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Written by Kevin Mercadante on September 23, 2020
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Betterment IRA Review: How To Rollover A 401(k)/IRA!

Given that the average worker will change jobs multiple times in the course of his or her career, that can create a decision time when it comes to what to do with your previous employer’s 401(k) plan.

In addition, many retirement investors also change IRA custodians from time to time, looking to take advantage of better investment opportunities and fee structures.

If you’re looking to do a rollover of either a 401(k) or an IRA account, Betterment has risen to become one of the best destinations. Not only do they offer professional investment management and multiple investment options, but they do it all at a very low fee structure.

Here is our full review of the IRA offerings from Betterment, including details about the rollover process for an IRA or 401(k)!

About 401(k)/IRA Rollovers

When you leave an employer, you’ll generally be given one of four options with your 401(k) plan:

  1. Keep the account where it is.
  2. Receive the funds in cash, which will terminate the retirement plan.
  3. Do a rollover into the retirement plan of your new employer.
  4. Do a rollover of your 401(k) plan into an IRA account.

Keeping the account where it is can make sense if you’re satisfied with the performance and management of the plan. But it may also mean you have little direct control over the plan and the investment activities within it.

If you choose to receive the funds in cash, you’ll have the benefit of the liquidity it will provide. But you’ll also be subject to a tax liability.

Under IRS rules, the distribution from the plan will be taxed as ordinary income, subject to your marginal tax rate for that year. If you’re under age 59 ½ at the time of the distribution, you’ll also be required to pay a 10% early withdrawal penalty.

Rolling the previous employer 401(k) plan into a new employer plan creates continuity. But not all employers will allow a rollover from a previous plan. And it may not be the best option if you’re not satisfied with the investment choices the new plan provides or the fees they charge.

That’s why most employees who separate from their employers choose to do a rollover of their 401(k) plan into an IRA account. By doing so, you’ll keep the funds for their intended purpose – retirement.

You’ll also avoid the potential income tax liability that comes with liquidating your account. But just as important, an IRA rollover enables you to choose the new trustee and how funds in the plan will be invested.

Betterment 401(k)/IRA Rollover Process

Though millions of people have 401(k) plans, relatively few have the experience and investment knowledge to properly manage the accounts. That’s true both when you are actively employed by your employer, and after you become separated and the funds are disbursed.

Betterment offers one of the very best opportunities to successfully manage your retirement accounts after separation. You can have your 401(k) plan rolled over into an IRA with Betterment, where it will be professionally managed for you at a very low fee.

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All you need to do is complete the rollover, and Betterment will handle everything from creating your portfolio allocation, to keeping them in balance to reinvesting dividends.

Your only responsibility from that point forward will be to fund your account, should you choose to do so.

For example, once you roll over a 401(k) plan into an IRA, you will then be eligible to make annual contributions of up to $6,000 per year, or $7,000 per year if you are 50 or older.

This will give you an opportunity to both successfully manage your 401(k) proceeds, as well as to grow your IRA through a combination of investment earnings and new account contributions.

betterment retirement

Betterment Plans

This platform offers two different robo-advisor plans for investment called Digital and Premium.

Betterment Digital

This is Betterment’s basic plan and it’s available to investors at all levels.

There’s no minimum initial investment required, and your portfolio will be fully managed for a low annual fee of just 0.25%.

That means you can have $10,000 managed for just $25 per year, or a $100,000 at just $250.

Betterment Premium

This is Betterment’s plan for investors with larger portfolios and a desire for a higher level of service.

The minimum initial investment required is $100,000, with an annual advisory fee of 0.40%.

The higher fee reflects the fact that the plan includes syncing of external accounts to better coordinate your investment allocations, as well as unlimited access to Betterment financial planners.

This is the plan to choose if you meet the portfolio minimum requirement, and you want human advice in addition to robo-advisor management.

Betterment Portfolios

Here are a few of the portfolio offerings from Betterment.

Betterment will create a portfolio on your behalf of stocks and ETFs by default, or you can choose one of the portfolios below.

Goldman Sachs Smart Beta

This is an actively managed portfolio that will attempt to outperform the general market.

This is done for through the buying and selling of securities that may be either Smart Beta ETFs or individual securities. You’ll need a minimum investment of $100,000 to take advantage of this plan, but there is no additional fee for the service.

BlackRock Target Income Portfolio

This portfolio emphasizes income, and is designed specifically for retirees looking for high interest.

Depending on your risk tolerance, low, moderate or aggressive – your portfolio will be invested in a mix of income generating securities, that can include everything from super safe short-term U.S. Treasury bills to high-yield bonds.

Betterment Socially Responsible Investing (SRI)

This portfolio will be invested in ETFs that meet certain standards for social, environmental and governance guidelines.

It can be used in conjunction with either the Digital or Premium plan, and at no additional cost.

Betterment Tax-Coordinated Portfolio

This is primarily an asset allocation strategy, in which income generating assets are held in tax-deferred retirement accounts, while capital gains generating assets are held in taxable accounts.

There, they can take advantage of lower capital gains tax rates. It works with your existing portfolio allocations, but specifically aims to reduce your tax liability.

Betterment Flexible Portfolios

This portfolio gives you the option to adjust the individual asset class weights within your portfolio.

For example, if your portfolio has a 5% allocation in US small cap stocks, you will have the option to increase it to 10% if that’s your investment preference. There is also no extra fee for this portfolio option.

betterment rollover

Betterment Investment Strategy

Like nearly all robo-advisors, Betterment employees Modern Portfolio Theory (MPT) in the construction of their portfolios.

The theory emphasizes proper asset allocation over individual security selection. That is, a portfolio properly diversified into mutually exclusive asset classes is likely to perform better over the long-term than one that emphasizes individual securities and active portfolio management.

In the case of Betterment, that means dividing your asset allocation into 14 different asset classes.

That includes six stock classes and eight bond classes.

Each class is represented by a single exchange traded fund (ETF) that’s tied to an underlying index that represents each respective class. In that way, your portfolio will be spread across thousands of individual securities through just 14 well diversified funds.

MPT also means that while your portfolio is unlikely to under perform the general market, it’s also not designed to outperform it. This is typical of robo-advisors, since they act as passive investment managers seeking only to match the market.

But Betterment does provide an opportunity to outperform the market through the use of value stocks for much of your US stock allocation. Value stocks hold the potential to outperform the general market since they represent companies that are out-of-favor with the general investment market.

As such, they have the potential to rise rapidly once they’re discovered by the general market.

Tax-Loss Harvesting

Tax-Loss harvesting is a strategy in which losing asset positions are sold to generate losses that will offset gains in other asset classes. It creates a form of backdoor tax deferral, by minimizing investment tax liability in any given year.

The strategy works by selling a losing ETF to generate a capital loss that can be used to reduce capital gains elsewhere in the portfolio, then replacing it with a comparable fund so the desired asset allocation targets are maintained.

Tax-loss harvesting is provided by Betterment on all taxable investment accounts, at no additional charge. (Since retirement accounts are tax-deferred, tax-loss harvesting is not required.)

The tables in the next section show the asset classes and the ETFs that make them up both the stock and bond portions of your portfolio.

Notice that on all the stock asset classes, as well as many bond classes, there are as many as three ETFs listed. These represent the funds Betterment is using to accomplish tax-loss harvesting for each asset class where it applies.

Betterment Stock & Bond Asset Classes and ETFs:

Stock Asset ClassPrimary ETFSecondary ETFAdditional Secondary ETF
US Total Stock MarketVanguard US Total Stock Market (VTI)Schwab US Broad Market ETF (SCHB)iShares S&P 1500 Index Fund (ITOT)
US Value Stocks – Large CapVanguard US Large-Cap Value (VTV)Schwab US Large Cap Value ETF (SCHV)iShares S&P 500 Value ETF (IVE)
US Value Stocks – Mid CapVanguard US Mid-Cap Value (VOE)iShares Russell Midcap Value Index (IWS)iShares S7P Mid-Cap 400 Value Index (IJJ)
US Value Stocks – Small CapVanguard US Small-Cap Value (VBR)iShares Russell 2000 Value Index (IWN)SPDR S&P 600 Small Cap Value ETF (SLYV)
International Developed Market StocksVanguard FTSE Developed Markets (VEA)Schwab International Equity ETF (SCHF)iShares Tr/Core MSCI EAFE ETF (IEFA)
International Emerging Market StocksVanguard FTSE Emerging Markets (VWO)iShares Inc/Core MSCI Emerging (IEMG)SPDR Portfolio Emerging Markets ETF (SPEM)
Bond Asset ClassPrimary ETFSecondary ETFAdditional Secondary ETF
US High Quality BondsiShares Barclays Aggregate Bond Fund (AGG)Vanguard Total Bond Market ETF (BND)N/A
US Municipal BondsiShares National AMT-Free Muni Bond (MUB)SPDR Nuveen Barclays Capital Muni Bond (TFI)N/A
US Inflation-Protected BondsVanguard Short-term Inflation Protected Securities (VTIP)N/AN/A
US High-Yield Corporate BondsXtrackers USD High Yield Corporate Bond (HYLB)SPDR Barclays Capital High Yield Bond (JNK)iShares iBoxx $ High Yid Corp Bond (HYG)
US Short-term Treasury BondsiShares Barclays Short Treasury Bond (SHV)N/AN/A
US Short-term Investment Grade BondsJ.P. Morgan - Ultra-Short Income ETF (JPST)N/AN/A
International Developed Market BondsVanguard Total International Bond (BNDX)N/AN/A
International Emerging Market BondsiShares Emerging Markets Bond (EMB)Vanguard Emerging Markets Government Bond (VWOB)PowerShares Emerging Markets PCY Debt (PCY)

Other Betterment Services

Betterment offers a couple of financial services that while not being investment related themselves, are nonetheless valuable additions to your investment activities.

Cash Reserve

Betterment offers this Cash Reserve account to give you a place to park your cash that will pay a rate of interest many times higher than your local bank.

Since the funds are invested through several partnering banks, FDIC insurance will cover deposits up to $1 million.

RateAs Of
0.40%9/10/2020

Checking

Like many other investment services, Betterment is moving closer to being a one-stop financial shop by offering banking services.

In partnership with NBKC Bank, Betterment offers their no-fee checking account. That means no monthly maintenance fees, overdraft fees, or other types of fees. They’ll also reimburse you for all ATM fees and foreign transaction fees that are charged by third party financial organizations.

There is no minimum balance requirement, your account will come with a Visa debit card, and you’ll enjoy FDIC insurance up to $250,000.

How to Set Up a 401(k)/IRA Rollover with Betterment

You can set up an account with Betterment in a matter of minutes, and entirely online. All you need to do is follow the instructions.

You’ll be asked to complete a questionnaire that will determine your risk tolerance, investment goals, and investment time horizon. That will help Betterment design a portfolio for you, which can range anywhere from conservatives to very aggressive.

Once your account has been opened, you’ll be able to complete the rollover of either your 401(k) plan or an IRA from another trustee.

The good news is that you can have Betterment handle the transfer of either plan directly with the current trustee. They just need to get the relevant information, which may require submitting documents from the current trustee.

Betterment will handle the transfer of funds from the previous account, sparing you the need to complete a bunch of paperwork and make phone calls to the current trustee.

Betterment Pros

  • The Digital plan requires no minimum initial investment – making it open to investors at all levels.
  • Portfolio management is comprehensive, and includes dividend reinvesting, periodic portfolio re-balancing, and complete reporting of all investing activities.
  • Betterment offers multiple portfolios to accommodate every type of investor.
  • Betterment includes value stocks in their portfolios, giving you an opportunity to outperform the general market.
  • The Flexible Portfolio will give you some control over your asset allocations.
  • Tax-loss harvesting is included on all taxable investment accounts.
  • Betterment Cash Reserve is available to give you higher interest on your savings, while Betterment Checking provides no-fee checking, enabling you to bank where you invest.

Betterment Cons

  • Unlike some robo-advisors, Betterment doesn’t offer alternative investments, like real estate and natural resource asset allocations.

Verdict

If you’re facing a decision to rollover a 401(k), or if you’d like to transfer your current IRA to a new trustee, Betterment should be on your short list of IRA providers. The combination of multiple investment opportunities, complete professional investment management, and low fees is too strong a combination to pass up.

Keep Reading:

Betterment 401K Rollover
Article written by Kevin Mercadante

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