvested losses to date—including benefits that have not yet been realized or claimed. While the estimate has its limitations, it provides a clear and actionable view into how tax-smart investing can add value over time. It helps show how harvested losses may lower your tax bill and boost after-tax returns—bringing transparency to a strategy that’s often hard to see in dollar terms. For many investors, it highlights the long-term financial benefits of managing taxes proactively. Conclusion Summary: Tax-loss harvesting can be an effective way to improve your investor returns without taking additional downside risk.

Solo 401(k)s vs. SEP IRAs: Sizing up your saving options while self-employed Both retirement accounts offer high contribution limits, but which one is right for you? If you’re self-employed, you likely wear several ill-fitting hats: accountant, admin, HR rep. And that last one is low-key important, because it means no one is setting up a retirement plan for you. So what's a gig worker, small business owner, or solo practitioner to do? There’s the trusty IRA, of course. But its tax benefits phase out at certain income levels, and its $7,500 annual contribution limit fills up fast. You may want—or need—to save more to realize your retirement goal. Luckily, two lesser-known retirement accounts offer self-employed workers 10x more capacity for tax-advantaged investing: the solo 401(k) and the SEP IRA. They’re similar in that sense (high contribution limits), but they also differ in some important ways. We’ve found that for many self-employed workers, choosing between the two often hinges on their hiring or lack thereof: 👉 No employees beyond a spouse, and no plans to hire? Consider a solo if you prioritize Roth access and a slight edge in contribution limits. Consider a SEP if you prioritize less administrative work. 👉 See yourself hiring a few employees in the not-so-distant future? Consider starting with a solo 401(k), then transitioning to a group 401(k) plan if you prioritize Roth access and more flexibility in how you structure employee contributions. Consider a SEP for slightly easier admin, and the ability to pause contributions to your employees’ SEPs during down years. 👉 Planning to expand beyond 5-10 employees at some point? Consider the solo-to-group 401(k) move for more flexibility in how you structure employee contributions. You can max out your own retirement savings, for example, while letting employees decide their own contribution rates. That’s the TL;DR version. For a deeper dive, let’s compare the two accounts across a few categories: High contribution limits Easy admin Roth access Small business growth High contribution limits Both accounts let you save plenty for retirement—upwards of $72,000 a year—but solos give you a couple of ways to stretch that even further: Case #1: You’re playing catch-up If you're age 50 or older and catching up on your retirement savings, a solo 401(k) offers additional “catch-up” contributions of $8,000 each year, or $11,250 for those 60-63. Note that starting in 2026, the IRS's transition rules generally require catch-up contributions be made on a Roth basis if you received more than $150,000 in prior-year W-2 FICA wages or salary from your sponsoring business (common for S-Corp or C-Corp owners). Because this rule specifically relies on FICA wages, however, true sole proprietors earning self-employment income (SECA) without W-2 wages are generally exempt from this requirement. Case #2: You’re a middle class super saver Say you earn less than $288,000, but you save well above the standard advice of 10-15% for retirement. In this scenario, you may run up against the SEP’s 25% compensation cap before you reach its overall $72,000 limit. But with solos, you can contribute as both an employer (up to 25% of compensation, or 20% of net self-employment income if you're a sole proprietor) and an employee (up to $24,500) until you hit the overall limit. ⚖️ Advantage: solo 401(k) Easy admin Both a solo 401(k) and SEP IRA, assuming they’re streamlined digital offerings such as ours, are simple to set up. At Betterment, you can open either account type entirely online. Both are relatively low maintenance as well. Neither a SEP nor a solo require annual paperwork, with the one exception being for solo 401(k) balances that exceed $250,000. In that case, the IRS requires solo owners (aka “sponsors”) to file Form 5500-EZ. While we’re not a tax advisor, and always recommend working with one, the form is relatively straightforward to fill out. ⚖️ Advantage: SEP IRA Roth access Solos and SEPs are designed for retirement, so the IRS gives special tax treatment to both account types. But in practice, solos give you not one but two different flavors of tax treatment to choose from: You can contribute with pre-tax dollars via a traditional solo 401(k), lowering your taxes now and freeing up more money to invest. You also have the ability to contribute with after-tax dollars via a Roth solo 401(k), enjoying tax-free qualified withdrawals in retirement. And Roth solo 401(k)s come with two added bonuses: Unlike traditional retirement accounts, they’re not subject to Required Minimum Distributions (RMDs) in retirement. Unlike Roth IRAs, they come with no income limits of any kind. Roth SEP IRAs, meanwhile, have technically been allowed by the IRS since 2023, but few providers have rolled them out yet. ⚖️ Advantage: Solo 401(k) Small business growth At some point in your self-employed journey, you may bring on hired help. In this case, it’s possible to transition both account types to accommodate employees. Some SEP providers let you shift from a solo practitioner to an employer who contributes to employees’ SEP IRAs on their behalf. But there’s a catch: you must contribute the same percentage of compensation to their SEPs as you do your own, which may prove challenging depending on your business. With solo 401(k)s, on the other hand, you can include a spouse from the get-go, provided they’re an employee or co-owner of the business. And if you see the potential for expanding beyond a handful of employees down the road, it may make sense to simply transition your solo 401(k) to a group 401(k) plan and enjoy more flexibility in how you structure contributions for your team. Our support team handles moves like this often and can help you when the time comes. ⚖️ Advantage: Solo 401(k) So which account is right for you? The good news is both SEP IRAs and solo 401(k)s offer excellent tax advantages that can help you reach retirement quicker. We offer both at Betterment, and make it easy to open either one. Because when you’re self-employed, you’re busy running your business. Optimizing your retirement savings? Leave that to us for one less hat in your wardrobe.

With U.S. markets struggling, is now the time to go global? Here’s the case for keeping a little international exposure in your investing. U.S. stocks have been the envy of the world since 2010, generating nearly 4 times the returns of their international counterparts. But since April 2, President Trump’s tariff policies have dragged down U.S. stocks and left investors unnerved. Does this mean the U.S. market is toast? Certainly not, but it does signal a potential shift in foreign investment, which means that if you haven’t already, now may be the time to consider diversifying globally. And we can help on that front. Hello, world. We're here to invest. The U.S. market is big, but it’s not the only game in town. Hundreds of billions of dollars in assets trade hands in international markets each day. It's why the Betterment Core portfolio, built on the idea that more diversification equals less risk, roughly mirrors the relative weights of global markets. Like we mentioned above, the U.S. market has been on an absolute tear the past 15 years, and even more so since 2020. This record winning streak has fueled our home bias, or the tendency for American investors to favor American markets. But history shows a pendulum that typically swings back and forth every 5 to 10 years. International markets outperformed in the 2000s, for example, and they saw a huge spike in the late 80s. So what’s an investor to do? If you're investing for the long term, the odds are good the U.S. market will hit at least one extended rough patch in that time. And in that scenario, a globally-hedged portfolio will very likely smooth out your returns from year to year. We’re seeing this start to play out in 2025, with the Betterment Core portfolio and its global diversification outperforming many common U.S.-only funds. As of 5/2/2025. Betterment Core composite actual time-weighted returns: 10.52% over 1 year, 12.35% over 5 years, and 7.30% over 10 years as of 5/2/2025. Composite performance calculated based on the dollar weighted average of actual client time-weighted returns for the Core portfolio at 90/10 allocation, net fees. Performance not guaranteed, investing involves risk. That being said, diversification is a sliding scale. There is no pass/fail, no good or bad. If you’re looking for a little more international exposure, but not to the extent of one of our pre-built portfolios, you can try a Custom portfolio and tailor your allocation as you see fit. But if you’re less experienced in investing, and simply want an option that requires less work, then let us do the recalibrating for you. We update our pre-built portfolios annually, finetuning our U.S. and international exposures based on the latest long-term projections. We can’t predict when the global tides will turn, but we can make sure you don’t miss out when they do.

Betterment's asset allocation methodology 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 Emergency Fund Betterment also allows users to create cash goals through the Cash Reserve offering, and crypto goals through the Crypto ETF portfolio. These goal types are outside the scope of this allocation advice methodology. Cash Reserve offered by Betterment LLC and requires a Betterment Securities brokerage account. Betterment is not a bank. FDIC insurance provided by Program Banks, subject to certain conditions. Learn more. For all investing goals (except for Emergency Funds) 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). Emergency Funds, by definition, do not have an anticipated time horizon (when you set up your goal, Betterment will assume a time horizon for Emergency Funds 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. Betterment maintains a small operational cash allocation in automated investing portfolios in taxable accounts, health savings accounts, and individual retirement accounts. For more information, please refer to disclosures for your portfolio. For all goals (except for Emergency Funds) 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 Emergency Funds, Betterment’s recommended investment allocation provides growth potential while limiting the risk of a drawdown that doesn't surpass a recommended buffer above the amount needed in an emergency. Below are the ranges of recommended investment allocations for each goal type excluding Emergency Funds. 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) 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 Emergency Fund goals, the Target Income built with BlackRock portfolio, and the Goldman Sachs Tax-Smart Bonds portfolio) for the Betterment Core portfolio, SRI portfolios, Innovation Technology portfolio, Value Tilt 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 reactive rebalancing and proactive 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 in order 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.

How Betterment manages risks in your portfolio 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 primarily 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. Our automated tools aim 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. And when selling any of your investments, our tax-smart technology is designed to minimize 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). 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 ETF portfolio is called portfolio drift. We define portfolio drift as the total absolute deviation of each super asset class from its target, divided by two. These super asset classes are US Bonds, International Bonds, Emerging Markets Bonds, US Stocks, International Stocks, and Emerging Markets Stocks. For Betterment-constructed portfolios that include a cash allocation, drift in the cash allocation is measured alongside super asset class drift. (Separately, Betterment-managed custom portfolios evaluate drift at the security group level. For reference, security groups are groupings of tickers that include a primary ticker, and may include secondary and/or tertiary tickers designed to help avoid wash sales and allow for tax-loss harvesting opportunities). 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. There are several different methods depending on the circumstances: First, in response to cash flows such as deposits, withdrawals, and dividend reinvestments, Betterment buys underweight holdings and sells overweight holdings. This reactive 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 potential capital gains taxes. And we use outflows (like withdrawals) by seeking to first sell asset classes that are overweight. Second, if cash flows are not sufficient to keep a client’s portfolio drift within its applicable drift tolerance (such parameters as disclosed in Betterment’s Form ADV), automated rebalancing sells overweight holdings in order to buy underweight ones, aligning the portfolio more closely with its target allocation. This proactive rebalancing reshuffles assets that are already in the portfolio, and requires a minimum portfolio balance (clients can review the estimated balance at www.betterment.com/legal/portfolio-minimum). The rebalancing algorithm is also calibrated to avoid frequent small rebalance transactions and to seek tax efficient outcomes, such as helping to reduce wash sales and minimizing short-term capital gains. 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. When Betterment rebalances a portfolio with a cash allocation, the rebalancing algorithm will first seek to bring the portfolio's cash allocation back to its target before investing in securities. If cash is below its target allocation, rebalancing will first use available funds (e.g., deposits, dividends, and/or proceeds from selling overweight holdings) to increase cash up to target, and only any remaining available cash is invested in securities; conversely, if cash is above its target allocation, the excess cash above target will be invested in securities as a part of the rebalancing transaction. If you are an Advised client, rebalancing in your account may function differently depending on the customizations your Advisor has selected for your portfolio. We recommend reaching out to your Advisor for further details. For more information, please review our rebalancing disclosures. How Betterment reduces risk in portfolios Investments like short-term US treasuries 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 60% stock portfolio. Portfolios with a stock allocation of 60% 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 60% for both the IRA and taxable versions of the Betterment Core portfolio strategy. If your portfolio includes no stocks (meaning you allocated 100% of your portfolio’s investments to 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 0% stocks, a Betterment Core portfolio generally consists of 60% U.S. short-term treasury bonds, 20% U.S. short-term high quality bonds, and 20% inflation protected bonds.* Increase the stock allocation in your portfolio, and we’ll decrease the allocation to these exposures. Reach the 60% stock allocation threshold, and we’ll remove these 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 asset classes don’t always go down at exactly the same time. By combining these asset classes, we’re able to produce a 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 0% stocks 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. Work toward your financial goals without risking it all Choosing an investment portfolio is a personal decision, but it doesn’t have to be a difficult one. At Betterment, our goal is to help you feel confident that you’re always taking an appropriate amount of risk. We’ll help you select a portfolio with the risk level that’s right for you, and you can rest assured that our automated services are built to manage it efficiently. *Target investments, actual holdings will vary.