Betterment Resources | Original Content by Financial Experts

Betterment's Socially Responsible Investing portfolios methodology

Three ways it can pay to automate your investing

Three ways it can pay to automate your investing Our managed offering adds value beyond a DIY approach. Here’s how. Key takeaways Portfolio construction is just the beginning. Betterment’s automated investing is designed to help you manage risk, maximize returns, and minimize leg work. Tax-smart features help you keep more of what you earn. Fully-automated Tax Coordination and tax-loss harvesting seek out efficiencies hard to replicate by hand. Navigation helps keep your goals on track. Automated rebalancing, effortless glide paths, and recurring deposits make it easier to stay the course through market ups and downs. Peace of mind is part of the return. Automation frees up time and headspace, letting you live your life instead of worrying about your portfolio. With the arrival of self-directed investing at Betterment, you can choose from thousands of individual stocks and ETFs on your own, including the very same funds we research and select for our curated portfolios. So if you can now buy the same low-cost investments, why pay someone (i.e., us) to manage them for you? It’s a fair question, and to help answer it, it helps to understand why our portfolio construction is just the beginning of the story. It's not just the Betterment portfolio you see today, but the one you see tomorrow (and in the weeks, months, and years that follow) that captures the full value of our expertise and technology. The ongoing optimization and evolution of your portfolio, in other words, is where our automated investing really shines. Sometimes the benefits are tangible. Sometimes they’re emotional. But regardless of how you frame it, we’re constantly working in the background to deliver value in three big ways. Tax savings: keeping more of what you earn Navigation: keeping your investing on-track Calm: keeping your sanity—and your spare time 1. Tax savings: keeping more of what you earn One of the most reliable ways to increase your returns is lowering the taxes owed on your investments. And here's the first way Betterment’s managed portfolios can pay off. Our trading algorithms take tax optimization to a level that’s practically impossible to replicate on your own. Take our Tax Coordination feature, which uses the flexibility of our portfolios to locate assets strategically across Betterment traditional IRAs/401(k)s, Roth IRAs/401(k)s, and taxable accounts. This mathematically-rigorous spin on asset location can help more of your earnings grow tax-free. Then there’s our fully-automated tax-loss harvesting, a feature designed to free up money to invest that would've otherwise gone to Uncle Sam. Our technology regularly scans accounts to identify harvesting opportunities, then goes to work. It’s how we harvested nearly $60 million in losses for customers during the tariff-induced market volatility of Spring 2025. Betterment does not provide tax advice. TLH is not suitable for all investors. Learn more. It’s also a big reason why nearly 70% of customers using our tax-loss harvesting feature had their taxable advisory fee covered by likely tax savings.1 And with the upcoming addition of direct indexing to Betterment’s automated investing, our harvesting capabilities will only continue to grow. 1 2. Navigation: keeping your investing on-track It’s easy to veer off-course when managing your own investing. Life happens, calendars fill up, and the next thing you know, your portfolio starts to drift. When you pay for automated investing, however, you not only get our guidance upfront, you benefit from technology designed to get you to your destination with less effort. As markets ebb and flow, for example, we automatically rebalance your portfolio to maintain your desired risk level. And the “glide path” that automatically lowers your risk as your goal nears? It just happens in eligible portfolios. No research or calendar reminders needed. Our management also helps steer your investing toward a time-tested path to long-term wealth. Most of our portfolios are globally diversified so you take advantage when overseas markets outperform. And we encourage recurring deposits so you buy more shares when prices are low. Recent research by Morningstar helps quantify the value of this “dollar-cost averaging” approach. They found investors lost out on roughly 15% of the returns their funds generated due in large part to jumping in and out of the market. Betterment customers using recurring deposits, meanwhile, earned nearly 3% higher annual returns.2 It turns out it’s easier to stay the course with a little help. 2 3. Calm: Keeping your sanity—and your spare time Our automation can save you time—two hours for each rebalance alone3—but the value of automating your investing is more than just time saved. It’s quality time spent. How much of your finite energy, in other words, are you spending worrying about your money? We can’t erase all of your anxiety, but our team and our tech can empower you to build wealth with confidence and ease, with an emphasis on the ease. 3 Between market volatility and a constant barrage of scary headlines, the world is stressful enough right now. There’s little need to add portfolio optimization and upkeep to the list. That is, of course, unless you enjoy it. But many of us don’t. The majority of Betterment customers we surveyed said they hold most of their assets in managed accounts, with self-directed investing serving as a side outlet for exploration. That’s why we offer both ways to invest at Betterment. The payoff is personal Investing performance and price are often measured down to the hundredth of a percentage point. That’s “zero point zero one percent” (0.01%), also known as a “basis point" or "bip" for short. Here at Betterment, it’s our mission to make every one of the 25 bips we most commonly charge worth it. We measure our portfolio’s performance after those fees, so you see what you’ve really earned. And we don’t stop there. With direct indexing and fully paid securities lending coming soon to automated investing, you’ll get even more ways to make your money work harder.

Can a portfolio be too simple?

Can a portfolio be too simple? Total market funds offer simplicity, but by unbundling asset classes—and adding Betterment’s automation—you can make your money work harder. Key takeaways Single-fund portfolios are easy to build, but they’re harder to optimize for taxes and costs. Using multiple funds adds the flexibility to fine-tune allocations and unlock savings. Betterment’s automation and expert-built portfolios give you the best of both worlds: easy to invest in, and built to work harder. If you’re looking to build long-term wealth, you could do worse than investing in one or two low-cost, globally-diversified total market funds. But you could potentially do better—and spend less of your limited bandwidth—by using a few more pieces and putting our technology to work in your favor. That’s the value of Betterment’s automated investing and expert-built portfolios, and it begins with (surprise!) tax optimization. Harvesting losses for tax wins, and putting your assets in the right place Targeting more than a date Splitting hairs on fund fees, so customers can save millions Harvesting losses for tax wins, and putting your assets in the right place Tax-loss harvesting can help give your taxable investing an edge, and it happens when you sell an asset for a loss and replace it with a similar one. The downside of a total market fund, however, is you have to wait for the entire fund to experience a loss. If only one piece of it dips, you can’t unbundle the assets and harvest that specific piece. It’s sell all, or sell nothing. That’s a big reason why we switched from using a single fund for U.S. stocks in our Betterment-built portfolios, opting instead for three separate funds representing small, medium, and large-sized U.S. companies. If one of them presents a harvesting opportunity, we can swap it for a similar alternative. The second area where larger fund lineups shine is asset location, or strategically divvying up your portfolio’s assets among traditional, Roth, and/or taxable accounts. Stocks with the highest potential for growth, for example, are often better-suited for traditional accounts. Let them grow tax-free, the thinking goes, then settle up with Uncle Sam when you’re retired and more likely to be in a lower tax bracket. Our mathematically-rigorous spin on asset location is called Tax Coordination, and it’s yet another way our automated investing helps you keep more of what you earn. To start taking advantage of it, simply open any combination of the three account types above and follow a few easy steps. Targeting more than a date One of the most common single-fund options for retirement savings are target date funds. They date back to the 90s and became the default option in many 401(k) plans starting in the late 2000s. The growth of target date funds has been a good thing for investors, helping move the industry toward lower-cost, automated investing. Prior to their arrival, advisors had to manually adjust the asset allocations or “glide paths” of portfolios over time. Similar to total market funds, however, the bundling of target date funds brings with it some constraints. The first constraint is their relative lack of choice. Say you were born in 1988 and are targeting a traditional retirement age of 62. Most target date fund managers give you one option—the 2050 fund. Our automated investing, on the other hand, gives you more than a handful of portfolios to choose from, including ones tailored for social responsibility and innovation. More funds also creates more levers to fine-tune your exposure, helping manage risk in all sorts of situations. Take bond-heavy portfolios as an example. Rising interest rates can erode their value, so we dial up their exposure to short-term corporate debt and U.S. Treasuries specifically to help hedge against that risk. Splitting hairs on fund fees, so customers can save millions The relatively high cost of target date funds has been trending downward, and many total market funds can be found for expense ratios of less than 0.1%. But we can squeeze out even more savings by splitting a portfolio up and shopping for better deals. A single one hundredth of a percentage point in fund fees (what’s referred to as a “basis point” or “bip” in investing lingo) may not sound like much, but we owe it to our customers to make every one count. You could pay 6 basis points (0.06%), for example, for a total world stock fund like VT. Or you could pay one-third of that for your U.S. stock allocation by breaking it up into three funds (SPYM, SPMD, and SPSM) like we do with our Core portfolio and others. Using our customers’ nearly $20 billion worth of U.S. stocks as an example, that would amount to roughly $7.6 million in combined savings each year. Flexibility to stretch your investing dollars even farther A simple portfolio can be a great place to start, but it’s not always where your money works hardest. By strategically using a few more funds, we can sprinkle tax advantages on more of your investing, optimize across account types, and potentially unlock even more cost savings. All automatically. You get the simplicity you want, but with our tech doing the heavy lifting behind the scenes.

How donating shares instead of dollars can lead to tax-free investing

How donating shares instead of dollars can lead to tax-free investing And how we make it easy. Key takeaways 2017 legislation weakened the federal income tax incentive for donating to charity. Donating and replacing taxable shares, however, can unlock a new avenue for tax savings. Pairing the strategy with tax-loss harvesting can lead to even more savings. Betterment gives you two easy ways to donate shares: directly to one of our partner charities, or through a donor-advised fund. Donating to charity isn't the big tax write-off it used to be. Not since the 2017 Tax Cuts and Jobs Act watered down the charitable tax deduction. But altruistic investors such as yourself have another tax-saving option at your disposal: donating shares. In this article, we’ll walk you through: How donating (then replacing) shares resets their tax bill How adding tax-loss harvesting can plus-up the savings How we make it easy to donate shares How donating (then replacing) shares resets their tax bill Let's start with a couple prerequisites up front: You can only donate appreciated shares, meaning ones that have gained in value. We require that you've held them for at least a year to maximize the potential tax savings. You can only donate shares from a taxable investing account. That means tax-advantaged accounts like 401(k)s and IRAs—with one exception for those 70 ½ or older—are off the table. So if you'd like to start leveraging this tax strategy, you'll need to first open and fund a taxable investing account. Similar to the mechanics of tax-loss harvesting, donating shares lowers your taxes thanks to a little something called cost basis. Cost basis is the price you pay for a share. It's how the IRS calculates the profits (aka capital gains) on your investing, and by extension your taxes owed on that investing. By donating and (most importantly) replacing shares, you reset the price paid for that slice of your investing. This means a share that had increased in value by say, 20%, suddenly becomes, in the eyes of the IRS, a share that hasn't appreciated at all. It's as if all the profit to that point never happened. Don't worry; the capital gains are still very much there. And you're wealthier for it. But the taxes owed when you ultimately sell those investments will be lower than if you had never donated. How adding tax-loss harvesting can plus-up the savings Tax-loss harvesting (TLH) helps you defer taxes down the road, freeing up more cash to invest now. And it does this by letting you deduct taxes today in exchange for a higher tax bill in the future. You can think of it like handing Uncle Sam an IOU come tax time. But guess what happens when you donate a share that was originally part of a harvest? You erase its entire tax bill—IOU and all—up to that point. It's one of the few ways you can actually avoid paying taxes altogether on some of your investing. So it’s no wonder why this combo move has long been a favorite of the wealthy. Now, thanks to technology like ours, it's never been easier for everyday investors to do right while reaping the same rewards. How we make it easy to donate shares Before tech like ours helped lower barriers, donating shares required several steps, things like tracking down the charity’s brokerage information, figuring out which shares to give, and filling out the necessary forms. But with Betterment, it’s as easy as logging in on a desktop browser and making a few clicks. We show you exactly how much of your taxable investing is eligible to donate, and our TaxMax technology seeks out the most tax-efficient shares to sell and donate. We also give you two ways to give. Donate directly to more than a dozen partner charities. We don’t charge any processing fees, so your entire donation goes directly to them. Open a donor-advised fund (DAF) with our partners at Daffy and donate to that, then choose from up to 1.5 million nonprofits, schools, and faith-based organizations while your funds stay invested. You get the tax deduction up front and can then automate your giving or disperse funds as you go. DAFs have historically come with high minimums, high fees, and dated technology, but Daffy is doing its best to change that. DAFs compared Daffy Fidelity Schwab Vanguard Minimum to open $0 $0 $0 $25,000 Minimum annual cost $36 0.60% or $100 0.60% 0.60% or $250 Average investment fee 0.05% 0.54% 0.65% 0.06% Source: Daffy Give smarter. Save bigger. Feel better. By donating and replacing shares, you can give your taxable investing a fresh start. Pair it with tax-loss harvesting, and you could wipe out even more of your tax bill while keeping your money growing. And since Betterment takes care of the tricky parts, from choosing which shares to donate to handling the logistics, giving smarter has never been easier. It’s one simple move that helps your portfolio—and your favorite cause—thrive.

Self-directed investing, the Betterment way

What’s an IRA and how does it work?

What’s an IRA and how does it work? 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 $7,500 if you’re under 50, or $8,600 if you’re 50 or older. For a 401(k), the contribution limit for 2025 is $24,500 if you’re under 50, or $32,500 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.

Investing

Looking for a specific topic?

All Investing articles

Meet some of our Experts

Visit our full content library to see the full range of articles, videos, and more.