Expert Insights

Life and taxes, not death and taxes Taxes aren’t fun but your life should be. We’ve got a couple of tools to help with taxes. See if they’re right for you. Benjamin Franklin once said, "In this world, nothing can be said to be certain, except death and taxes." At Betterment, we prefer a more optimistic take: Nothing is certain, except life and taxes. And we want to help you live a better life by helping you save money on taxes as you invest. The main idea: Unlike many investment managers, we automate advanced tax-efficient strategies, making life easier if the features are right for you, including: Tax Loss Harvesting+ (TLH+) Tax Coordination Let’s see how each strategy works. What is TLH+? TLH+ seeks to increase the annual returns in a taxable account by automating an advanced tax-saving strategy. When investments lose value, Betterment looks for opportunities to sell them to help offset the taxes that come with income and capital gains. You can offset up to $3,000 of your ordinary income each year with tax losses. TLH+ coordinates harvests across your household’s Betterment accounts, including IRAs, 401(k)s, joint accounts, and trusts. What is Tax Coordination? Tax Coordination is designed to optimize and automate a strategy called asset location. It organizes your portfolio so that the highest-tax assets go into the accounts with the biggest tax breaks. Using Tax Coordination can help you make the most out of every dollar you invest for retirement because it is designed to minimize your tax liability while maximizing your after-tax returns. Tax Coordination only manages accounts held at Betterment within a retirement goal, so it may be worth considering your personal situation and if rolling over an IRA or 401(k) prior to adding a taxable account is the right call for you. The big picture: Taxes aren’t fun but your life should be. So we do our best to automate these advanced tax strategies for you. Want to see if these tax-efficient strategies are for you? Log in to your Betterment account from a web browser and navigate to the “Performance” section. You can learn more about TLH+ and Tax Coordination and turn them on if they’re right for you.

Why it’s not your time to time the market History shows that timing the market is a fool's errand. Instead, here are two investing approaches to help build wealth over time. The main idea: Timing the market can be risky and takes a lot of effort and skill (or luck!) to be successful. History is not on the side of timing the market. Study after study after study after study—you get the point—has shown the risks of timing the market and how a more general buy-and-hold strategy can help investors increase their portfolio performance. The risks of timing the market include: Poor timing and investing when asset prices are at a higher point. Missing high-performing periods, even single days or months, when the market increases. Timing the market also takes a lot of work: Successful market timing usually requires analysis and forecasting techniques that can be quite advanced. Market timing also requires a dedication of time as you need to be constantly tracking and analyzing the market. Instead, consider these two approaches. Both can work well if you have long-term investing goals. Lump-sum investing is depositing the entire balance of cash at once. This method works well if you have extra cash and are looking to maximize the time your funds are invested. It lowers the likelihood that you miss out on any high-performing periods. Keep in mind that your entire lump sum is at risk if the market decreases. Dollar-cost averaging is depositing the same amount of money at fixed intervals (weekly, monthly, etc) over a period of time. This approach works well if you want to take less risk with a lump sum of cash and protect against short-term market declines, or if you only have money to save after each paycheck. Either way, both options are less risky than timing the market and less work for you to manage.

Your 3 steps for fall financial planning Fall is here. Here are three steps to take to end the year feeling good. By the time December rolls around, the last thing most of us want to think about is finances. That’s why we’ve compiled three steps to take this fall to make the end of this year (and the start of next year) less stressful. By spending a few hours looking at your investing plan, potential charitable donations, and tax situation, you can decrease year-end stress, and set yourself up for long-term success. Your three steps for fall financial planning: 1) Review your asset allocation based on your goals Review your investment accounts outside of Betterment: To get a full understanding of your asset allocation, be sure to review your investments across all platforms. Look at your 401(k), taxable investment accounts, and even cash. You may have appropriate asset allocation on one platform, but when you look at your accounts holistically, you may notice you are over or under-invested in a specific asset class. Tip: To make sure you are not forgetting any accounts, use our “connected accounts” feature to get a clearer picture of all of your financial assets (and debt). Review your investing goals: To make sure your asset allocation is still appropriate, review each of your investing goals. For shorter-term goals, a Cash Reserve account can be a good option. But for longer-term goals, we recommend diversified investment portfolios. You can set up a new goal in your Betterment account and we’ll recommend the asset allocation based on your inputs. 2) Plan your year-end charitable giving Set a budget: If you have a larger budget for your spending, make sure to include charitable giving as a line item. Even if you don’t track a budget, think about how much you can afford to donate this year. This can help make sure your giving fits into your spending during the final months of the year. Tip: If you feel like your budget is not as high as you’d like, you can also volunteer time. Consider donating shares: Donating shares that you’ve held for more than a year can boost your charitable giving and offer a tax benefit. We've partnered with well-known charities across a range of causes to make it simple for you to donate. Learn how to donate shares. 3) Optimize your tax planning Plan for a tax bill: Look at your past year’s sources of income. If you have income from freelance work or interest income from high-yield savings, make sure you plan ahead to be able to pay your tax bill. Increase 401(k) contributions: You have until December 31st each year to contribute to your 401(k). Consider increasing your contribution during the final months of the year which can lower your taxable income. Consider tax coordination: If you are investing in multiple accounts, a sophisticated tax optimization strategy known as asset location can increase your after-tax returns. While asset location requires detailed, continual work if you're trading on your own, our Tax Coordination approach is automated and can be used with retirement goals at Betterment. Learn more about Tax Coordination. Consider tax loss harvesting: Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, ideally maintaining an optimal asset allocation and expected returns. Our Tax Loss Harvesting+ service is automated once enabled and available at no additional cost to Betterment users. Bonus tip: As you end the year, review your emergency savings. If you haven’t saved at least three months’ worth of living expenses consider setting up an Emergency Fund goal in your Betterment account. You can automate small deposits each month to start saving today.

How big should your emergency fund be? An emergency fund keeps you afloat when your regular income can’t. Here’s how much to save and how to start. The takeaway: Try saving at least three months’ worth of living expenses so you are prepared for a job loss or medical emergency. When planning your emergency savings, consider: Your costs for food, housing, medical needs, and other essential expenses. Potential unexpected costs related to children or other dependents. If you work in an industry with high turnover, or you have a serious medical condition, you may want to save more, such as six months of your monthly expenses. The risks: Not having an emergency fund could lead to a negative financial spiral. Without an emergency fund, you could find yourself taking on high-interest debt to cover your expenses such as daily needs, your mortgage, or rent. If you’re unable to meet basic needs, you may have to make hard choices about which necessities to live without. Two account types work well for emergency savings: We recommend choosing a cash account or investing account. A cash account, like a savings account, is a low-risk place to stash your cash. At Betterment, our Cash Reserve account lets you earn interest on your savings and provides FDIC insurance up to $2 million ($4 million for joint accounts) through our program banks.† An investing account can offer greater growth potential but in exchange, you take on more risk. If you go this route, we recommend an account that is in a majority of bond investments. Also, increasing your target savings amount will add a buffer against potential losses. Set up an Emergency Fund goal with Betterment and we’ll provide a suggested monthly savings amount to help you reach your savings goal. An Emergency Fund goal is designed for emergency savings. With an Emergency Fund goal, you can set a target savings amount and a target date which you can always adjust. You can choose from either saving in a Cash goal or an investment account. We recommend choosing the one that best fits your personal risk level. We’ll give you a goal forecaster tool to visualize how much you’ll need to save each month to hit your goal, but we recommend starting by saving what you can afford and increasing the amount over time. Once you’re ready, create a recurring deposit, and you’ll start saving automatically.

How donating shares can help you save on taxes Donating shares lets you avoid paying taxes on capital gains, and you can still deduct the value of your gift on your tax return. In 1 minute There are many different ways for you to give back to your community. For example, giving directly to individuals in poverty, donating cash to charities, and volunteering your time are all well-known and worthwhile options. As an investor, you may have access to an option that comes with significant potential advantages: You can donate qualifying appreciated shares—or in other words, shares that are worth more today than when you acquired them. When you donate in the form of cash, you can deduct the value of that donation on your tax return. And that’s great! But by donating cash, you could be missing out on an additional tax incentive. Donate appreciated shares instead, and you could also avoid paying taxes on capital gains. That means your donation goes further while spending the same amount. And yes, you still get to deduct the value of those gifted shares on your tax return—as long as you’ve held them for at least a year. However, you should be aware that the deduction may not be exactly the same value. The IRS calculates the tax-deductible value of those shares as the average of the highest price and the lowest price on the day you made the transfer. Sometimes that means the deductible value ends up being slightly lower than the exact value you donated. Other times it ends up being slightly higher, giving you yet another benefit! But either way, the amount you save by avoiding the capital gains tax can exceed the differences in valuation. Consider if boosting your charitable giving by donating shares is right for you. In 5 minutes In this guide, we’ll: Explore donating shares instead of cash Explain how the IRS calculates these deductions Show you how Betterment makes donating shares easy You’ve been investing, planning for your future and becoming financially secure, and you’d like to pay it forward. That’s great! There are many ways to give back to your community. You might donate to charitable organizations. You might give cash directly to those in need. Or you might give of your time by volunteering. As an investor, you have a charitable super power. You can make your gifts go further and enjoy tax benefits at the same time. Why you should consider donating shares instead of cash When you have assets that have gained value, donating cash means you may not be making the most of your gift. Donations in the form of eligible shares offer two main advantages: You won’t pay capital gains taxes on the shares you donate You can deduct the value of your gift on your tax return Since you get more tax benefits, your money can stretch further. You have more left over to donate, invest, or use as you see fit. How the IRS calculates these deductions When you donate a share, you do so at a certain point in time, with an associated price. For greatest tax efficiency, you generally should only donate shares you’ve held for at least one year1. At that point, the IRS lets you claim a deduction for the whole, appreciated value up to 30% of adjusted gross income. However, the price at the time of your gift isn’t necessarily the same value that’s deducted on your tax return. The IRS rules say the deductible amount for your tax filing must be the “fair market value.” And the IRS determines the fair market value by taking the average of the highest price and lowest price on the day of the transfer. Say you donate $1,000 worth of shares: 20 shares worth $50 each. During the day of your donation, the shares trade at a high price of $51 and a low of $47. The IRS will call the fair market value of all twenty shares $980. That $980 is the deductible value when you file your taxes for the year. So keep in mind that the value you plan to donate won’t necessarily match the exact value you can deduct on your taxes. However, while the numbers may be slightly lower or higher than you initially expect, the value of saving on capital gains tax by donating appreciated shares and then being able to deduct that value to lower your taxes even further, generally exceeds any differences in valuation during the day of transfer. Betterment makes donating shares easy We believe that donating securities should be as easy as donating cash. You’re trying to make a difference. You shouldn’t have to worry about math or forms. No snail mail. No walking into an office. So we streamlined the process. Here’s how: We track how much of your account is eligible to give to charity. Betterment automatically reports the amount eligible for donation, assessing which shares of your investments have been held for more than one year, and which of those have the most appreciation. We estimate the tax benefits of your gift. Before you complete a donation, we’ll let you know the expected deductible amount and potential capital gains taxes saved. We move assets from your account to a charitable organization’s account. No paperwork! With a traditional broker, your gift would have to move from your account to the organization’s brokerage account, which involves time and paperwork. But Betterment offers charities investment accounts with no advisory fees—on up to $1 million of assets—to make the gift process seamless. We provide a tax receipt once the donation is complete. We’ll email the receipt to you, and you’ll also be able to access it from your Betterment account at any time. Additionally, we take on most of the reporting for our partner charities, letting them devote their resources more efficiently to the causes you support, rather than to administrative tasks. We partner with highly-rated charities across a range of causes. These include nonprofits such as the World Wildlife Fund, Boys and Girls Clubs of America, and Givewell. Log in to your Betterment account to see the full list. Don’t see your preferred charity? Put in a request to add them! Gifting securities to charity, rather than donating cash, is a strategy that wealthy philanthropists have been employing for decades to save on capital gains taxes. We hope to democratize these benefits by helping everyday Americans use the same exact tax-saving method. If you decide it’s right for you, join our community of altruistic investors today and make the most of your charitable donations! If you’re already a Betterment customer, log in to donate your appreciated shares. 1IRS Publication 526, pg. 11-12

The keys to understanding investment performance Understanding investing performance doesn’t have to be a challenge. Here’s how we simplify it for you. In this guide, we look at how we crunch numbers for you and provide two tools to analyze your returns. Plus, see four questions to ask so you understand the overall performance of an investing platform. But first, don’t fall for fallacies: Typical media coverage may skew your perspective. Avoid these two fallacies when looking at your own investing performance. The Dow/S&P 500 Fallacy: Benchmarks like the Dow Jones Industrial Average are popular, but they don’t actually tell you much about the stock market. The Dow only represents 30 US stocks. And the S&P 500 doesn’t give you a full picture of the US market—let alone the global market. The Points Fallacy: It’s common to hear reporters say things like, “Dow loses 500 points.” But it’s far more valuable to look at the percentage change. If the Dow is at 35,000 points, a 500-point drop is less than two percent. That’s not something long-term investors generally need to worry about. Instead of falling for fallacies: To know how you’re performing relative to the market, ask, “Which market?” Many Betterment portfolios are globally-diversified, making the MSCI All Country World Index a better benchmark than the S&P 500 or Dow. How Betterment simplifies looking at performance: We crunch the numbers for you, showing you three aspects of performance. Your combined accounts. We pull together all of your accounts and show their performance as one number. You can also zoom in on the account level. Your total returns. Since changes in the prices of assets in your portfolio are more volatile, and don't tell the full picture, we look at total returns which include price changes and dividends together instead of breaking them out separately. Your long-term timeline. We show your performance over as long a period as possible to help keep you focused on the long term and minimize short-term stress. Two tools to analyze your returns: We don’t encourage frequent monitoring of performance, but when you do want to review performance, we have two tools to help you understand the big picture. Tool #1: Time-weighted return. Time-weighted return is the default return you see on your Betterment accounts. When you invest, you often have deposits made over time. The time-weighted return imagines that all deposits were made on your first day of investing. Why would you want to do this? Because cash coming in and out of your portfolio at different times can distort and complicate your returns due to the nature of the constantly-fluctuating stock market. Also, if you were comparing returns across two different accounts with two different cash flow patterns, you couldn’t be sure if the difference was due to the investments or due to the timing of the cash flows. The time-weighted return can refer to a price-only return or a total return. Price return reflects only the change in the price of the asset, while total return reflects both price and reinvested income. By default, Betterment displays the total return for a more comprehensive view of performance. Tool #2: Individual rate of return. Individual rate of return can be displayed on the performance screen of each account by clicking on the “Show balance details” link. The individual rate of return is affected by each and every instance of cash flow that goes in and out of your portfolio. Cash flows at Betterment can include deposits, withdrawals, dividends, and fees. Individual rate of return does a better job of answering the question, “What are the average returns on the dollars I personally deposited into Betterment?” as opposed to “How well does Betterment design and manage the portfolios I have with them?” Looking beyond returns is important when considering an investing platform or fund. Here are four questions to ask: What are the commissions, trade fees, and assets under management (AUM) fees? How much time and effort are required of you to manage the investments? Does the investing philosophy align with your values? Does the platform offer tax efficiencies such as tax loss harvesting and asset location? (Note: Your stated returns likely won’t take into account any potential value these tools may have added.)