Betterment’s portfolio construction methodology Jan 7, 2026 8:00:00 AM Learn more about the process that underpins all the portfolios we build on behalf of customers. Table of contents Introduction Global diversification and asset allocation Portfolio optimization Tax management using municipal bonds The Value Tilt portfolio strategy The Innovative Technology portfolio strategy The Socially Responsible Investing portfolio strategies Conclusion Citations I. Introduction Betterment builds investment portfolios designed to help you make the most of your money and live the life you want. This guide lays out our portfolio construction process, one informed by real-world evidence and systematic decision-making. The Betterment Core portfolio serves as the foundation for all of the globally-diversified portfolios we construct. From there, specific adjustments are applied to other portfolios based on the investment objective of their particular strategies. These adjustments include additional allocations to value-focused or innovative stocks, or adherence to Socially Responsible Investing (SRI) criteria. For more information on the third-party portfolios we offer, such as the Goldman Sachs Smart Beta portfolio, see their respective pages and disclosures. When building a portfolio, any investment manager faces two main tasks: asset class selection and portfolio optimization. We detail our approach to these in the sections that follow. Our fund selection process, while equally as important, is covered in a separate methodology. II. Global diversification and asset allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for any given feasible level of risk. The objective of most long-term portfolio strategies is to maximize return for a given level of risk, which is measured in terms of volatility—the dispersion of those returns. In line with our approach of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory.1 A major tenet of Modern Portfolio Theory is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. Modern Portfolio Theory seeks to maximize expected return given an expected risk level or, equivalently, minimize expected risk given an expected return. Other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. Asset class selection Our approach to asset allocation starts with a universe of investable assets, which could be thought of as the “global market” portfolio.2 To capture the exposures of the asset classes for the global market portfolio, we evaluate available exchange-traded funds (ETFs) that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns portfolio construction with our fund selection methodology. All of our portfolios are constructed of the following asset classes: Stocks U.S. stocks International developed market stocks Emerging market stocks Bonds U.S. short-term treasury bonds U.S. inflation-protected bonds U.S. investment-grade bonds U.S. municipal bonds International developed market bonds Emerging market bonds We select U.S. and international developed market stocks as a core part of the portfolio. Historically, stocks exhibit a high degree of volatility, but provide some degree of inflation protection. Even though significant historical drawdowns, such as the global financial crisis in 2008 and pandemic outbreak in 2020, demonstrate the possible risk of investing in stocks, longer-term historical data and our forward expected returns calculations suggest that developed market stocks remain a core part of any asset allocation aimed at achieving positive returns. This is because, over the long term, developed market stocks have tended to outperform bonds on a risk-adjusted basis. To achieve a global market portfolio, we also include stocks from less developed economies, called emerging markets. Generally, emerging market stocks tend to be more volatile than U.S. and international developed stocks. And while our research shows high correlation between this asset class and developed market stocks, their inclusion on a risk-adjusted basis is important for global diversification. Note that we exclude frontier markets, which are even smaller than emerging markets, due to their widely-varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. We incorporate bond exposure because, historically, bonds have a low correlation with stocks, and they remain an important way to dial down the overall risk of a portfolio. To promote diversification and leverage various risk and reward tradeoffs, we include exposure to several asset classes of bonds. Asset classes excluded from Betterment portfolios While Modern Portfolio Theory would have us craft a portfolio to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion. Our portfolio construction process excludes commodities and natural resources asset classes. Specifically, while commodities represent an investable asset class in the global financial market, we have excluded commodities ETFs because of their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in our portfolios. We do provide exposure to real estate, but as a sector within stocks. Adding additional real estate exposure by including a REIT asset class would overweight the exposure to real estate relative to the overall market. Incorporating awareness of a benchmark Before 2024, we managed our portfolios in a “benchmark agnostic” manner, meaning we did not incorporate consideration of global stock and bond indices in our portfolio optimization, though we have always sought to optimize the expected risk-adjusted return of the portfolios we construct for clients. The “risk” element of this statement represents volatility and the related drawdown potential of the portfolio, but it could also represent the risk in the deviation of the portfolio’s performance relative to a benchmark. In an evolution of our investment process, in 2024 we updated our portfolio methodology to become “benchmark aware,” as we now calibrate our exposures based on a custom benchmark that expresses our preference for diversifying across global stocks and bonds. A benchmark, which comes in the form of a broad-based market index or a combination of indices, serves as a reference point when approaching asset allocation, understanding investment performance, and aligning the expectations of portfolio managers and clients. In our case, we created a custom benchmark that most closely aligns with our future expectations for global markets. The custom benchmark we have selected is composed of: The MSCI All Country World stock IMI index (MSCI ACWI IMI) The Bloomberg U.S. Universal Bond index The S&P US Treasury Bond 0-1 Year Index (for <40% stock allocations) Our custom benchmark is composed of 101 risk levels of varying percentage weightings of the stock and bond indexes, which correspond to the 101 risk level allocations in our Core portfolio. At low risk levels (allocations that are less than 40% stocks), we layer an allocation to the S&P US Treasury Bond 0-1 Year Index, which represents short-term bonds, into the blended benchmark. We believe that incorporating this custom benchmark into our process reinforces the discipline of carefully evaluating the ways in which our portfolios’ performance could veer from global market indices and deviate from our clients’ expectations. We have customized the benchmark with 101 risk levels so that it serves clients’ varying investment goals and risk tolerances. As we will explore in the following section, establishing a benchmark allows us to apply constraints to our portfolio optimization that ensures the portfolio’s asset allocation does not vary significantly from the geographic and market-capitalization size exposures of a sound benchmark. Our benchmark selection also makes explicit that the portfolio delivers global diversification rather than the more narrowly-concentrated and home-biased exposures of other possible benchmarks such as the S&P 500. III. Portfolio optimization As an asset manager, we fine-tune the investments our clients hold with us, seeking to maximize return potential for the appropriate amount of risk each client can tolerate. We base this effort on a foundation of established techniques in the industry and our own rigorous research and analysis. While most asset managers offer a limited set of model portfolios at a defined risk scale, our portfolios are designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable our Core portfolio strategy to be customized to 101 different stock-bond risk levels. Optimizing portfolios Modern Portfolio Theory requires estimating variables such as expected-returns, covariances, and volatilities to optimize for portfolios that sit along an efficient frontier. We refer to these variables as capital market assumptions (CMAs), and they provide quantitative inputs for our process to derive favorable asset class weights for the portfolio strategy. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model (CAPM) along with a utility function which allows us to optimize for the portfolio with a higher return for the risk that the investor is willing to accept. Computing forward-looking return inputs Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market.3 This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio.5 By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers.4 In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input. This matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the assets themselves. In another more recent evolution of our investment process, we also attempt to increase the robustness of our CMAs by averaging in the estimates of expected returns and volatilities published by large asset managers such as BlackRock, Vanguard, and State Street Global Advisors. We weight the contribution of their figures to our final estimates based on our judgment of the external provider’s methodology. Constrained optimization for stock-heavy portfolios After formulating our CMAs for each of the asset classes we favor for inclusion in our portfolio methodology, we then solve for target portfolio allocation weights (the specific set of asset classes and the relative distribution among those asset classes in which a portfolio will be invested) with the range of possible solutions constrained by limiting the deviation from the composition of the custom benchmark. To robustly estimate the weights that best balance risk and return, we first generate several thousand random samples of 15 years of expected returns for the selected asset classes based on our latest CMAs, assuming a multivariate normal distribution. For each sample of 15 years of simulated expected return data, we find a set of allocation weights subject to constraints that provide the best risk-return trade-off, expressed as the portfolio’s Sharpe ratio, i.e., the ratio of its return to its volatility. Averaging the allocation weights across the thousands of return samples gives a single set of allocation weights optimized to perform in the face of a wide range of market scenarios (a “target allocation”). The constraints are imposed to make the portfolio weights more benchmark-aware by setting maximum and minimum limits to some asset class weights. These constraints reflect our judgment of how far the composition of geographic regions within the portfolio’s stock and bond allocations should differ from the breakdown of the indices used in the benchmark before the risk of significantly varied performance between the portfolio strategy and the benchmark becomes untenable. For example, the share of the portfolio’s stock allocation assigned to international developed stocks should not be profoundly different from the share of international developed stocks within the MSCI ACWI IMI. We implement caps on the weights of emerging market stocks and bonds, which are often projected to have high returns in our CMAs, and set minimum thresholds for U.S. stocks and bonds. This approach not only ensures our portfolio aligns more closely with the benchmark, but it also mitigates the risk of disproportionately allocating to certain high expected return asset classes. Constrained optimization for bond-heavy portfolios For Betterment portfolios that have more than or equal to a 60% allocation of bonds, the optimization approach differs in that expected returns are maximized for target volatilities assigned to each risk level. These volatility targets are determined by considering the volatility of the equivalent benchmark. Manually established constraints are designed to manage risk relative to the benchmark, instituting a declining trend in emerging market stock and bond exposures as stock allocations (i.e., the risk level) decreases. Meaning that investors with more conservative risk tolerances have reduced exposures to emerging market stocks and bonds because emerging markets tend to have more volatility and downside-risk relative to more established markets. Additionally, as the stock allocation percentage decreases, we taper the share of international and U.S. aggregate bonds within the overall bond allocation, and increase the share of short-term Treasury, short-term investment grade, and inflation-protected bonds. This reflects our view that investors with more conservative risk tolerances should have increased exposure to short-term Treasury, short-term investment grade, and inflation-protected bonds relative to riskier areas of fixed income. The lower available risk levels of our portfolios demonstrate capital preservation objectives, as the shorter-term fixed income exposures likely possess less credit and duration risk. Clients invested in the Core portfolio at conservative allocation levels will likely therefore not experience as significant drawdowns in the event of waves of defaults or upward swings in interest rates. Inflation-protected securities also help buffer the lower risk levels from upward drafts in inflation. IV. Tax management using municipal bonds For investors with taxable accounts, portfolio returns may be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, we incorporate municipal bonds within the bond allocations of taxable accounts. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved by incorporating municipal bonds. For investors in states with some of the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state-specific municipal bonds. V. The Value Tilt portfolio strategy Existing Betterment customers may recall that historically the Core portfolio held a tilt to value companies, or businesses that appear to be potentially undervalued based on metrics such as price-to-earnings (P/E) ratios. Recent updates, however, have deprecated this explicit tilt that was expressed via large-, mid-, and small-capitalization U.S. value stock ETFs, while maintaining some exposure to value companies through broad market U.S. stock funds. We no longer favor allocating to value stock ETFs within our portfolio methodology in large part as a result of our adoption of a broad market benchmark, which highlights the idiosyncratic nature of such tilts, sometimes referred to as “off benchmark bets.” We believe our chosen benchmark that represents stocks through the MSCI ACWI IMI, which holds a more neutral weighting to value stocks, more closely aligns with the risk and return expectations of Betterment’s diverse range of client types across individuals, financial advisors, and 401(k) plan sponsors. Additionally, as markets have grown more efficient and value factor investing more popularized, potentially compressing the value premium, we have a marginally less favorable view of the forward-looking, risk-adjusted return profile of the exposure. That being said, we have not entirely lost conviction in the research supporting the prudence of value investing. The value factor’s deep academic roots drove decisions to incorporate the value tilt into Betterment’s portfolios from our company’s earliest days. For investors who wish to remain invested in a value strategy, we have added the Value Tilt portfolio, a separate option from the Core portfolio, to our investing offering. The Value Tilt portfolio maintains the Core portfolio’s global diversification across stocks and bonds while including a sleeve within the stock allocation of large-, mid-, and small-capitalization U.S. value funds. We calibrated the size of the value fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio. Based on this approach, investors should expect the Value Tilt portfolio to generally perform similarly to Core, with the potential to under- or outperform based on the return of U.S. value stocks. With the option to select between the Value Tilt portfolio or a Core portfolio now without an explicit allocation to value, the investment flexibility of the Betterment platform has improved. VI. The Innovative Technology portfolio strategy In 2021, Betterment launched the Innovative Technology portfolio to provide access to the thematic trend of technological innovation. The portfolio’s investment premise is based upon the thesis that, over the long term, the companies innovating and disrupting their respective industries are shaping our global economy and may be the winners of the next industrial revolution. Some of these themes the portfolio seeks to provide increased exposure to are: Artificial intelligence Alternative finance Clean energy Manufacturing Biotechnology Similar to the Value Tilt portfolio, the Core portfolio is used as the foundation of construction for the Innovative Technology portfolio. With this portfolio strategy, we calibrated the size of the innovative technology funds’ exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio. Through this process, the Innovative Technology portfolio maintains the same globally-diversified, low-cost approach that is found in Betterment’s investment philosophy. The portfolio, however, has increased exposure to risk given that innovation requires a long-term view, and may face uncertainties along the way. It may outperform or underperform depending on the return experience of the innovative technology funds’ exposure and the thematic landscape. To learn more, read the Innovative Technology portfolio disclosure. VII. The Socially Responsible Investing portfolio strategies Betterment introduced its first Socially Responsible Investing (SRI) portfolio in 2017 and has since expanded the options to include three distinct portfolios: Broad Impact, Social Impact, and Climate Impact. These SRI portfolios are built on the same foundational principles as the Core portfolio, utilizing various asset classes to create globally-diversified portfolios. However, they incorporate socially-responsible ETFs that align with specific Environmental, Social, and Governance (ESG) and shareholder engagement mandates, tailored to each SRI focus. Betterment’s SRI approach emphasizes three core dimensions: Reducing exposure to companies engaged in unsustainable activities Increasing investments in those addressing environmental and social challenges Allocating to funds that utilize shareholder engagement to promote responsible corporate behavior. This methodology ensures diversified, cost-efficient portfolios that resonate with investors' values. For more information, read our full Socially Responsible Investing portfolios methodology. VIII. Conclusion After setting the strategic weight of assets in our various Betterment portfolios, the next step in implementing the portfolio construction process is our fund selection methodology, which selects the appropriate ETFs for the respective asset exposure in a generally low-cost, tax-efficient way. In keeping with our philosophy, that process, like our portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time. The level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances. Most of our portfolios contain 101 individualized risk levels (each with a different percentage of the portfolio invested in stocks vs. bonds, informed by your financial goals, time horizon and risk tolerance). Finally, our overlay features of automated rebalancing, tax-loss harvesting, and our methodology for automatic asset location, which we call Tax Coordination, are designed to be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, to help each and every Betterment customer maximize value while invested at Betterment and when they take their money home. IX. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 4 Note that the risk aversion parameter is essentially a free parameter. 5 Ilmnen, A., Expected Returns.

How our Tax Coordination feature can boost your returns Nov 1, 2024 9:00:00 AM Our spin on asset location can help shelter retirement investment growth from some taxes. Taxes. You may try to think of them as little as possible, but they’re on our minds a lot. Especially when they relate to investments. That’s because we’re always looking to maximize our customers’ potential take-home returns—and key to that pursuit is minimizing how big of a bite taxes take. On that front, our Tax Coordination feature is a fully-automated approach to an investment strategy known as asset location—and it’s available at no additional cost. If you’re saving for retirement in more than one type of account, then asset location in general, and our spin on it specifically, can help to increase your after-tax expected returns without taking on additional risk. Here’s how. How Tax Coordination works Many Americans wind up saving for retirement in some combination of three account types: Taxable Tax-deferred (Traditional 401(k) or IRA) Tax-exempt (Roth 401(k) or Roth IRA) Each type of account gets a different tax treatment, and different assets are taxed differently as well. These rules make certain investments a better fit for one account type over another. Returns in IRAs and 401(k)s, for example, don’t get taxed annually, so they generally shelter growth from tax better than a taxable account. We’d rather shield assets that lose more to tax in these types of retirement accounts, assets such as bonds, whose dividends are usually taxed annually and at a high rate. In the taxable account, however, we’d generally prefer to have assets that don’t get taxed as much, assets such as stocks, whose growth in value (“capital gains”) is taxed at a lower rate and crucially only when they’re “realized,” or in other words, when they’re sold at a higher price than what you paid for them. Wisely applying this strategy to a globally-diversified portfolio can get complicated quickly. Check out our full Asset Location methodology if you’re curious what that complexity looks like—or keep reading for more of the simplified explanation. The big picture diversification of asset location When investing in more than one account, many people select the same portfolio in each one. This is easy to do, and when you add everything up, you get the same portfolio, only bigger. To illustrate this approach, here’s what it looks like with a hypothetical asset allocation of 70% stocks and 30% bonds. The different shades of green represent various types of stocks, and the different shades of blue represent various types of bonds. But as long as all the accounts add up to the portfolio we want, each individual account on its own doesn’t have to mirror that portfolio. Each asset can go in the account where it makes the most sense from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase the after-tax expected return without taking on more risk. This is asset location in action, and here’s what it looks like, again for illustrative purposes: This is the same overall portfolio as we originally showed, except we redistributed the assets unevenly to reduce taxes. Note that the aggregate allocation is still a 70/30 split of stocks and bonds. The concept of asset location isn’t new. Advisors and sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for more benefit is very mathematically-complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts. Our expert-built technology handles all of the complexity in a way that a manual approach just can’t match. Our rigorous research and testing, as outlined in our Asset Location methodology, demonstrates that accounts managed by Tax Coordination are expected to yield meaningfully higher after-tax returns than uncoordinated accounts. How to benefit from Betterment’s Tax Coordination To benefit from from our Tax Coordination feature, you first need to be a Betterment customer with a balance in at least two of the following types of Betterment accounts: Taxable account Tax-deferred account: A Traditional IRA or a Betterment Traditional 401(k) offered by your employer. Tax-exempt account: A Roth IRA or a Betterment Roth 401(k) offered by your employer. Note that you can only include a 401(k) in a goal using Tax Coordination if it’s one we manage on behalf of your current or former employer. If your employer doesn’t currently use Betterment to provide their 401(k) plan, tell them to give us a look at betterment.com/work! If you have an old 401(k) with a previous employer, you can still benefit from our Tax Coordination feature by rolling it over to a Betterment IRA. For step-by-step instructions on how to set up Tax Coordination in your Betterment account, as well as answers to frequently asked questions, head on over to our Help Center. Or if you’re not yet a Betterment customer, get started by signing up today.

Can a portfolio be too simple? Dec 10, 2025 2:22:50 PM 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 Betterment Manages Risks in Your Portfolio Dec 20, 2024 12:00:00 AM Betterment’s tools can keep you on track with the best chance of reaching your goals. Investing always involves some level of risk. But you should always have control over how much risk you take on. When your goals are decades away, it's easier to invest in riskier assets. The closer you get to reaching your goals, the more you may want to play it safe. Betterment’s tools can help manage risk and keep you on track toward your goals. In this guide, we’ll: Explain how Betterment provides allocation advice Talk about determining your personal risk level Walk through some of Betterment’s automated tools that help you manage risk Take a look at low-risk portfolios The key to managing your risk: asset allocation Risk is inherent to investing, and to some degree risk is good. High risk, high reward, right? What’s important is how you manage your risk. You want your investments to grow as the market fluctuates. One major way investors manage risk is through diversification. You’ve likely heard the old cliche, “Don’t put all your eggs in one basket.” This is the same reasoning investors use. We diversify our investments, putting our eggs in various baskets, so to speak. This way if one investment fails, we don’t lose everything. But how do you choose which baskets to put your eggs in? And how many eggs do you put in those baskets? Investors have a name for this process: asset allocation. Asset allocation involves splitting up your investment dollars across several types of financial assets (like stocks and bonds). Together these investments form your portfolio. A good portfolio will have your investment dollars in the right baskets: protecting you from extreme loss when the markets perform poorly, yet leaving you open to windfalls when the market does well. If that sounds complicated, there’s good news: Betterment will automatically recommend how to allocate your investments based on your individual goals. How Betterment provides allocation advice At Betterment, our recommendations start with your financial goals. Each of your financial goals—whether it’s a vacation or retirement—gets its own allocation of stocks and bonds. Next we look at your investment horizon, a fancy term for “when you need the money and how you’ll withdraw it.” It’s like a timeline. How long will you invest for? Will you take it out all at once, or a little bit at a time? For a down payment goal, you might withdraw the entire investment after 10 years once you’ve hit your savings mark. But when you retire, you’ll probably withdraw from your retirement account gradually over the course of years. What if you don’t have a defined goal? If you’re investing without a timeline or target amount, we’ll use your age to set your investment horizon with a default target date of your 65th birthday. We’ll assume you’ll withdraw from it like a retirement account, but maintain a slightly riskier portfolio even when you hit the target date, since you haven’t decided when you'll liquidate those investments. But you’re not a “default” person. So why would you want a default investment plan? That’s why you should have a goal. When we know your goal and time horizon, we can determine the best risk level by assessing possible outcomes across a range of bad to average markets. Our projection model includes many possible futures, weighted by how likely we believe each to be. By some standards, we err on the side of caution with a fairly conservative allocation model. Our mission is to help you get to your goal through steady saving and appropriate allocation, rather than taking on unnecessary risk. How much risk should you take on? Your investment horizon is one of the most important factors in determining your risk level. The more time you have to reach your investing goals, the more risk you can afford to safely take. So generally speaking, the closer you are to reaching your goal, the less risk your portfolio should be exposed to. This is why we use the Betterment auto-adjust—a glide path (aka formula) used for asset allocation that becomes more conservative as your target date approaches. We adjust the recommended allocation and portfolio weights of the glide path based on your specific goal and time horizon. Want to take a more aggressive approach? More conservative? That’s totally ok. You’re in control. You always have the final say on your allocation, and we can show you the likely outcomes. Our quantitative approach helps us establish a set of recommended risk ranges based on your goals. If you choose to deviate from our risk guidance, we’ll provide you with feedback on the potential implications. Take more risk than we recommend, and we’ll tell you we believe your approach is “too aggressive” given your goal and time horizon. Even if you care about the downsides less than the average outcome, we’ll still caution you against taking on more risk, because it can be very difficult to recover from losses in a portfolio flagged as “too aggressive.” On the other hand, if you choose a lower risk level than our “conservative” band, we'll label your choice “very conservative.” A downside to taking a lower risk level is you may need to save more. You should choose a level of risk that’s aligned with your ability to stay the course. An allocation is only optimal if you’re able to commit to it in both good markets and bad ones. To ensure you’re comfortable with the short-term risk in your portfolio, we present both extremely good and extremely poor return scenarios for your selection over a one-year period. How Betterment automatically optimizes your risk An advantage of investing with Betterment is that our technology works behind the scenes to automatically manage your risk in a variety of ways, including auto-adjusted allocation and rebalancing. Auto-adjusted allocation For most goals, the ideal allocation will change as you near your goal. 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, without having to sell any assets. If we do need to sell 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. 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. 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% bonds), we can take the hint. You likely don’t want to worry about market volatility. So in that case, we recommend that you invest everything in these ETFs. At 100% bonds and 0% stocks, a Betterment Core portfolio consists of 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 100% bond portfolio are the actual yields of the underlying assets after fees. Since we’re investing directly in funds that are paying prevailing market rates, you can feel confident that the yield you receive is fair and in line with prevailing rates.

Backdoor Roths and beyond: The four camps who can benefit Feb 6, 2024 10:41:21 AM Roth IRA conversions can unlock serious savings, especially if you find yourself in one of these scenarios. Roth IRAs and their tax-free perks are pretty great—so great that in some scenarios, it can make sense to convert pre-tax dollars from traditional retirement accounts into post-tax dollars in a Roth IRA. This is what’s known as a Roth conversion. You’re effectively taking those pre-tax funds and telling Uncle Sam you’d rather pay taxes on them now in exchange for the benefit of tax-free and penalty-free withdrawals in retirement. And if you need the money earlier, the IRS requires only that you wait five years before withdrawing each conversion to avoid a 10% penalty. So who do Roth conversions appeal to in particular? Four types of people: High earners and the “backdoor” Roth conversion Recent retirees and unwelcome RMDs Early retirees and the Roth conversion “ladder” People experiencing temporary income dips High earners and the “backdoor” Roth conversion Did you know the IRS restricts access to Roth IRAs based on income? Shut the front door! Yes, if your income exceeds these eligibility limits, you can’t contribute directly to a Roth IRA. But as the saying goes, when one door closes, another door opens. A “backdoor,” more specifically. So if you make too much money, fear not – you can contribute indirectly to a Roth IRA via a Roth conversion widely known as a “backdoor” Roth. This entails contributing post-tax dollars first to a traditional IRA, then converting those funds to a Roth IRA. If you’ve never contributed to a traditional IRA before, pulling off a backdoor Roth can be simple, especially if you use Betterment. Open both a traditional and Roth IRA with us, fund the traditional, then convert those funds to your Roth IRA once they’ve settled. Done! If you have any existing traditional IRA funds, however, things get a little more complicated due to something called the pro rata rule. In short, you need to move any pre-tax dollars out of your traditional IRA(s) into an employer-sponsored retirement account like a 401(k) before you can use the account as a backdoor. This gets even more complicated if you have both pre- and post-tax dollars mixed together in your traditional IRA(s). Before going down the road of a backdoor Roth conversion, or any Roth conversion really, we highly recommend seeking the advice of a financial advisor, as well as a tax advisor in certain cases. They can help assess both your current situation and future projections. Recent retirees and unwelcome RMDs The IRS doesn’t let you keep funds in your traditional retirement accounts indefinitely. They’re meant to be spent, after all. So starting at age 73, annual required minimum distributions (RMDs) from these accounts kick in. RMDs aren’t inherently a bad thing, but if your expenses can already be covered from other sources, RMDs will just raise your tax bill unnecessarily. You can get ahead of this and lower your future amount of RMDs by converting traditional account funds to a Roth IRA before you reach RMD age. That’s because Roth IRAs are exempt from RMDs. And as an added benefit, you’ll minimize taxes on Social Security benefits and Medicare premiums later on in retirement. Just make sure you convert those funds before you turn 73, because once RMDs kick in, those amounts can’t be converted. Early retirees and the Roth conversion “ladder” If you want to retire early, even by “just” a few years, you very well might encounter a problem: Most of your retirement savings are tied up in tax-advantaged 401(k)s and IRAs, which slap you with a 10% penalty if you withdraw the funds before the age of 59 ½. A few exceptions to this early withdrawal rule exist, the biggest for early retirees being that contributions to a Roth IRA (i.e., not the gains you may see on those contributions) can be withdrawn early without taxes or penalties, in this specific order: “Regular” contributions made directly to a Roth IRA. As an aside, you can always withdraw these funds tax-free and penalty-free without waiting five years. Once you’ve burned through regular contributions, the IRS allows you to withdraw contributions that were converted from traditional 401(k)s and traditional IRAs! You won’t pay any additional taxes on these withdrawn contributions because taxes have already been paid. But withdrawn conversions (item #2 above) typically are still subject to a 10% penalty if withdrawn before 5 years. Think of this rule as a speed bump in an otherwise swift shortcut. So what does all of this mean for early retirees? Starting five years before they plan on retiring, they can create a “ladder” looking something like the table below (note: dollar amounts are hypothetical). They convert funds each year, pay taxes on them at that time, then withdraw them five years later 10% penalty-free and sans any additional taxes. Time Amount converted Amount withdrawn Source of withdrawal 5 years pre-retirement $40,000 $0 N/A 4 years pre-retirement $40,000 $0 N/A 3 years pre-retirement $40,000 $0 N/A 2 years pre-retirement $40,000 $0 N/A 1 year pre-retirement $40,000 $0 N/A Retired early! 🎉 Year 1 of retirement $40,000 $40,000 5 years pre-retirement Year 2 of retirement $40,000 $40,000 4 years pre-retirement Year 3 of retirement $40,000 $40,000 3 years pre-retirement Year 4 of retirement $40,000 $40,000 2 years pre-retirement Year 5 of retirement $40,000 $40,000 1 year pre-retirement Etc. Etc. Etc. Etc. People experiencing temporary income dips Say you find yourself staring at a significantly smaller income for the year. Maybe you lost your job. Maybe you work on commission and had a down year. Or maybe you had a big tax writeoff. Whatever the reason, that dip in income means you’re currently in a lower tax bracket, and it may be wise to pay taxes on some of your pre-tax investments now at that lower rate compared to the higher rate when your income bounces back. Watch out for potential Roth conversion pitfalls Each of these scenarios requires careful tax planning, so again, we recommend working with a trusted financial advisor and/or tax advisor. They can help you avoid the most common Roth conversion mistakes and take full advantage of this post-tax money maneuver. Our CERTIFIED FINANCIAL PLANNER™ professionals are here to offer on-demand guidance.

The benefits of estimating your tax bracket when investing Apr 6, 2026 12:00:00 AM Knowing your tax bracket opens up a huge number of planning opportunities that have the potential to save you taxes and increase your investment returns. If you’re an investor, knowing your tax bracket opens up a number of planning opportunities that can potentially decrease your tax liability and increase your investment returns. Investing based on your tax bracket is something that good CPAs and financial advisors, including Betterment, do for customers. Because the IRS taxes different components of investment income (e.g., dividends, capital gains, retirement withdrawals) in different ways depending on your tax bracket, knowing your tax bracket is an important part of optimizing your investment strategy. In this article, we’ll show you how to estimate your tax bracket and begin making more strategic decisions about your investments with regards to your income taxes. First, what is a tax bracket? In the United States, federal income tax follows what policy experts call a "progressive" tax system. This means that people with higher incomes are generally subject to a higher tax rate than people with lower incomes. Tax year 2025 brackets for 2026 tax filings Tax rate Single filers Married filing jointly 10% $0–$11,925 $0–$23,850 12% $11,926–$48,475 $23,851–$96,950 22% $48,476–$103,350 $96,951–$206,700 24% $103,351–$197,300 $206,701–$394,600 32% $197,301–$250,525 $394,601–$501,050 35% $250,526–$626,350 $501,051–$751,600 37% $626,351 or more $751,601 or more Source: Internal Revenue Service Instead of thinking solely in terms of which single tax bracket you fall into, however, it's helpful to think of the multiple tax brackets each of your dollars of taxable income may fall into. That's because tax brackets apply to those specific portions of your income. For example, let's simplify things and say there's hypothetically only two tax brackets for single filers: A tax rate of 10% for taxable income up to $10,000 A tax rate of 20% for taxable income of $10,001 and up If you're a single filer and have taxable income of $15,000 this year, you fall into the second tax bracket. This is what's typically referred to as your "marginal" tax rate. Portions of your income, however, fall into both tax brackets, and those portions are taxed accordingly. The first $10,000 of your income is taxed at 10%, and the remaining $5,000 is taxed at 20%. How difficult is it to estimate my tax bracket? Luckily, estimating your tax bracket is much easier than actually calculating your exact taxes, because U.S. tax brackets are fairly wide, often spanning tens of thousands of dollars. That’s a big margin of error for making an estimate. The wide tax brackets allow you to estimate your tax bracket fairly accurately even at the start of the year, before you know how big your bonus will be, or how much you will donate to charity. Of course, the more detailed you are in calculating your tax bracket, the more accurate your estimate will be. And if you are near the cutoff between one bracket and the next, you will want to be as precise as possible. How Do I Estimate My Tax Bracket? Estimating your tax bracket requires two main pieces of information: Your estimated annual income Tax deductions you expect to file These are the same pieces of information you or your accountant deals with every year when you file your taxes. Normally, if your personal situation has not changed very much from last year, the easiest way to estimate your tax bracket is to look at your last year’s tax return. The 2017 Tax Cuts and Jobs Act changed a lot of the rules and brackets. The brackets may also be adjusted each year to account for inflation. Thus, it might make sense for most people to estimate their bracket by crunching new numbers. Estimating Your Tax Bracket with Last Year’s Tax Return If you expect your situation to be roughly similar to last year, then open up last year’s tax return. If you review Form 1040, you can see your taxable income on Page 1, Line 15, titled “Taxable Income.” As long as you don’t have any major changes in your income or personal situation this year, you can use that number as an estimate to find the appropriate tax bracket. Estimating Your Tax Bracket by Predicting Income, Deductions, and Exemptions Estimating your bracket requires a bit more work if your personal situation has changed from last year. For example, if you got married, changed jobs, had a child or bought a house, those, and many more factors, can all affect your tax bracket. It’s important to point out that your taxable income, the number you need to estimate your tax bracket, is not the same as your gross income. The IRS generally allows you to reduce your gross income through various deductions, before arriving at your taxable income. When Betterment calculates your estimated tax bracket, we use the two factors above to arrive at your estimated taxable income. You can use the same process. Add up your income from all expected sources for the year. This includes salaries, bonuses, interest, business income, pensions, dividends and more. If you’re married and filing jointly, don’t forget to include your spouse’s income sources. Subtract your deductions. Tax deductions reduce your taxable income. Common examples include mortgage interest, property taxes and charity, but you can find a full list on Schedule A – Itemized Deductions. If you don’t know your deductions, or don’t expect to have very many, simply subtract the Standard Deduction instead. By default, Betterment assumes you take the standard deduction. If you know your actual deductions will be significantly higher than the standard deduction, you should not use this assumption when estimating your bracket, and our default estimation will likely be inaccurate. The number you arrive at after reducing your gross income by deductions and exemptions is called your taxable income. This is an estimate of the number that would go on line 15 of your 1040, and the number that determines your tax bracket. Look up this number on the appropriate tax bracket table and see where you land. Again, this is only an estimate. There are countless other factors that can affect your marginal tax bracket such as exclusions, phaseouts and the alternative minimum tax. But for planning purposes, this estimation is more than sufficient for most investors. If you have reason to think you need a more detailed calculation to help formulate your financial plan for the year, you can consult with a tax professional. How Can I Use My Tax Bracket to Optimize My Investment Options? Now that you have an estimate of your tax bracket, you can use that information in many aspects of your financial plan. Here are a few ways that Betterment uses a tax bracket estimate to give you better, more personalized advice. Tax-Loss Harvesting: This is a powerful strategy that seeks to use the ups/downs of your investments to save you taxes. However, it typically doesn't make sense if you fall into a lower tax bracket due to the way capital gains are taxed differently. Tax Coordination: This strategy reshuffles which investments you hold in which accounts to try to boost your after-tax returns. For the same reasons listed above, if you fall on the lower end of the tax bracket spectrum, the benefits of this strategy are reduced significantly. Traditional vs. Roth Contributions: Choosing the proper retirement account to contribute to can also save you taxes both now and throughout your lifetime. Generally, if you expect to be in a higher tax bracket in the future, Roth accounts are best. If you expect to be in a lower tax bracket in the future, Traditional accounts are best. That’s why our automated retirement planning advice estimates your current tax bracket and where we expect you to be in the future, and uses that information to recommend which retirement accounts make the most sense for you. In addition to these strategies, Betterment’s team of financial experts can help you with even more complex strategies such as Roth conversions, estimating taxes from moving outside investments to Betterment and structuring tax-efficient withdrawals during retirement. Tax optimization is a critical part to your overall financial success, and knowing your tax bracket is a fundamental step toward optimizing your investment decisions. That’s why Betterment uses estimates of your bracket to recommend strategies tailored specifically to you. It’s just one way we partner with you to help maximize your money.