Betterment’s Tax-Coordinated Portfolio™ optimizes and automates a strategy called asset location. Asset location can deliver additional after-tax returns while maintaining your desired level of portfolio risk.
This investment strategy manages multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs).
We’ve built a calculator so you can preview Betterment’s automated asset location in a Tax-Coordinated Portfolio.
Try Our Asset Location Calculator
To estimate extra after-tax returns with Tax-Coordinated Portfolio, follow these simple steps to use our calculator now.
- Allocation: Adjust your risk level or allocation of stocks to bonds. (The calculator is set to a default allocation of 70% stocks and 30% bonds.)
- Balances: Input the estimated account balances across your portfolio.
- Investment Horizon: Enter the number of years you’ll be investing in these accounts.
- Extra After-Tax Returns with TCP: Finally, toggle “On” to see estimated additional after-tax returns at the end of your time horizon.
Why Does Asset Location Result in Extra After-tax Returns?
Asset location places your least tax-efficient assets in the accounts taxed most favorably, and the most tax-efficient assets in the accounts taxed least favorably, all while maintaining the desired asset allocation for the aggregate portfolio.
Managing asset location with a globally diversified portfolio is a complex, mathematically rigorous, and continuous undertaking.
Betterment’s Tax-Coordinated Portfolio is an automated implementation of asset location that is tailored to each investor’s personal circumstances.
Betterment customers can take advantage of Tax-Coordinated Portfolio if you have a balance in at least two of the following three accounts with Betterment: 1. Taxable, 2. Tax-deferred (traditional 401(k) or IRA), or 3. Tax-exempt (Roth 401(k) or Roth IRA).
You can learn more about asset location and Tax-Coordinated Portfolio from our white paper, which provides a detailed examination of our methodology and from our full disclosures. You can also read about how our team built this feature.
How the calculator simulates Tax-Coordinated Portfolio: This calculator assumes that it is making initial investments from cash, rather than selling existing assets that have already been subject to market fluctuations. This is significant, because in an actual Betterment taxable account with existing assets, multiple exchange-traded funds (ETFs) may have appreciated, and selling them would realize capital gains. Since the entire purpose of asset location is to maximize after-tax returns by deferring (or avoiding) taxes whenever possible (without deviating from the desired asset allocation), Tax-Coordinated Portfolio seeks to avoid realizing capital gains when reorganizing assets.
Those who enable Tax-Coordinated Portfolio in their existing Betterment accounts may see a (perhaps substantially) different asset location than the one simulated by this calculator if given the same account balances. A Tax-Coordinated Portfolio in an existing Betterment account could result in an asset location that is not arranged to achieve the full incremental benefit illustrated by the calculator, at least initially. The calculator assumes no embedded gains in the taxable account because its goal is to show the value of the strategy in the abstract, controlling for personal circumstances.
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