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Understanding Tax Coordination

Learn more about asset location, which can increase your retirement savings by investing more efficiently within each of your retirement accounts.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Sep. 01, 2018 | Updated Aug. 26, 2021
Published Sep. 01, 2018 | Updated Aug. 26, 2021
8 min read

For more information on our estimates and Tax Coordination more generally, see our Tax Coordination methodology and full disclosures.


TABLE OF CONTENTS

Setting Up

How it Works


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 a new account within my Tax-Coordinated Portfolio accounts?

To add a new 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.”

How do I add an existing account to my Tax-Coordinated Portfolio accounts?

To add an existing account to your Tax-Coordinated Portfolio, choose your Tax-Coordinated Portfolio from the menu on the left after logging in on a web browser, then select the  “Settings” tab, “Edit tax-coordination”, then “Include another account.”

Can tax-coordinated rebalancing realize taxable gains for me if I include a taxable account?

Betterment’s Tax-Coordinated Portfolio is designed to avoid rebalancing that would realize taxable gains as a function of its regular tax-efficient rebalancing formula. Regular rebalancing as a result of tax-coordination will occur in your taxable account without realizing taxable gains when possible (for example, when securities are trading at a loss). However, in certain circumstances, rebalancing may occur in the taxable account portion of a TCP that realizes taxable gains.

For example, withdrawals or transfers out of the TCP can force rebalancing in the taxable account that could result in realizing taxable gains. You can read more about that in the section below: “How do large withdrawals affect my Tax-Coordinated Portfolio?”

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 a 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 about 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.

Can I transfer out an account held in my Tax-Coordinated Portfolio?

Yes, you can. Transferring an account out of a Tax-Coordinated Portfolio can cause rebalancing within the TCP in order to ensure that your TCP has a fully diversified portfolio of holdings at the target stock/bond allocation that you set. If there is a funded taxable account in the TCP, the rebalancing may be a taxable event.

If an individual’s Tax-Coordinated Portfolio holds both an IRA and a taxable account, transferring out the IRA can cause the taxable account to rebalance to the overall target allocation of the Tax-Coordinated Portfolio, which could result in the sale of securities and realized gains or losses in the taxable account.

If you’re attempting to transfer out an IRA held in a Tax-Coordinated Portfolio that includes a funded taxable account, you generally have the following options:

  1. Transfer out your taxable account first:
    • You can postpone your IRA transfer request and work with your custodian to request a complete transfer of your taxable account first. When you transfer out your taxable account first, any rebalancing in the Tax Coordinated Portfolio will occur in the tax-advantaged IRA account. Click here for instructions on transferring out your taxable assets.
  2. Disable Tax-Coordination first:
    • You may request to have your Tax-Coordinated Portfolio disabled by selecting from the menu Retirement > Overview > Goal settings > Modify Tax Coordination > I no longer want a Tax-Coordinated Portfolio > Send request to Customer Support
      • We will reach out to you for further authorization before disabling your Tax-Coordinated Portfolio, as the process could result in realizing taxes due to rebalancing in your taxable account. At this point, you may request to disable tax-coordination with rebalancing turned off in the taxable account to minimize taxable rebalancing in the process.
  3. Cancel your IRA transfer:
    • If you decide that you would prefer to keep your tax-coordinated accounts at Betterment, you can simply cancel your outbound IRA transfer request and keep the funds in your Betterment account.
  4. Proceed with the transfer, accepting any taxable rebalancing that might occur:
    • You can move forward with your outbound IRA transfer without disabling your Tax-Coordinated Portfolio and accept the risk of realizing gains or losses in your taxable account.

Betterment is not responsible for tax consequences, missed market opportunities, or other costs that may arise from transferring out an account within a Tax-Coordinated Portfolio or dismantling a Tax-Coordinated Portfolio. If you have any questions regarding this process, please email support@betterment.com for more information.

How do large withdrawals affect my Tax-Coordinated Portfolio?

If you know you will be making large withdrawals or transfers out of your tax-coordinated accounts, you may want to delay enabling our tax coordination tool until after those transfers have occurred.

This is because large changes in the balances of the underlying accounts can necessitate rebalancing, and thus may cause taxes.  When large withdrawals or transfers out complete, some taxes can be unavoidable when rebalancing to your overall target allocation.

The goal of tax coordination is to reduce the drag taxes have on your investments, not cause additional taxes. So if you know an upcoming withdrawal or outbound transfer could cause rebalancing, and thus taxes, it would be prudent to delay enabling tax coordination until you have completed those transfers. To learn more about tax coordination, please see our TCP methodology paper.

How do I disable Tax Coordination?

You can do so by clicking on your Retirement goal > Settings > Feature (Tax-Coordination) > Edit > Modify Tax Coordination > I no longer want a Tax-Coordinated Portfolio > Send request to Customer Support, and completing the flow. You will be given the opportunity to leave a note regarding your intentions/questions for the Customer Support team that handles those requests.

Note: Requesting tax-coordination to be disabled does not automatically disable TCP right away. The request is sent to the Customer Support team that processes those requests, who will reach out to you about your request and provide more context as to how the disable and subsequent rebalancing in the remaining accounts could work, as well as information regarding potential tax implications. At this point, you may request to disable tax-coordination with rebalancing turned off in the taxable account to minimize taxable rebalancing in the process. You will need to respond to the Customer Support outreach to complete the process of disabling tax coordination.

Betterment is not responsible for tax consequences, missed market opportunities, or other costs that may arise from disabling tax-coordination for a Tax-Coordinated Portfolio.

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