Josh Rubin

What Is a Tax Advisor? Attributes to Look For Since Betterment isn't a tax advisor, we often suggest that customers see a tax advisor regarding certain issues or decisions. Who exactly is a tax advisor and how should you think about picking one? Tax season is now upon us. Now that you’ve probably received all of your tax forms, you may be facing a choice for how to proceed with filing: do it yourself with tax software or hire a professional tax advisor? Although it certainly will be more expensive than using tax software, hiring a tax advisor makes sense for certain individuals, depending on their financial circumstances. Here are two important factors to consider when deciding if a tax advisor is right for you: Time: Even with tax software guiding you, filing your taxes yourself can be time consuming. You’ll need to make sure that you’ve entered or imported the data from your tax forms correctly, which often takes at least several hours, and your time is worth something. Complexity: The more complicated your financial situation, the more a tax advisor may be able to help you. Have partnership income, or income from an S corporation? Been subject to alternative minimum tax in past years? Received or exercised stock options this year? Tax software can handle these issues, but it will take time, and the risk of mistakes (and even an audit) increases. If you decide that your situation warrants professional assistance, some further questions are worth exploring: what exactly is a tax advisor and how should you think about picking one? Who counts as a tax advisor? Anyone with an IRS Prepare Tax Identification number (a “PTIN” for short) can be paid to file tax returns on behalf of others. But merely having a PTIN doesn’t tell you much about the tax preparer; tax preparers have different experience, skills, and expertise. What you really want is a tax advisor, a professional with a certification and experience level that qualifies her not only to prepare your return, but to use her knowledge of the tax code to provide advice on your financial situation. There are three different professional certifications to consider, each of which qualifies a tax advisor to practice with unlimited representation rights before the IRS. This means that in addition to preparing returns, they also are licensed to represent their clients on audits, payments and collection issues, and appeals. Certified Public Accountants (CPAs) CPAs have completed coursework in accounting, passed the Uniform CPA Examination, and are licensed by state boards of accountancy (which require that they meet experience and good character standards). Some, but not all, CPAs specialize in tax preparation and planning. You can find complaints about CPAs either by searching records with state boards of accountancy and at Better Business Bureaus. Enrolled Agents Enrolled agents are licensed by the Internal Revenue Service after they have passed a three-part examination and a background check. The IRS maintains complaints about enrolled agents on the website of its office for enrollment, and you can also find complaints on the National Association of Enrolled Agents website. Licensed Tax Attorneys Licensed attorneys have graduated from law school, passed a state bar exam, and are admitted to the bar in at least one state. Some, but not all, attorneys specialize in tax preparation and planning. Many tax attorneys have completed an additional year of law school study in a master’s program in tax (called a Tax LL.M. degree). Disciplinary actions against attorneys can be found by searching the state bar associations with which the attorney is registered. How to Select a Tax Advisor or Tax Consultant No tax advisor with one of the certifications described above is necessarily better than any of the others in all situations. Rather, what matters most is: How the advisor approaches the tax preparation process, including the specific experience the tax advisor has with issues relevant to your particular financial situation. Whether you feel comfortable with the tax advisor. How the advisor structures their fees. You may be able to screen potential advisors along several of these dimensions based on information you can find about them online; for others, an initial meeting will be critical to determine if the advisor is right for you. 1. Assess your confidence in the quality of a tax advisor's recommendations, as well as their experience. Here are a few specific factors to consider carefully when assessing the potential quality of a tax advisor's work. First, you should try to identify a tax advisor who will act ethically and with integrity. Before scheduling a meeting with a potential tax advisor, check to see if the advisor has been subject to any complaints, disciplinary actions, or other ethical infractions. When meeting with the advisor, be on the lookout for outlandish promises: if an advisor guarantees you a certain refund without having first looked at your returns, you should be wary (any promise that sounds too good to be true probably is). If the advisor suggests taking a position on a tax return that strikes you as overly aggressive (because it is not grounded in your actual financial situation) or if you simply do not understand something the advisor is saying, make sure to ask, and keep asking until you are satisfied with the answer. Having a tax advisor prepare your returns does not take away your responsibility for the accuracy of your tax return. Of course, an advisor who knowingly takes an improper position on a tax return will face consequences, but it is your return, and you can too. A good tax advisor also should provide more value than simply filling out your returns. She should help you to structure your finances in an optimal way from a tax perspective. Not every tax advisor has expertise with every nuance of the tax code, and so you’ll want to make sure that the advisor you select has significant experience with the particular issues for which you’re seeking expert advice. Of course, there are certain common issues that every good advisor should know: for example, how to maximize the value and efficacy of your charitable contributions, how to weigh the tax tradeoffs between renting and owning a home, or how to save money for or gift money to family members. For other less common situations, however, you’ll want an advisor with specific experience. If you own a business or are self-employed, if you work for a startup and own a significant number of stock options, or if some portion of your income is reported on a K-1 (because you are a partner in a business or own shares in an S corporation), you likely will be best served by finding an advisor who has worked with a significant number of clients with these tax issues. Finally, maintaining the security of your personal information is more important than ever these days, and the inputs for your taxes is some of the most sensitive information you have. There will always be some risk of data breaches, but a good tax advisor will take steps to safeguard your information. Make sure that you ask about how the tax advisor stores your personal information and what methods she uses to communicate with you regarding sensitive topics. You also should ask about whether the advisor has ever been subject to a data breach and what steps the advisor is taking to protect against future ones. 2. Assess your comfort level with the working relationship. You want to make sure you have a good rapport with your tax advisor, and that you feel like you understand each other. At your first meeting, make sure to bring three years’ worth of old tax returns for your advisor to review. Ask if you missed any deductions, and if your old returns raise any audit flags. Consider the advisor’s responses. Does the advisor seem willing to spend time with you to ask thorough questions to fully understand your situation? Or does she rush through in a way that makes you feel like she might be missing certain issues or nuances? Does the advisor explain herself in a way that is understandable to you, even though you don’t have a tax background? Or does the advisor leave you confused? A tax advisor may work by herself or be a member of a larger organization or practice. Each approach has its benefits and drawbacks. You can be sure that a solo practitioner will be the one who actually prepares your returns, but it may be harder to reach the advisor during the height of tax season, and the advisor may find it difficult to get a second opinion on tricky issues or issues outside her core areas of expertise. On the other hand, although the collective expertise of a larger practice may exceed that of even a very talented advisor practicing on her own, it may be more difficult to ensure that your return is prepared personally by your advisor. Finally, think about whether you want to work with a tax advisor who is already part of your social network, or who has been referred by a trusted family member or friend. On the one hand, having the seal of approval of someone you know and trust may help to assure you that the advisor is right for you. On the other hand, consider whether it will be harder to part ways with the advisor down the road if she fails to meet your standards. 3. Evaluate the cost of the tax advice. The final issue you’ll want to think about is cost. Tax preparation services are a low margin business (particularly with the competition that tax preparers face from low cost software), but you can expect to pay more for tax planning services or advice. The best cost structure is one where the tax advisor charges for her time or for the specific forms that the advisor completes and files. By paying for the advice itself and not a particular outcome, this cost arrangement properly aligns the incentives between your tax advisor and you. Be wary of compensation structures that create the potential for conflicts of interest between you and and your tax advisor. For example, some tax advisors may try to earn additional revenue from you by selling other services or financial products along with tax preparation. Ultimately, when it comes to cost, your goal should not be solely to minimize your combined out of pocket cost to the IRS and your advisor for this year’s tax return. Rather, you should take a longer term view, recognizing that good, personalized tax advice can help you to structure your financial life in a tax-efficient way that can pay dividends for years to come.

FDIC Insurance: What It Is And How It Works Deposit insurance was created in 1933 by Congress to restore faith in the U.S. banking system. Learn about how deposit insurance works and what it can mean for your cash. Money that’s been deposited into a bank is generally thought of as safe. This is partly because the FDIC insures bank deposits. But what exactly is FDIC insurance, and how does it work? First, we need to know how banks make money from deposits. Please note that Betterment is not a bank. When you put money in a deposit account at a bank—let’s say in a checking account or a CD—the money doesn’t just sit there. Instead, the bank turns around and lends it out to other parties who are in need of loans. The parties that borrow from the bank repay those loans over a longer period of time: think mortgages or lines of credit for businesses. The bank earns money by charging a higher rate of interest on the loans it offers than the interest it pays you on your deposited funds. The bank usually owes you the money that you’ve deposited sooner than the bank’s borrowers owe what they’ve borrowed back to the bank. This is because many deposit accounts that banks offer provide depositors with immediate access to their funds at any time. This process is called maturity transformation, and it’s at the heart of our modern economic system. It usually works out well for all of the parties involved. You get a place to stash money that you don’t need to spend immediately, other parties get loans to finance productive economic activities, and the bank earns a profit. Bank Runs and the Great Depression What happens when the arrangement doesn’t work out so well? Because the bank keeps only a fraction of customers deposits on hand at any given time, there isn’t enough money on hand to allow every single account holder to withdraw their money from the bank at the same time. If too many people want to access their cash at the same time—known as a “run” on the bank —the bank won’t be able to satisfy every withdrawal request. This can happen during times of economic stress. If there’s a recession or a downturn, and borrowers from the bank have trouble making their regular principal and interest payments to the bank, depositors at the bank may start to get concerned about being able to get their deposits back. The depositors might all try to withdraw their money at the same time. This is exactly what happened during the Great Depression. Borrowers had trouble making payments back to the bank, depositors became concerned that the bank wouldn’t have their money when they needed it, and the depositors all tried to withdraw their money at the same time. This created a vicious cycle, and many banks failed. What is deposit insurance? To restore confidence in the banking system, which had suffered from thousands of bank failures over the preceding few years, Congress created the Federal Deposit Insurance Corporation (“FDIC”) to insure bank deposits. When Congress created the FDIC in 1933, the insurance limit was only $2,500. It has been raised steadily since then, and was last raised during the financial crisis of 2008 to the current limit of $250,000. The concept of deposit insurance is relatively simple: if a bank fails, the government will step in and pay back up to a certain amount of deposits that otherwise would be lost. This helps to ensure confidence in the banking system and helps to prevent bank runs. If we can all rest assured knowing that the government will step in to insure our deposits if our banks fail, it’s less likely that we’ll all panic and try to withdraw our money from the bank at the same time. In turn, banks are more likely to survive economic downturns without failing. Deposit insurance prevents the vicious cycle from occurring in the first place. How Deposit Insurance Works Deposit insurance isn’t free, but the good news is that there is no direct cost to you as a consumer. Banks themselves pay the premiums to the FDIC in order to receive the insurance coverage. See if your bank participates in the FDIC program by searching your bank’s name on the FDIC website. FDIC member banks also typically display their membership information prominently on their own websites. The table below lists the most common types of banking products and indicates whether or not they are typically covered by deposit insurance through the FDIC—as long as the institution is a member firm. Source: FDIC and SIPC Note that investment products generally aren’t covered by FDIC insurance. Instead, they are protected by SIPC up to a certain limit, which covers losses due to failures of member broker-dealers in certain circumstances. What are the limits? There are limits to the FDIC insurance coverage. The FDIC insures only up to $250,000 of deposits for:         a) a single depositor,         b) at a single banking institution,         c) in each account ownership category. Examples of a single depositor include an individual, a business held as a sole proprietorship, or an estate. Examples of ownership categories include individual accounts, joint accounts, retirement accounts, and trusts. You could receive more than $250,000 of FDIC insurance at a single bank, depending on how your deposits are spread among multiple ownership categories. In the example below, a depositor has an individual checking account holding $100,000, and a joint checking account at the same bank holding $200,000. Even though the total between the two accounts is $300,000, which is over the standard limit of $250,000, the full balance would be covered because it’s split across two types of account ownership categories.   You could also receive more than $250,000 of FDIC insurance if your deposits are spread across multiple banks, as long as the banks are truly separate and not just continued branches of one single bank. In the example below, Bank A holds $250,000, Bank B holds $250,000, and Bank C holds $50,000—all in individual accounts. Although the total across all three banks is $550,000—well beyond the standard limit of $250,000 for the individual account ownership category at a single bank—each separate balance is still fully covered due to the fact that the funds are held at three separate banks. What if my bank fails? The FDIC and state banking regulators monitor banks on an ongoing basis to ensure that they are financially able to meet their obligations. If an FDIC member bank is determined to be unable to meet its obligations because it is insolvent, the FDIC will close the bank and put it into a status known as receivership. In receivership, the FDIC will settle the bank’s debts and sell the bank’s assets—typically to another bank. In addition to overseeing the receivership, the FDIC also will pay out the insurance to depositors of a failed bank. If your bank closes, the FDIC will reach out to each customer by sending a letter to the address it has on file. You might also hear of your bank’s failure on the news, or on notices either at the bank’s physical location or on their website—especially if you use an online bank. After your bank closes, the FDIC aims to pay your deposits back to you within 2 business days. If you had more money deposited than what is covered by current FDIC limits, you could then file a claim against the bank’s estate for any non-insured funds that were lost. After the bank’s assets are liquidated and sold as part of the receivership process, you may be entitled to a portion of those assets, if anything is left over. The FDIC was created to restore faith in the banking system. We hope that our explanation of how deposit insurance works helps you to feel confident as you manage your cash.

Managed Account or Self-Directed Brokerage Account? Let’s explore the key differences between two types of common investment accounts: managed accounts and self-directed brokerage accounts. You’ve decided that you want to open an investment account to help achieve your financial goals—great start. What kind of account are you going to open? Two types of investment accounts to consider are managed accounts and self-directed brokerage accounts. There are also other types of accounts, but for simplicity, we’ll focus on just these two common types. Neither is the universally better option for every investor in every situation, so it’s important to understand the differences. Managed Accounts With a managed account, you give your investment advisor (or portfolio manager) discretionary authority over the account—you give up control over which securities to buy and sell in the account and instead give full control to the advisor. By contrast, non-discretionary investment advisory services provided by an advisor require you to be the one to take action. They save you time and offer convenience... A managed account advisor receives high-level direction from you about your financial goals, risk tolerance, investing timeline, and other factors, and then chooses: Which securities to invest in When to buy and sell assets How dividends are reinvested When to rebalance the portfolio When to tax loss harvest Because of this, managed accounts are convenient—you don’t have to research investments, follow the market, or worry about any of the other actions listed above (although it always make sense to review your account periodically to protect against fraud, as well as to ensure that the account continues to be appropriate for your needs). ...but not a lot of control. The tradeoff for convenience is that you give up day-to-day control over the investments in the account. This includes the timing of each trade. If you are the type of investor who follows the market closely and wants to dictate the precise moment at which your assets are bought and sold, a managed account may not be the right option for you. This level of convenience can also sometimes come at a higher price. The advisor will charge a fee, which is typically charged against a percentage of the assets that the advisor manages. The fee covers account monitoring on an ongoing basis to help ensure that the investments in the portfolio are appropriate to your financial goals and situation. For a buy-and-hold investor who does not make a significant number of trades, a managed account could be more expensive than a self-directed brokerage account, where fees are typically charged based on transactions. Self-Directed Brokerage Accounts With a self-directed brokerage account, you control the buying and selling of securities. You also assume responsibility for all other aspects of managing the account. The brokerage’s role is simply to execute the trades that you request. Additionally, this type of account typically does not come with holistic advice or continuous monitoring of your investments. They can be less expensive... Because you’re taking on all of the account management responsibilities, a self-directed brokerage account can often be a cheaper way to access investing capabilities than a managed account. Self-directed brokerage accounts usually charge commissions on a transaction-by-transaction basis. If you don’t trade often (or, if you have access to commission-free financial products through your account), this may be a cheaper option. ...but with more control comes more responsibility. A self-directed brokerage account gives you the benefit of exercising far more control over the timing and pricing of trades. You can place market orders to buy or sell at the current market price—orders which most modern brokerages typically are able to execute very soon after the order is placed. Or, you can even limit orders to buy or sell only at particular price points. This ability to time the market comes at a potential price beyond just taking up more of your time: our research shows that it is often time in the market, and not market timing, that helps investors build returns. Managed Accounts at Betterment Betterment offers only managed accounts, which we believe are appropriate for long-term investors looking to buy and hold securities to achieve their financial goals. For one low fee, we fully manage the account by choosing investments, reinvesting dividends, rebalancing when needed, harvesting losses, and more. Open a managed account and let us worry about the management details so that you can save time and live better—all for a low fee.