Chrissy Celaya, CFP®

How we help you navigate market volatility Aug 16, 2023 12:00:00 AM At Betterment, our portfolios and automated features are designed to handle the market’s downturns. You may have been told to “sit tight and stay the course” when the market is dropping. That’s not always easy to do—unless your portfolio is designed to handle market volatility. The big idea: At Betterment, our platform was designed to help manage the inevitable downturns of the market. You can sit tight and stay the course, knowing that: Our portfolios are constructed with volatility in mind Portfolio management features such as automated rebalancing and tax loss harvesting are built to help keep you on track during downturns How we construct portfolios to weather the storm: We create diversified portfolios designed to offer relatively low costs and keep long-term performance in mind. First, we use expert-based assumptions: Our stock and bond allocation recommendations are based on assumptions, including a range of possible outcomes, in which we give slightly more weight to potential negative ones, by building in a margin of safety—otherwise known as ‘downside risk’ or uncertainty optimization. Even before you’ve invested your first dollar, your portfolio has already been designed to account for the market fluctuations like the big downturns in 2008 and in 2020. Second, we use your personal goals: Our allocation recommendations consider the amount of time you’ll be invested. For goals with a longer time horizon, we often advise that you hold a larger portion of your portfolio in stocks. For shorter-term goals, we recommended a lower stock allocation. By using your investor profile and the goal details you provide, in conjunction with our expert-based assumptions, we’re able to recommend a diversified portfolio of stock and bond ETFs that has an initial allocation recommended just for you. How our automated features keep you on track: We’ve designed three key features to navigate volatility for you. First, automated allocation adjustments: For certain goal types, our system changes your portfolio’s stock and bond allocation automatically over time to help manage risk based on your goals. We call this recommendation “auto-adjust” or a goal’s “glidepath”—a gradual reduction of stocks in favor of bonds. For most Betterment goals, we recommend that you scale down your risk as your goal’s end date gets closer, helping to reduce the chance that your balance will drastically fall if the market drops. You can use our auto-adjust feature in eligible portfolios and goal types. Second, automated portfolio rebalancing: We monitor and adjust your portfolio based on your account balance and market movements to help manage risk. Rebalancing is the process of selling and buying the necessary securities as the market fluctuates to bring the value of each allocation back to the desired level of the portfolio. When the market fluctuates, not all investments fluctuate to the same degree. For example, stocks are generally more volatile than bonds, which can create an undesired asset allocation within your portfolio. We automate that process for you and do it with potential tax implications in mind. Third, automated tax loss harvesting: Our automated software monitors your account for opportunities to harvest tax losses. Tax loss harvesting is the practice of selling a security that has experienced a loss to potentially reduce your tax bill. The sold security is replaced by a similar one, ideally maintaining an optimal asset allocation. It can be beneficial if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years. You can opt into tax loss harvesting, but keep in mind that everyone’s tax situation is different—and tax loss harvesting may not be suitable for yours.

Five common Roth conversion mistakes Oct 14, 2022 12:00:00 AM Learn more about Roth conversion benefits—for high earners and retirees especially—and common conversion mistakes to avoid. Converting pre-tax funds from your traditional retirement accounts into a post-tax Roth IRA (i.e., a Roth conversion) can make sense in certain scenarios. But before you move any money, we recommend connecting with a trusted financial advisor and, in some cases, a tax advisor. They can help you sidestep five common Roth conversion mistakes: Converting outside of your intended tax year You must complete a Roth conversion by a year’s end (December 31) in order for it to count toward that specific tax year’s income. Keep in mind this is different from the IRA contribution deadline for a specific tax year, which (somewhat confusingly) bleeds into the following calendar year. As we’ve mentioned before, Roth conversions require careful planning on your part (and, ideally, your tax advisor) to determine how much you should convert, if at all, and when. Converting too much Speaking of, the question of how much to convert is a crucial one. Blindly converting too much could push you into a higher tax bracket. A common strategy used to avoid this is called “bracket filling.” You determine your income and how much room you have until you hit the next tax bracket, then convert just enough to “fill up” your current bracket. Of course, it can be difficult to determine your exact income. You might not know whether you’ll get a raise, for example, or how many dividends you’ll earn in investment accounts. Because of this, we highly recommend you work with a tax advisor to figure out exactly how much room you have and how much to convert. You no longer have the luxury of undoing a Roth conversion thanks to the 2017 Tax Cuts and Jobs Act. As a side note, you can squeeze more converted shares into your current bracket if the market is down since each share is worth less in that moment. To be clear, we don’t recommend making a Roth conversion solely because the market is down, but if you were already considering one, this sort of market volatility could make the conversion more efficient. Withdrawing converted funds too early When making a Roth conversion, you need to be mindful of the five-year holding period before withdrawing those converted funds, which is different from the 5 year holding period for qualified distributions. And as we mentioned earlier, you’ll typically pay taxes on the amount you convert at the time of conversion, and future withdrawals in retirement can be tax and 10% penalty free. After making a Roth conversion, however, you must wait five tax years for your withdrawal of your taxable conversion amount to avoid the 10% penalty. Withdrawals of amounts previously converted are always tax-free. Notably, this countdown clock is based on tax years, so any conversion made during a calendar year is deemed to have taken place January 1 of that year. So even if you make a conversion in December, the clock for the five year rule starts from earlier that year in January. One more thing to keep in mind is that each Roth conversion you make is subject to its own five year period related to the 10% early withdrawal penalty. Paying taxes from your IRA Paying any taxes due from a conversion out of the IRA itself will make that conversion less effective. As an example, if you convert $10,000 and are in the 22% tax bracket, you’ll owe $2,200 in taxes. One option is to pay the taxes out of the IRA itself. However, this means you’ll have only $7,800 left to potentially grow and compound over time. If you’re under the age of 59 ½, the amount withheld for taxes will also be subject to a 10% early withdrawal penalty. Instead, consider paying taxes owed using excess cash or a non-retirement account you have. This will help keep the most money possible inside the Roth IRA to grow tax-free over time. Keeping the same investments Conversions can be a great tool, but don’t stop there. Once you convert, you should also consider adjusting your portfolio to take advantage of the different tax treatment of traditional and Roth accounts. Each account type is taxed differently, which means their investments grow differently, too. You can take advantage of this by strategically coordinating which investments you hold in which accounts. This strategy is called asset location and can be quite complex. Luckily, we automated it with our Tax Coordination feature.