Public Statements

Our Customers Donated Over $2 Million Dollars To Charity in 2020 In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. 2020 was an unprecedented year in many regards, with the COVID-19 pandemic leaving millions of Americans out of work as businesses were forced to close and many states issued shelter in place orders and other restrictive measures. It was also an unprecedented year for Betterment’s Charitable Giving feature, with new records in both the number of donations and the amount donated by our customers who chose to give back to those who are most in need. Many of our customers make generous gifts to charities in a variety of ways—whether it’s by spending their precious time, or by donating their hard-earned money. Our customers also have the choice to donate their invested securities to charities through their Betterment accounts. When securities are donated, the value of those assets is transferred directly to the charity. This is advantageous because the donor doesn’t pay taxes on the gain, and the recipient organization generally doesn’t pay taxes on the gain, either. In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. Skip to the instructions for how to donate. Since launching our Charitable Giving feature in 2017, our customers have donated over $7.5 million dollars in appreciated shares to support causes near and dear to them. We are proud to support a community of smart investors with big hearts. This year, consider a smart giving strategy that can help you maximize your gifts while minimizing your tax liability. We’ll walk you through how it works. Donating securities should be as easy as donating cash. You’re trying to make a positive difference, so we believe you shouldn’t have to do any math or sign any forms. We want to keep it easy—as easy as giving cash. No snail mail, and no walking into an office. Here is a behind-the-scenes look at how we help make it easy. On your behalf, we track how much of your account is eligible to give to charity. You typically should only donate assets that you’ve held for more than one year, but we don’t expect you to sort through all the assets and pick which ones you can give. We’ll track those assets for you. We’ll estimate the tax benefits of your gift. Before you complete your gift, we’ll let you know the estimated tax benefits, including the expected deductible amount and potential capital gains taxes saved. We move assets from your account to a charitable organization’s account without any paperwork. With a traditional broker, a charitable gift has to move from your account to the organization’s brokerage account, which can take time and paperwork. Betterment is offering charities investment accounts without any advisory fees—on up to $1 million of assets—to make the gift process seamless. After the donation is complete, we provide a tax receipt. The receipt is emailed to you, and it will also be available in your Betterment account at all times. What’s more, we take much of the heavy lifting in reporting off of our partner charities. This means they can devote their resources more efficiently to the causes you are supporting, rather than to administrative tasks. Donating securities helps maximize your charitable impact. There are two tax advantages investors may be able to take advantage of when donating eligible shares. Eliminate capital gains taxes on donated shares. Deduct the value of the gift on your annual tax return. As long as you itemize your deductions, the entire value of your donated securities is deductible on your income tax return, just like any cash donation would be—as long as you’ve held the securities for more than one year. As an example, let’s say you make $150,000, are single, and live in New York. Your income places you into the current (2021) 15% long-term capital gains bracket, the 24% federal bracket, and the 6.41% state bracket.  If you donate $3,000 worth of shares to a charitable organization, and you bought those shares two years ago for $2,100, then you would save $192.69 in capital gains taxes. The full $3,000 could then be deducted on your tax return, saving you an additional $912.30. Overall, you end up with $1,104.99 in tax savings, which is about 21% more than if you had just donated the cash and taken the deduction. You can then use the extra tax savings towards future donations, helping to further maximize your impact. Value now Purchase value, two years ago Capital gains tax saved Deductible amount on tax return Total potential tax savings Donating shares $3,000 $2,100 $192.69 $3,000 $1,104.99 This is 21% more than a cash donation. Donating cash $3,000 n/a n/a $3,000 $912.30 The table above assumes the following about a hypothetical person donating to a charity: (1) The person itemizes the deductions on their tax return, and (2) The federal Alternative Minimum Tax does not apply to the person. Charitable giving works in tandem with our other tax-smart strategies. Our charitable giving capabilities automatically work in tandem with our other tax-smart strategies, such as Tax Loss Harvesting+. Imagine you started using Betterment two years ago. If any holdings in your portfolio took a loss in the first year—which is common—Tax Loss Harvesting+ (TLH+) would kick in, if you have it turned on. TLH+ would benefit you by harvesting those losses and selling the assets, which allows you to deduct up to $3,000 from your income at tax time. This practice essentially defers the tax liability from any future gains to a later date. If by the calendar year after the harvest, those same shares appreciated above the original purchase price, then they would be eligible to donate to charity. You could then avoid the taxes altogether because you will not owe the standard capital gains taxes you would otherwise be subject to. Donate while also keeping your financial goals on track. Once you donate shares from an investing goal, your goal’s overall account balance will naturally be lower. Immediately after you donate, we will ask you if you’d like to make a new cash deposit to promptly replenish your investment goal. If you redeposit, we can smartly rebalance your portfolio and help keep it on track to meet its goal. If you think of your replenishing deposit as the cash you otherwise would have given to charity, the process of giving and then redepositing ends up serving as a tax-optimized and cost-efficient cycle for transferring funds to charity. The graphic below, which visually represents this cycle, is for illustrative purposes only. If you do not redeposit after your donation, your account balance will, of course, remain lower—and we may rebalance your account as usual. Smart Investors + Big Hearts = Effective Altruism. You may already be familiar with effective altruism, which is the simple idea that you can increase how much value you create when you help others if you more thoughtfully apply your resources.   We offer access to a dozen charities, including GiveWell.org which carefully vets and directs donations to the most impactful causes, and Against Malaria Foundation, which protects low-income families from one of the largest killers in the world—mosquitos that carry malaria. See a full list of supported charities. Please note that we give no special preference to or endorse any one charity in particular, and the activities of each charity are not directly associated with or connected with Betterment. How to Donate Shares From Your Betterment Account To donate shares from your Betterment account, simply navigate to “Transfers” on the left and select “Give to Charity” under “Transfers from Betterment.” If your account has appreciated shares that have been held for more than a year, you can specify an amount to give, and then select which charitable organization(s) will receive your donation. Shortly after the transfer completes, you’ll receive a tax receipt via email. You can choose from the following charities: Against Malaria Foundation Big Brothers Big Sisters of NYC Boys and Girls Clubs of America Breast Cancer Research Foundation Brooklyn Community Bail Fund DonorsChoose.org Feeding America GiveWell Hour Children NAACP Empowerment Programs Save The Children The Trevor Project UNICEF USA World Wildlife Fund Wounded Warriors Family Support Don’t see your charity? See below... If you don’t currently see a charity you’d like to donate to, you can request a new charity be added. When you’re instructed to select a charity, there is an option to request a new one at the bottom of the page. In time, we will work with the requested charities to try to add them as an option.  Qualified Charitable Distributions Qualified charitable distributions can be made from most IRAs (excluding SEP and SIMPLE) if the owner is age 70½ or over. These distributions can be used to satisfy part or all of your required minimum distribution and these donations will not be counted as taxable income. Betterment can support QCDs from IRAs if you meet certain criteria. Please reach out to our team for further instructions. 2021, Here We Come Let’s maximize our ability to give back together, and help support those who are most in need this year. Our altruistic and tax-smart customers have donated over $7 million dollars to charity, with over $2 million dollars donated in 2020 alone. Can we beat that for 2021? For more information, see IRS Information for Charitable Contributions. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

The Fiduciary Rule Is on Life Support – We Must Act Now Whether or not the fiduciary rule survives could directly impact you. Because if it dies, and your money manager is no longer required by law to act in your best interest...are they going to anyway? You give your retirement money to a money manager. You expect them to look at all the investment options out there and make decisions based on what’s best for you, your portfolio, and your money’s growth over time. You expect them to act in your best interest—to do the right thing for you. You expect them to charge reasonable fees, try to minimize taxes, and make decisions that are going to get you the returns you deserve. You expect all of this because it’s their job. It’s what they’re paid to do. They’re the expert, the professional. Surely they’re going to advise you on the best investment decisions for you...right? I wish it were that simple, and I can’t believe it isn’t. But today, many money managers are not doing what’s best for you. They recommend funds because they make money selling them. They charge confusing fees that you can’t see. They push you into investments that are in their best interest—not yours. And the one thing that was going to help stop it might not survive. President Donald Trump on Feb. 3 signed a memorandum directing the Department of Labor (DOL) to reconsider its fiduciary rule, which would require money managers who provide retirement advice to act in their clients’ best interests. The rule was set to go into effect on April 10, but the DOL on Feb. 10 reportedly filed for a 180-day delay, putting the rule at risk of being diluted beyond recognition or, worse, thrown out completely. Whether or not this rule survives could directly impact you. Many companies were planning to make positive changes in response to the rule and publicly supported it, back when they were going to be required by law to do what was best for their clients. But now that the Trump administration is threatening the rule’s existence, we expect many of those institutions to remain silent, indicating that their former support was solely for public display. We believe that, in some ways, silence from those institutions is as bad as lack of public support. Because if your money manager is not openly supporting the rule, then they may not be willing to fight for you. And once the rule is gone for good, it could mean reverting to business as usual. We encourage you to reconsider your money manager or, at the very least, push them to clarify their stance. Because if the rule dies, and they’re no longer required by law to act in your best interest...are they going to anyway? The State of the Industry (Also Known As “Why This Rule Must Live”) The fiduciary rule’s six-year history has coincided with a secular shift in the industry that has felt promising and good. We’ve seen positive evolutions, like easier access to low-cost investments (e.g., exchange-traded funds) and heightened awareness of how financial providers are compensated. As the Washington Post’s Barry Ritholtz put it, “The fiduciary rule is not shaping investor behavior, it is now catching up with it." But now that the rule has the potential to be thrown out, we have to reexamine the conflicts of interest that are costing American workers and their families $17 billion a year—and that could persist without the proper regulations in place. Many money managers (brokers) are not currently required to make investment recommendations based on your best interests, and instead only need to pick “suitable” investments. They are allowed to consider whether a particular recommendation will result in a higher commission or kickbacks to them. As a result, you are likely to end up in a less-than-ideal portfolio—one that’s higher-cost and lower-return than it should be. This Is What Firms Are Allowed To Do. Is It Happening to You? Here’s the Way It Should Be We believe in low, transparent fees. We believe that when you give your money to a money manager, they should choose funds based on what’s best for you, the customer—not your money manager. A Defective Argument: The Fiduciary Rule “Limits Investors’ Choice” There have been various arguments opposing the fiduciary rule. The most recent came from Gary Cohn, the White House National Economic Council Director, who said that the rule would limit investors’ rights to choose their investments. He told The Wall Street Journal in an interview: “We think it is a bad rule. It is a bad rule for consumers…. This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” It’s an interesting analogy, but it’s flawed. The rule isn’t about limiting choice (all the choices are still there); it’s about empowering consumers with information to make better decisions and forcing advisors to give straightforward advice. The right analogy would be both options are still on the table—you want to eat a cheeseburger instead of a salad, you can still do that—but you’ll know exactly how many calories are in it and how much it’ll cost you. In the case of financial services, if you want to put your money in a worse investment product, you can still do that—and the advisor has to disclose all the fees associated with it, and can’t tell you it’s the best option for you (unless it truly is). The text of the rule itself is clear on this point; it simply requires advisors to make an investment recommendation that they can demonstrate is in an investor’s best interest. Sure, that may be the lowest-cost option, but not necessarily. If advisors are not able to defend the investment products they are recommending, including their cost, investors will not suffer from their absence. If you want a good analogy for what this rule could do for financial services, consider the medical industry. Doctors aren’t allowed to get paid by drug companies for pushing drugs on you. That would be ridiculous, right? Why should it be different in financial services? Why should so-called financial advisors be allowed to be compensated for pushing certain products on you? It’s ridiculous! They shouldn’t. And, if we have our way, they won’t. Former Rule Champions, Where Are You Now? We’ve been closely following which big financial firms are committed to the positive changes represented by the fiduciary rule. Last fall, when it was expected that the rule would go into effect this April, many firms publicly trumpeted their support. Merrill Lynch came out with an ad campaign that declared, “We’re committed to your best interest. Not the status quo.” Other firms, like J.P.Morgan and Commonwealth Financial Group, announced they’d be cutting commissions in their retirement accounts to comply with the rule. Now that the rule’s future is in doubt, Merrill Lynch is retreating from its support of the rule and has indicated it may not complete the changes it previously committed to making. Many other firms have likewise gone silent on their support for the rule and their intent to follow through on earlier commitments. Some firms are even gloating over the fact that they didn’t take a position on the rule or commit to changes. AdvisorHub.com quoted UBS Chief Financial Officer Kirt Gardner saying, “There is some indication that [the DOL Rule] will, at a minimum, be delayed and potentially not be implemented at all. And because we delayed our announcement…that’s proved to be very effective given some of the commitments that our competitors have made.” It’s become extremely difficult to get individual firms to commit to a clear public position on the fiduciary rule. In January, Sen. Elizabeth Warren, D-Mass., a longtime supporter of the rule, sent a letter to 33 financial institutions that had already begun making changes designed to satisfy the rule’s regulations. She warned them that the rule was under attack, while also questioning whether they supported it and would continue to work toward implementing changes. This was an opportunity for these firms to speak out in support of the rule. Twelve firms ignored the letter. Of the 21 that responded, many provided a general statement about the importance of the rule's objectives, but declined to make a clear commitment to its actual implementation. Make no mistake, though, the fiduciary rule is the only realistic hope for prompt action to improve the quality of retirement advice. If firms genuinely support the rule's objectives, they should also support the rule. In the coming weeks, we encourage you to watch closely to see which firms are willing to take a clear public stand on behalf of investors, and which are silent or hide behind trade groups. What You Can Do to Protect Your Right to Honest Financial Advice Today, I’m sad for retirement savers. I’m disappointed that so many of us have trusted people we’ve chosen to manage our money, to prepare us for the future, and yet we still can’t be sure if they’re doing the right thing for us. I’m angry that the one ruling that could make us feel confident again is under attack. Why would anyone want to get rid of something that could do so much good? We encourage you to advocate for yourself and your future by submitting a public comment in support of the fiduciary rule here. You can also contact your elected representative and/or financial provider to share your support for the rule. Then it might be time to ask your money manager these questions: Why are your services and investments right for me and my situation? Who makes money from my account—and how much? Do you make more money recommending some investments over others? Are you committed to acting in my best interests for all my accounts, at all times? We’re not giving up on this. We stand for our customers and their best interests, and we always will. We don’t take political sides, but we are fighting for this rule until all investors receive advice they can trust. Because if the rule dies, whether it’s quick or slow, it’s sure to be painful. A version of this article originally appeared on CNBC.

Betterment’s Employee Demographics And Our Commitments To Doing Better We share details on the makeup of Betterment’s employees, our initiatives for diversity and inclusion, and how we’re encouraging progress within the fintech community. TABLE OF CONTENTS Betterment’s Employee Demographic Data Scaling Our Diversity And Inclusion Efforts Conclusion In June, our CEO and Founder Jon Stein made a statement: “Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country. We will advocate for our Black colleagues, friends, and fellow citizens and work harder to build a nation that’s just for all, where we all can pursue happiness, without fear, oppression, or unequal treatment.” Over the last two months, we’ve been hard at work learning how to live up to that promise and take a stand against racial injustice. We’ve formed a coalition with the broader fintech community, we’re increasing our transparency with our employees and our customers, and we’re investing in resources for our employees of color. We acknowledge that these initiatives are a work in progress, but we want to share them with the Betterment community. Betterment’s Employee Demographic Data First, we’d like to share the demographic data of our full-time Betterment team (293 employees as of July 7, 2020). The demographic data below is collected using the Equal Employment Opportunity Commission (EEOC) questions and selections during an employee’s onboarding process. Because of this, the type of information we collected is limited. Starting in 2020, we will provide optional opportunities for additional demographic selections (including but not limited to gender, race, and ethnicity) that are more inclusive for both employees and candidates. Full-Time Employees Leadership Team* *(defined as Director-level or higher): Product, Design, Engineering, And Analytics Teams Engineering Teams We've made progress with gender representation over the past few years, but we still have a long way to go. And our progress in racial and ethnic representation—particularly within our leadership cohort—is not where it should be. We have work to do here, and are committed to ensuring that our team better reflects the communities and customers we serve across the U.S. Scaling Our Diversity And Inclusion Efforts The conversations we’ve had internally as a community, and with your input, are helping inform and drive the sustained change we’re looking to make. We’re working toward a new normal in several ways: Fintech Coalition We recognize that the fintech industry needs to improve access to jobs, career advancement, and financial services, not only for underrepresented groups, but especially for people in the Black and brown community. To hold us and other fintech companies accountable to making this change, we spearheaded the creation of the fintech coalition. Each company that joins the coalition will publish individual plans and provide regular updates on progress toward our commitments to enhancing access to financial services, as well as job and career advancement for people in the Black and brown community. As part of the coalition, we are committed to publicly sharing our representation data on an annual basis each July. Betterment’s Call-to-Action Initiative Immediately following the murder of George Floyd, our employees formed a Call-to-Action (CTA) group. These employees have been brainstorming and executing a number of efforts to unbias our product, increase community outreach, and begin internal educational forums such as book clubs and speaker series. This group is committed to creating change over time, beginning with the following: Betterment is supporting our Black employees in “Calling Out Black” every Friday throughout the summer. Calling Out Black acknowledges the exhaustion, pain, and emotional weight our Black employees might feel in the workplace, especially during times of civil unrest due to police violence. These days provide space for our Black employees to reclaim their mental, emotional, and physical wellbeing. Beginning in 2021, Betterment will recognize Juneteenth as an annual paid holiday to commemorate the ending of slavery in the U.S. We are running a summer education series for our non-Black employees about racial inequality and anti-racist allyship, featuring guest speakers as well as small-group discussions. We’ll be working with Paradigm for a three-part Inclusive Leadership Training series beginning in late July. All managers will go through these sessions that are focused on objectivity, belonging and voice, and the growth mindset. In August, Netta Jenkins will provide company-wide training with her business Holistic Solutions, which will include a discussion forum for Black and brown employees, a session for people managers on how to manage during Black and brown trauma, and two town halls for the entire company. Improve Our Hiring Process Over the last few years, our Recruiting Team has taken steps to expand our new hire sourcing efforts and diversify our interview process. Some of these steps include: Partnering with Jopwell, the leading career advancement platform for Black, Latinx, and Native American professionals to support targeted sourcing of diverse candidates. Allocating funds on a monthly basis to post on underrepresented job boards (e.g., Women In Tech, Women In Product, Black Women in Tech, /dev/color, The Mom Project, etc.) Increasing our geographic diversity by building a remote workforce. We recognize that these efforts have failed to impact the percentage of employees of color at Betterment. Because of this, we have amplified our commitment to this area in four ways: With an employee population that is 70% white, we acknowledge that most folks refer others who look like them. We're pausing our cash referral bonus program to reallocate those funds to support diversity, equity, and inclusion (DEI) hiring initiatives. Implementing a more streamlined application process where all candidates only need a resume to apply. Continuing to reduce bias in our job descriptions by investing in technology that decodes gendered language; by excluding education requirements; and by including must-have qualities and experience only. Researching and partnering with companies that help us increase our sourcing reach. Increasing Internal Data Collection This summer, we will launch internal surveys to collect broader representation information for both employees and candidates. These surveys will include additional optional self-identification opportunities for racial and ethnic groups, as well as gender. We will share this information with leadership, ERSGs, and our Community Council on a quarterly basis, and will use this information to inform our progress and let us know where we need to focus our efforts. Amplifying Our Employee Resource Strategy Groups (ERSGs) We currently have seven active ESRGs: Black at Betterment, Latinx at Betterment, Asians of Betterment, Women of Betterment, Women in Tech, Betterparents, and Betterpride. Representatives from these groups act as facilitators between their communities and Betterment leadership, as well as participate in our Community Council, a group that meets on a regular basis to further diversity and inclusion initiatives. Through our partnership with Netta Jenkins, we’re investing time in evaluating and improving the structure and reach of our ERSGs. We want to create more open communication between these groups and company leaders, and ensure that these groups are represented as stakeholders in company initiatives. Conclusion Fintech—and Betterment—has been heralded for providing broad and equitable access to financial services, regardless of how much money someone has. While this access is a step forward, it doesn’t directly address the wealth and financial knowledge gaps felt by many people of color—particularly members of the Black and brown community—at the hands of a system that does not treat them equally. We know we haven’t done nearly enough for our community and our employees, and we must do more. Thank you for your feedback and support as we work to do just that.

Taking Action Against Racial Injustice Betterment shares with our customers how we’re taking action against systemic racial injustice.

If We Aren’t Changing The System, We’re Perpetuating It Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country.

Jon Stein: Thoughts on 2020's Volatile Market Much of what Betterment has worked toward the past 10 years has been purpose-built to endure all the worst and the best the market has to throw at us. I started today like I imagine a lot of people around the world might have: Wondering about the latest news. Helping my wife come up with new ideas to entertain our two young daughters. Thinking about how fortunate we are to be together and healthy, and about those most vulnerable during these uncertain times. Connecting with coworkers remotely (and missing our in-person interactions). I’ve also been thinking about my family’s and our customers’ finances. I’ve been thinking about how we all can make smart decisions to make the most of our current situation. Relatives (who are also Betterment customers) have told me brokers are calling them, saying, “Now’s the time to buy,” and “Let’s transition your portfolio,” and, to all of them I reiterate the same thing I always say: “Invest appropriately for your goals. Invest regularly. Stay the course (aka, don’t try to time the market).” Betterment was born in the aftermath of the last financial crisis. Our vision, a smarter way to manage money for everyone, was based in no small part on what I saw during that time: Too many people making rash (often bad) financial decisions and struggling to make sense of the economic turmoil, because of a lack of good, outcome-oriented, fiduciary advice. Much of what Betterment has been working toward over the past ten years—the services we’ve built, the products we’ve launched, the customer-outcome-obsessed company we strive to be for you—has been purpose-built for times like these, to endure all the worst and the best the market has to throw at us. How we’re working for you in these challenging times. Betterment has migrated to fully remote operations, and our teams are all up and running. We are fortunate that we were well prepared for this; in 2019, we opened new offices in Philadelphia and Denver and onboarded a dozen remote employees living across the country. This experience has served us well in our current environment, and made it relatively easy for us to institute a mandatory work from home policy early on. Today, all of our team, all over the U.S., is working for you. Just like you, we have parents juggling meetings with at-home kids, and supportive teammates picking up extra work to allow those who need it to take time to care for loved ones. They’re answering your calls, building and launching our new checking account, or analyzing our trading, advice, and operations, and working hard to give you the service and advice you expect and deserve. That we’ve seen record call volumes might be no surprise. Our call hold times have been elevated: ~30 minutes in the recent, dramatic days of market volatility. For me, this was a positive surprise. It’s longer than I’d like it to be, but better than the busy signal I might have feared after hearing about it elsewhere. Our services have remained open and up through record trading volume. We’ve harvested billions of dollars of tax losses and rebalanced hundreds of thousands of customers smartly, and tax-efficiently, working to make the most of even down days. We’re also launching new ways to answer your questions and connect with you, including advice videos and live Q&A on platforms like Twitter and Reddit. We hear you, and we’re working as hard as we can to respond to your feedback and concerns. “Empower people to make the most of their money so they can live better.” That’s our mission at Betterment—the reason each of us joined and what brings us together. It’s our mission when the market is up and when it’s down. One of the things about working at Betterment is that every single one of us is a customer as well. It means that we’re working for you, and we’re working for our families. We celebrate with you when we reach our financial goals, and we hurt with you when the markets are in turmoil. We’re with you, working hard to help navigate spending, saving, investing, and retirement with confidence. We’ve known from the start that there will be good days and bad days in the market, as in life. We are invested in the world and with the world, in a global portfolio. As the world goes, so we go. Smart investing is the confidence to endure. On average and over time, being broadly and globally diversified is wise, today and every day. Historically, it has led to the most consistent returns, with the least amount of risk, of any widely available investment strategy that we have identified. Implementing it well requires discipline, smart automation, and appropriate identification of goals and time horizons. This approach and our advice are designed to help you make smart decisions today that help you reach your goals in the long-term. Everything we do is built with the intention of helping you achieve better results than you could without us, than anyone could without us. Just as importantly, everything we do is built to help you have peace of mind. But just because some may be better off, or more fortunate, doesn’t make anyone immune to the pain going on around us. As friends and loved ones are vulnerable or exposed and the worldwide economy goes through a rough patch, we feel it, too. Smart investing is not the absence of dark days, or the absence of fear, it’s the confidence to endure. We will get through this, and the economy will be stronger in the long run. Things will get better, for the world, our customers, our team—and you. Invest appropriately for your goals. Invest regularly. And stay the course. We’re here for you, should you want a hand to hold (or, better make that, a person to talk to), and we’ll get through it better, together.

The Senate Is Planning a Tax Hike on Retail Investors. It Should Be Removed. The Senate’s current tax bill includes a mandate that would be punitive for everyday investors. Without a doubt, the FIFO mandate should be removed from consideration. Congress is currently working on a massive overhaul to our tax code, and the Republican-led majority appears committed to signing a bill into law before the end of the year. While the proposals have far-reaching impact, one provision proposed by the Senate would be particularly punitive for retail investors: the so-called “first in first out” (FIFO) mandate. This provision mandates that when retail investors sell a portion of an investment, they must sell their oldest shares first—that is, the first shares “in” must be the first shares “out.” While this technical change may sound innocuous, the FIFO mandate would dramatically harm millions of retail investors. It would raise taxes in unintuitive ways, distort investment behavior, and deprive investors of the opportunity to plan efficiently for retirement. Investing would become more complex and more time consuming—disempowering and disenfranchising everyday people who need to invest for their future. The Senate has already recognized that the FIFO mandate is bad news. In the first draft of the bill, the FIFO mandate applied to investments made by investment funds, but the Senate exempted them after an intense lobbying effort. As a result, investment companies will continue to have the freedom to decide which shares they want to sell. Retail investors unequivocally deserve the same opportunity. What a FIFO future could look like Imagine an investor who, for the last 20 years, has been putting $100 each month into an hypothetical index fund that has returned 10% on average. After 20 years, her deposits from the first year are now up approximately 600%. Say the market has been down this year, but she smartly continues her monthly investments, knowing that in the long term, consistency is the best strategy. Now assume that, before the index fund has recovered its value, our investor has an unforeseen expense of $600. She covers it by withdrawing from her portfolio. Under current tax law, she would be able get the $600 she needs by selling the shares that she purchased earlier in the year. Since these shares are currently trading at less than what she paid for them, she wouldn’t owe any taxes because she actually lost money on those shares. In fact, she could use her losses on the shares to offset other income, reducing her overall tax burden. In contrast, under the proposed FIFO mandate, she would not be able to sell her most recently purchased shares. Instead, she would be forced to first sell the shares that she purchased 20 years ago, which would mean that $500 of the appreciated value would be considered taxable gains. Assuming a combined federal/state long-term capital gains rate of 25%, she will owe $125 in taxes. In trying to withdraw $600, she will be left with $475, net of the tax she owes. To get the full $600 out of her portfolio, she would have to sell about $760 worth of shares, even though the most recent $600 she invested has actually lost value.1 The FIFO mandate might cause her to attempt complex and burdensome strategies to avoid this harsh result. Or, more likely, she would simply decrease her investments in the market, impairing her own investment goals and the growth of the overall economy. FIFO triple-taxes investment income and distorts investor behavior According to the GOP Tax Reform Framework released earlier this fall, tax reform seeks to establish a “simpler, fairer” tax code “built for growth.” The FIFO mandate will actually undermine these goals by distorting investing behavior as investors take extraordinary measures to avoid taxes or avoid investing altogether. Middle-class savers and retirees will fare the worst. By depriving investors of the freedom to choose which shares they want to sell, the FIFO mandate effectively raises taxes on investment income, resulting in a new era of triple taxation for retail investors. Under current law, retail investors already pay personal taxes on investment returns, and the companies they invest in pay corporate taxes. By greatly increasing the impact of the capital gains tax, which could otherwise be deferred (or possibly avoided) under current law, the FIFO mandate essentially imposes a third layer of taxation. Under the FIFO mandate, investors would have to take extraordinary measures, divorced from economic reality, to avoid a large tax bill. Decisions made decades earlier could lead to potential tax consequences that would prevent investors from making what would otherwise be the best investment decisions. Investors would have to maniacally focus on the tax lots they purchase and sell. They might be encouraged to purchase countless versions of similar funds to preserve the ability to access their money in response to unplanned needs. They could seek to open a multitude of accounts at different financial institutions to avoid the FIFO mandate. But, these complicated strategies are likely to be impractical for ordinary retail investors, many of whom already struggle to find the time to properly manage their finances. Only wealthy investors are likely to successfully avoid the FIFO mandate; others are more likely to pay higher taxes—or worse, invest less. Thus, the FIFO mandate will be particularly punitive precisely for middle class savers who have done everything right: picking an investment strategy and sticking to it consistently. They are the ones who would find themselves with fewer and more expensive options when they need to access their savings, including in the face of an unplanned emergency. This is plainly unfair. Retirees would suffer disproportionately. In a world where corporate pension plans have largely disappeared and Social Security benefits are set to be increasingly uncertain (the Social Security Administration says it is “three quarters funded for the long term”), saving for retirement is already a challenge for most Americans. FIFO further complicates retirement savings because older investors will disproportionately face higher taxes early in retirement, as the first shares they will be required to sell will likely have the largest gains. In a future where retirees are personally responsible for their retirement, every penny matters and depleting retirement savings is counterproductive. Furthermore, the many unanswered questions about the mandate could have major consequences for investors. For example, would the FIFO mandate apply across spouses, meaning there might be a marriage penalty? Would it apply across different brokerage accounts, leading to complex accounting or gaming by opening multiple accounts? Would the FIFO mandate apply to charitable giving? Depending on how these questions are answered, the FIFO mandate could inflict additional harm. FIFO clearly hurts investors. But it doesn’t really help Congress either. So, given all the consequences of a FIFO mandate, why is it in the Senate’s tax plan today? The probable answer is, of course, the mandate’s potential to raise revenue—$2.7 billion over 10 years, according to the Joint Committee on Taxation. That $2.7 billion will come primarily from middle-class investors early in retirement. Yet, the revenue generated from the FIFO mandate is miniscule compared to the Senate tax plan of $1.5 trillion in overall deficit spending. The FIFO mandate’s paltry revenue generation is hardly a solution to Congress’ larger budgetary problem. It would cause collateral harm and create unfairness that is not nearly justified by the additional revenue. If Senate Republicans are truly looking to establish a “simpler, fairer” tax code “built for growth” they should eliminate the FIFO mandate. Given that it adds relatively little revenue in the overall scheme of the tax plan, and is extremely punitive to individual investors, removing FIFO should be a straightforward fix everyone can agree on. Citations 1 The tax rate on the capital gains could end up being much higher due to the capital gain being a component of AGI (Adjusted Gross Income). A higher AGI may reduce tax credits, limit tax deductions, and increase the portion of Social Security subject to income tax. This editorial was originally published on Investment News.