Planning for retirement is a crucial step in organizing your financial life. Many people have different definitions of what retirement actually means, but saving money, in general, is a good habit and a part of any good retirement plan.
There are many different types of tax-advantaged retirement accounts, such as employer-sponsored 401(k) plans, 403(B) plans, 457 plans, pension plans, and more. These can be an effective choice for some retirement investors, however, they must be offered through an employer.
For many others, an IRA is an attractive choice for a retirement account. These can be set up on your own and don't require an employer sponsor But even when looking at the IRA, there are multiple account types to choose from.
Traditional IRAs and Roth IRAs are a couple of the most common variations of retirement accounts.
Zeroing in on the Roth IRA, let's take it a step further. Just like there are many different brokerages out there, there are numerous Roth IRA providers.
The cold hard truth is that some are just better than others.
Today, we are going to be reviewing the Betterment Roth IRA. By the end, you should have a good understanding of whether or not this Roth IRA and investment platform will be right for you.
Summary
Roth IRAs can be a great retirement tool for many investors. The Betterment platform is one that is geared towards retirement investing with a lot of great features to keep your Roth IRA running in the most efficient way.
These features include tax coordinated portfolios, automated rebalancing, fractional shares and portfolio allocation over time. However, your money will solely be invested in ETFs holding stocks and bonds. There is no self directed approach or individual stocks. When you compare the 0.25% asset management fee to most financial advisors, it is significantly less expensive. There are a number of free Roth IRAs out there, but they often lack the features that Betterment offers.
All in all, if you are going to choose a robo-advisor to manage your Roth IRA, Betterment offers a very appealing option.
Pros
Cons
Betterment launched in 2008, and has since grown to be one of the largest robo-advisors on the market today with over $22 billion in assets under management.
The company has been built on the idea of saving your money and planning for your financial future. They have become a favorite of hands-off investors due to their focus on being a truly automated system.
They feature no minimum deposit which is great for beginner investors and those who want to give the platform a try.
Betterment is also very structured with a great goal-setting system. Their easy-to-use user interface makes Betterment an appealing platform for beginner investors. They also offer a high yield savings account called Betterment Cash Reserve.
Betterment also has a strong focus on retirement accounts. They offer traditional, Roth, and SEP IRAs for you to use. But today we’ll be focusing on the Roth and what makes it special.
Here is our full review of Betterment.
When you sign up for a Betterment account, you will be prompted to answer a questionnaire detailing your investing experience and goals. This questionnaire will be used to create an investing plan for you.
As time goes on, you will be able to tweak your plan and edit your investments as new circumstances arise. However, one of the core benefits of Betterment is how streamlined the platform is. Once your account is set up, you can rely on their algorithms to help you meet your goals.
Additionally, within your account, you'll be able to set up individual sub-accounts if you want to save for multiple goals. In the case of a Roth IRA, you likely won't need to do this because all of your investments will likely be used for retirement.
A Roth IRA is a retirement account that is funded with after-tax dollars. This means you fund the account with dollars that have already been taxed when you earned them.
The advantage of a Roth IRA is that qualified distributions are tax-free. So in retirement, you will be able to take distributions from this account and not have to pay income taxes.
Traditional IRAs on the other hand are considered tax-deferred, meaning you get a deduction off your taxes for the amount you contribute to your account.
For example, if your income was $40,000 and you made a $2,000 contribution to a traditional IRA, you will only be taxed on $38,000.
Later in retirement, you will be able to take qualified distributions from your account. You will pay ordinary income taxes on distributions from a traditional IRA.
The Roth IRA gives you delayed gratification. You pay taxes now, but avoid them down the road in the future as your money grows tax-free.
Traditional IRA's and 401k's give you instant gratification. You get the tax break now, but you pay taxes on future gains.
The choice between these two types of accounts is an important one and largely depends on your individual circumstances.
Based on the 2022 tax year, you may contribute up to $6,000 per year to your Roth IRA but if you are over 50 you may deposit up to $7,000 instead. This amount does tend to increase every couple of years to keep up with inflation.
A common misconception about Roth IRAs is that once you put funds into your account, they are locked away forever. This is not the case.
In reality, you are able to withdraw your contributions from your Roth IRA at any point without paying any taxes or penalties. This is because a Roth IRA holds money that has already been taxed as mentioned earlier.
The restrictions come into place when you start withdrawing your earnings. In order to withdraw your gains tax-free, there are a few requirements you must meet. Essentially your withdrawal must be what is referred to as a qualified distribution.
To be classified as a qualified distribution, your account must have been opened at least 5 years ago and you must have a qualifying reason. Qualifying reasons include reaching age 59.5, becoming disabled, or death.
There are also a few exceptions to the penalty such as buying your first home, qualified education expenses, medical expenses, and more.
As these are retirement accounts, the primary tax incentive is to save for retirement and get a benefit for doing it. So, a general rule of thumb to follow here is only invest money you are willing to put away for your retirement.
Betterment charges its fees based on the assets under management in your accounts. There are two Betterment price tiers, Betterment Digital and Betterment Premium.
Digital ($0 Minimum, 0.25% Fee) - If you have less than $100,000 in managed assets you will be using their Digital tier which has no minimum deposit amount and charges a fee of 0.25% of your total managed assets. You get access to all of Betterment's investment features and tools.
If you had $100,000 in this account tier, your fee would amount to $250 per year.
Premium ($100,000 Minimum, 0.40% Fee) - If you have over $100,000 or more to invest then you can opt to be included in Betterment Premium with access to a financial advisor. The Betterment Premium plan has a fee of 0.40% of your total managed assets. You will get access to all of Betterments features plus continuous access to a financial planner.
If you had $100,000 in this account tier, your fee would amount to $400 per year.
You DO NOT need to be in the Premium plan just because you have $100,000 or more invested. In fact, you can have any amount of money invested in the Digital plan, even in excess of $100,000. You just can't invest in the Premium plan if you have less than $100,000.
Betterment has some unique features as they have such a heavy focus on retirement accounts. This makes them one of the best platforms for opening a Roth IRA and begin planning for retirement.
Betterment gives your portfolio an advised allocation and occasionally it will lean away from this mark. Portfolio rebalancing will bring it back into its original asset allocation.
If your portfolio drifts by more than 3%, Betterment will automatically rebalance the portfolio to bring it back in line with the intended allocation. This happens when Betterment performs buys and sells in your account on your behalf.
Don't worry about taxes, you are placing these trades within a retirement account!
Allocation Adjustment means that Betterment is going to be adjusting your portfolio in order to maintain the amount of risk that they recommended, based on your goals for retirement.
Typically Betterment will recommend more aggressive asset allocations if you have a long time horizon.
According to Betterment if you are in your twenties or thirties most people should be running a 90/10 ratio of stocks vs bonds for long-term investments.
There are a number of reasons to tone down risk as your time horizon shortens. To keep it simple, the older you are the less time you have to recoup any losses. Meaning you should be less invested in stocks that are volatile and more in lower-risk stocks and bonds.
The closer you get to retirement age, the more your portfolio will be weighted towards safer assets such as bonds.
The allocation adjustment process is entirely automatic through Betterment and not something you have to do manually. Based on your goals, the reallocation will be different from person to person.
That is the benefit of having a robo-advisor, they do all the hard work for you automatically!
Betterment's tax coordination feature is something that will only be applicable to people with both a taxable account and an IRA.
Basically what this means is that Betterment is going to put as much of your high tax rate assets into the Roth IRA as possible. The lower tax rate assets will be held in your taxable account.
For example, this may mean investing in dividend stocks with qualified dividends in your taxable account and interest-bearing bonds in your Roth IRA. Qualified dividends are taxed at lower long-term capital gains rates and interest is taxed as ordinary income.
This will allow your total allocation to remain the same, but your after-tax returns are going to be higher as a result.
Betterment claims this tactic can increase your after-tax returns by 15% over a 30-year span.
To explain it simply, your investments that are taxed at a higher rate will be placed in your tax-sheltered account. The investments you pay less in taxes on will be placed in your taxable account.
Betterment makes opening an account and an IRA with them pretty simple. Most people will be able to get it done in a matter of minutes and get the ball rolling.
Betterment also gives you the opportunity to preview your portfolio and projections before you actually sign up in order to make sure the platform is the best choice for your financial situation.
Betterment even offers a Roth IRA calculator to see if a Roth is actually is the best choice.
Lastly, you’ll actually sign up for the account. You will need all the standard info here: name, birthday, social security number the whole bit. The only thing left to do is link your bank account so you can begin funding your account.
What if you already have a Roth IRA and just want to transfer it into the Betterment platform?
Well, there are two different roads you can go down to get this done. Betterment will do this process for you, or you can do it manually.
If you prefer, Betterment can perform a direct transfer with their automated service. Betterment will transfer your assets from the origin brokerage into the Betterment platform. It usually takes around 7 business days to complete.
The other way is for you to withdraw your funds from the old IRA and deposit them with Betterment using a 60-day rollover. Doing it this way gives you 60 days to complete the deposit or the IRS will count it as an early withdrawal and you will pay penalties and fees.
Roth IRAs can be a great retirement tool for many investors. The Betterment platform is one that is geared towards retirement investing with a lot of great features to keep your Roth IRA running in the most efficient way.
These features include tax coordinated portfolios, automated rebalancing, fractional shares, and portfolio allocation over time. However, your money will solely be invested in ETFs holding stocks and bonds. There is no self-directed approach or individual stocks.
When you compare the 0.25% asset management fee to most financial advisors, it is significantly less expensive. There are a number of free Roth IRAs out there, but they often lack the features that Betterment offers.
All in all, if you are going to choose a robo-advisor to manage your Roth IRA, Betterment offers a very appealing option.
