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Tax Optimization

What is Tax Coordination? How Asset Location Works at Betterment

What is Betterment's approach to asset location? It's called Tax Coordination, and it's a built-in tax optimization strategy for retirement goals at Betterment.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: February 27, 2019

If you are investing in multiple accounts, a sophisticated tax optimization strategy known as asset location can increase your after-tax returns.

While asset location requires detailed, continual work if you're trading on your own, our approach is Tax Coordination, which is built in to retirement goals at Betterment.

If you are investing in multiple accounts, a sophisticated tax optimization strategy known as asset location can increase your after-tax returns.

While asset location requires detailed, continual work if you’re trading on your own, our Tax Coordination approach is automated, and is built into retirement goals at Betterment.

Our Tax Coordination feature optimizes and automates a strategy called asset location for your retirement goals. Asset location can deliver additional after-tax returns while still maintaining your desired level of portfolio risk.

This advanced tax optimization strategy leverages our retirement goal setup, which allows you to manage multiple account types as a single goal-based portfolio. Tax Coordination then places assets that are taxed at a higher rate into accounts that are sheltered from taxes, like IRAs.

How does asset location work?

The potential after-tax returns you can earn with Tax Coordination are based on three basic factors.

  1. Your allocation of stocks and bonds. Your retirement goal’s portfolio has a specific allocation of stocks and bonds. Since each type of investment is taxed differently, your allocation can have a big impact on how Tax Coordination works.
  2. Your balances in each account type. Tax Coordination doesn’t change your initial balances that you’ve deposited within each separate account type, so if you’re just getting started at Betterment, your initial deposit or rollover can shape the impact of Tax Coordination.
  3. How long you plan to invest. Sheltering certain assets from taxes has a greater effect over time, because more money stays in your portfolio and it can keep growing.

Why does Tax Coordination lead to extra after-tax returns?

Tax Coordination automates the process of asset location. Asset location means buying your least tax-efficient assets in the accounts taxed most favorably, and the most tax-efficient assets in the accounts that are taxed least favorably. This is done while maintaining the desired risk level you’ve set for your overall retirement portfolio.

Normally, asset location within a globally diversified portfolio is a complex, mathematically rigorous, and continuous undertaking. Tax Coordination is Betterment’s way of making it easy—it’s built into every retirement goal. Tax Coordination is the automated implementation of asset location that is tailored to each investor’s personalized retirement goal.

How to Set up of Tax Coordination for Your Retirement Goal

When you set up a retirement goal at Betterment, we’ll ask you about your income and tax bracket, and if you fall into a qualifying tax bracket, we’ll recommend that you turn on Tax Coordination. In just a few clicks you’ll be set up.

Once your retirement goal is open, you’ll notice that you’ll have a taxable account within the goal by default. This account will leverage Tax Coordination if you contribute outside of your IRAs and/or a Betterment 401(k) plan. Tax Coordination also works if you only have a traditional IRA or 401(k) and a Roth IRA or 401(k), because traditional and Roth accounts are taxed differently.

Learn More about Tax Coordination

We’ve created a quick guide that walks you through some of the most frequently asked questions about Tax Coordination.

Learn more about Betterment’s approach to asset location in the Tax Coordination methodology. There we provide a detailed exploration of how the advanced tax optimization works. You should also review the Tax Coordination disclosure.

 

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