Understanding Tax Coordination
Learn more about asset location, which can increase your retirement savings by investing more efficiently within each of your retirement accounts.
TABLE OF CONTENTS
- How do I set up a Tax-Coordinated Portfolio?
- Should I roll over before setting up a Retirement goal that uses Tax Coordination?
- Can I roll over into a Retirement goal after I start one?
- How do I add to my Tax-Coordinated Portfolio accounts?
- Can I include a Betterment joint account or trust in a goal using Tax Coordination?
- Can I use Tax Coordination with my Betterment 401(k)?
- Can I change the allocation of a goal using Tax Coordination?
How it Works
- How does Tax-Coordinated Portfolio save me money on taxes?
- How do I get the most out of my Tax-Coordinated Portfolio?
- How does Tax-Coordinated Portfolio affect my external accounts?
- How does Tax-Coordinated Portfolio affect my tax forms?
- Is there a downside to using Tax-Coordinated Portfolio?
- How do I withdraw from an account that uses Tax Coordination?
How do I set up a Tax-Coordinated Portfolio?
Log in to Betterment. From the menu, select a goal you wish to include in your Tax-Coordinated Portfolio. Select “Goal Settings” and choose “Setup Tax-Coordination.”
Should I roll over before setting up a Retirement goal that uses Tax Coordination?
Since we can rebalance tax-advantaged accounts (as compared to your taxable accounts) without causing you taxes, you may want to consider rolling over tax-advantaged accounts (like IRAs) first and then funding your taxable account. Funding your taxable account first won’t cause any harm, but because we’re protecting your account from any unnecessary taxes, it may take longer for your portfolio to reach its optimal location.
Learn more about important considerations before rolling over assets to Betterment.
Can I roll over into a Retirement goal after I start one?
Yes. You can initiate a rollover by clicking “Rollover” on the Transfer tab of your Betterment account and following the instructions.
If you haven’t yet set up your retirement goal using Tax Coordination, you may want to consider rolling over first. Adding an IRA after setting up your portfolio won’t cause any harm, but it may take longer for your portfolio to reach its optimal location. This is because we protect your portfolio from unnecessary taxes by making smaller rebalances in your taxable accounts.
How do I add to my Tax-Coordinated Portfolio accounts?
To add an account to your Tax-Coordinated Portfolio, choose your Tax-Coordinated Portfolio from the menu on the left after logging in on a web browser, and then scroll down and choose “+ Add new account.”
Can I include a Betterment joint account or trust in a goal using Tax Coordination?
Tax Coordination, Betterment’s automatic approach to asset location, is available in Retirement Goals (also known as a Tax-Coordinated Portfolio). Currently, Tax Coordination is not available for joint accounts or trusts.
Can I use Tax Coordination with my Betterment 401(k)?
Yes, if your employer uses Betterment for Business to manage their 401(k) plan, you can include your Betterment 401(k) in your Tax-Coordinated Portfolio just like you would with your IRAs.
If your employer does not use Betterment for their 401(k), you can refer them.
Can I change the allocation of a goal using Tax coordination?
You can change the overall allocation of your Tax Coordinated Portfolio, at any point, by selecting your retirement goal from the menu and then clicking “Portfolio Analysis“. You’ll be able to review your current allocation and Betterment’s suggestion for you. When ready to make an adjustment, click ” Adjust.”
It’s important to remember that changing your allocation could trigger taxable events. Don’t worry, our Tax Impact Preview will show you a real-time tax estimate before you confirm the transaction.
If you decide you no longer want these accounts coordinated, contact us and we’ll be happy to help.
How does Tax-Coordinated Portfolio save me money on taxes?
Once you set up your Tax-Coordinated Portfolio, Betterment will look across all of your long-term investing accounts held at Betterment and automatically reorganize which assets are held in which accounts.
We’ll generally place your least tax-efficient assets in your tax-advantaged accounts (IRAs and 401(k)s), which already have big tax breaks, while diverting the most tax-efficient assets to your taxable account. In practice, each asset’s after tax return is considered in the context of every available account. The assets are generally then arranged (unequally) across all coordinated accounts to maximize the after-tax performance of the overall portfolio.
We do this in a way that keeps your overall allocation the same, while working to boost your after-tax returns. You can read more about how we do this in our white paper.
For more information on our estimates and Tax-Coordinated Portfolio generally, see the full disclosures.
How do I get the most out of my Tax-Coordinated Portfolio?
Asset location works when you have more than one funded account that is taxed differently (such as a taxable, Traditional IRA, and Roth IRA). You should expect more benefit if the accounts are funded with relatively similar balances, and the most benefit if you have meaningful funds in all three types of accounts.
Tax-Coordinated Portfolio can only manage investments held at Betterment. To maximize your tax-saving opportunities, consider moving additional accounts to Betterment.
How does Tax-Coordinated Portfolio affect my external accounts?
Having a Tax-Coordinated Portfolio at Betterment does not affect your external accounts. We can only coordinate accounts that are held with Betterment, so the more you roll over or transfer to your Tax-Coordinated Portfolio, the bigger potential benefit you should expect.
How does Tax-Coordinated Portfolio affect my tax forms?
Your Tax-Coordinated Portfolio will not change the forms you receive. You’ll get the exact same forms we send today (1099-B, 1099-DIV, 1099-R). These forms will correspond to each account as they would have before.
Is there a downside to using Tax-Coordinated Portfolio?
Asset location is a long-term strategy. While it may lower taxes in the short-term, the greater benefits come from a longer investment period. If you’re not planning to invest over a longer horizon, you may still benefit from paying fewer annual taxes, but are likely to see less benefit when it comes time to withdraw your money.
If all of the accounts you are including in your Tax-Coordinated Portfolio have the same allocation and time horizon, there is little risk to using a Tax-Coordinated Portfolio. Note that Tax-Coordinated Portfolios will still be subject to market risk. If you choose to include a goal that has a different allocation than your tax-advantaged accounts, just know that you are changing the time horizon on that goal. Tax-Coordinated Portfolio is not designed for investors who qualify for a marginal tax bracket of 12% or below.
You can read more these and other Special Considerations in our white paper.
How do I withdraw from an account that uses Tax Coordination?
Tax Coordination is a strategy meant for long-term investors that is designed to save taxes year after year. However, you will always have access to your funds, with or without this strategy. So while unplanned withdrawals are always an option, activity in a taxable account that results in sales (such as allocation changes or withdrawals) can cause additional taxes, as with any investment account.
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