At Betterment, we receive a lot of questions from customers about filing taxes. While we cannot provide tax advice (you should consult a tax professional for that), taxes are an inevitable part of the investment process, and we do everything we can to make tax return preparation as efficient as your overall experience with us. Here’s how we do it.
Everything in one place
Tax considerations for investments require a lot of information — you need to keep track of dividends, cost basis, and capital appreciation to name a few things. Betterment does this for you and provides all relevant tax documents, available February 1, in a simple-to-read format.
- Form 1099-B: This form reports to the IRS all the gains and losses in your account as a result of sales made during the year. Securities are sold whenever you make a withdrawal or change your allocation, and when we assess our management fee. This form must be included in your 1040 tax return if you have any gains or losses from sales.
- Form 1099-DIV: This form reports to the IRS all dividends you’ve received, and is only required if they amount to more than $10 over the course of the year.
- Form 1099-R: This form is only included in your Consolidated Tax Statement if you have an IRA, and made a distribution from it. A distribution occurs when you make a withdrawal, convert a traditional IRA to a Roth IRA, or in the case of IRA re-characterization.
- Form 5498: This form details any contributions you’ve made for the 2013 tax year. We report this information to the IRS, but you don’t need to file this form (it’s for your records). Since contributions for 2013 are permitted up to April 15, 2014, this form will only be made available separately in May.
On February 1, or any time after, click on the Activity tab in your Betterment account, where you’ll find a PDF version of your tax statement that includes all the forms that are applicable to your account. We’ll also notify you of their availability when you log in.
To accommodate your tax planning, we generate these documents in-house so we can get them to you as soon as possible — as a result, we provide them earlier than many other providers in the financial services industry.
Integrated with tax software
You can also automatically import your documents into TurboTax or H&R Block Tax Software. Import your return directly into either program by entering your Betterment email and password, and the service will automatically download and calculate your tax information. How simple is that?
Neither TurboTax nor H&R Block Tax Software store your credentials — they are used solely to create a secure, one-time link which only allows them to access the forms necessary to complete your return, and nothing more.
Your account number
If you work with an accountant to file your taxes, he or she may ask for your Betterment account number. For taxable accounts, your account “number” is the email address associated with your Betterment account. For IRAs, we provide an account number on your tax form. Other financial services companies like PayPal use an email address as your alphanumeric account number, as well.
Best practices for filing
- Gather all of your paperwork before you begin. Gather your statements relating to investment, savings, and checking account, your job and other sources of income, and charitable donations before filing — it eliminates surprises and helps the whole process move smoothly when you have every document in place. Also, make sure your ducks are in a row: If need be, update your contact information with your providers, particularly Betterment.
- Max out your IRA contributions. Because traditional IRA contributions come from your pre-tax income, contributing to your IRA can lower taxable income. You can write off 2013 traditional IRA contributions and potentially lower your bill to Uncle Sam if you make those contributions before filing your 2013 taxes.
- Time your filing. Once you have your paperwork, you can fully figure your taxes before they are ready to submit. Betterment product manager Alex Benke, CFP®, recommends timing your return to the IRS based on whether or not you will be getting a refund.
“File immediately if you will be receiving a refund,” says Benke. “Delay filing until close to April 15th if you owe the IRS money.”
The rationale: That “loan” to the government is interest-free, so no need to pay it off early.
Note that any IRA rollovers and conversions count for the calendar year in which they are performed — the April 15th extended deadline does not apply to these activities.
Optimized tax treatment, year-round
At Betterment, we keep your tax bill low through advanced features like automatic rebalancing and reinvestment of dividends. When you withdraw from a goal, Betterment first looks at your current asset allocation and will favor selling the investments you are overweight to bring you back into balance
As always, we are available seven days a week to answer any questions you have about Betterment tax documents or your Betterment account. Happy filing!