My 401(k). My future.
Use the resources below to make the most of your 401(k) plan and strengthen your financial wellness.
Most Recent Posts
-
How to turn your retirement savings into retirement income
How to turn your retirement savings into retirement income An income strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens. Retirement planning doesn’t end when you retire. To have the retirement you’ve been dreaming of, you need to ensure your savings will last. And how much you withdraw each month isn’t all that matters. In this guide we’ll cover: What a retirement income plan is How much to withdraw each year Which accounts you should withdraw from first Why changes in the market affect you differently in retirement How to handle a market downturn when you’re nearing retirement How Betterment helps take the guesswork out of your retirement income What is retirement income planning? You’ll likely spend decades saving and investing for retirement. But when that big moment comes, what happens next? If you’ve been diligently setting aside cash, you might have upwards of a million dollars to manage. That’s certainly something to be proud of: It puts you in a great position—and also comes with new responsibilities. Think of it this way: You’ve been getting a paycheck from your employer regularly for 30 to 40 years. Now you’re the one cutting those checks. So,how do you make the most of your assets? What is the best way to turn them into a stream of sustainable income that will, hopefully, last you through retirement? “Retirement income planning” is a broad phrase to help you think about how to prepare for the “spend down” years (as opposed to the “saving up” years). Financial professionals used to refer to the “three-legged stool” of retirement income planning: Social Security, a pension, and personal savings. Considering that pensions are hardly used anymore, and the future of Social Security is murky, we’re more-or-less down to one leg: personal savings. But in today’s world, personal savings can incorporate a few different cash streams – personal investment accounts, Individual Retirement Accounts (IRAs), and of course – a 401(k). All of which can play a role in your retirement income plan. Why changes in the market affect you differently in retirement Stock markets can swing up or down at any time. They’re volatile. When you’re saving for a distant retirement, you usually don’t have to worry as much about temporary dips. But during retirement, market volatility can have a greater effect on your savings. An investment account is a collection of individual assets. When you make a withdrawal from your retirement account, you’re selling off assets to equal the amount you want to withdraw. So say the market is going through a temporary dip. Since you’re retired, you have to continue making withdrawals in order to maintain your income. During the dip, your investment assets may have less value, so you have to sell more of them to equal the same amount of money. When the market goes back up, you have fewer assets that benefit from the rebound. The opposite is true, too. When the market is up, you don’t have to sell as many of your assets to maintain your income. There will always be good years and bad years in the market. How your withdrawals line up with the market’s volatility is called the “sequence of returns.” Unfortunately, you can’t control it. In many ways, it’s the luck of the withdrawal. Still, there are ways to help decrease the potential impact of a bad sequence of returns. How to limit bad timing from ruining your retirement The last thing you want is to retire and then lose your savings to market volatility. Consider taking some steps to try and protect your retirement from a bad sequence of returns. Adjust your level of risk As you near or enter retirement, it’s likely time to start dialing down your stock-to-bond allocation. Invest too heavily in stocks, and your retirement savings could tank right when you need them. Betterment generally recommends turning down your ratio to about 56% stocks in early retirement, then gradually decreasing to about 30% toward the end of retirement. Rebalance your portfolio During retirement, the two most common cash flows in/out of your investment accounts will likely be dividends you earn and withdrawals you make. If you’re strategic, you can use these cash flows as opportunities to rebalance your portfolio. For example, if stocks are down at the moment, you likely want to withdraw from your bonds instead. This can help prevent you from selling stocks at a loss. Alternatively, if stocks are rallying, you may want to reinvest your dividends into bonds (instead of cashing them out) in order to bring your portfolio back into balance with your preferred ratio of stocks to bonds. Keep an emergency fund Even in retirement, it’s important to have an emergency fund. If you keep a separate account in your portfolio with enough money to cover three to six months of expenses, you can likely cushion—or ride out altogether—the blow of a bad sequence of returns. Supplement your income Hopefully, you’ll have enough retirement savings to produce a steady income from withdrawals. But it’s nice to have other income sources, too, to minimize your reliance on investment withdrawals in the first place. While there still is Social Security—it’s future is murky. Maybe you have a pension you can withdraw from, too. Or a part-time job. Or rental properties. Along with the other precautions above, these additional income sources can help counter bad returns early in retirement. While you can’t control your sequence of returns, you can control the order you withdraw from your accounts. And that’s important, too. How much should you withdraw each year Deciding how much to withdraw annually from your 401(k) once you’re retired involves balancing anticipated expenses with available savings. You’ll want to consider tax implications, market fluctuations, inflation, health/longevity, and additional income streams (more on this below). A good place to start is with the 4% rule, which entails withdrawing 4% of your retirement savings in the first year, then adjusting the amount annually for inflation. Keep in mind: the 4% rule typically assumes your portfolio is split almost evenly between stocks and bonds, and that your funds are held in a tax-deferred account, such as a traditional IRA or 401(k), where withdrawals are taxable. Although the 4% rule has been popular for decades, it's applicability has been challenged in recent years. Longer lifespans, healthcare costs, inflation rates, and additional income streams have all changed the economic landscape. Ultimately, there is no one-size-fits-all answer to how much you should withdraw annually in retirement. A financial advisor can help you create a roadmap that’s right for you in retirement. Which accounts to withdraw from first In retirement, taxes are usually one of your biggest expenses. They’re right up there with healthcare costs. When it comes to your retirement savings, there are three “tax pools” your accounts can fall under: Taxable accounts: individual accounts, joint accounts, and trusts. Tax-deferred accounts: individual retirement accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans Tax-free accounts: Roth IRAs, Roth 401(k)s Each of these account types (taxable, tax-deferred, and tax-free) are taxed differently—and that’s important to understand when you start making withdrawals. When you have funds in all three tax pools, this is known as “tax diversification.” This strategy can create some unique opportunities for managing your retirement income. For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. With a tax-deferred account like a Traditional 401(k), you usually pay taxes on the full amount you withdraw, so with each withdrawal, taxes take more away from your portfolio’s future earning potential. Since you don’t have to pay taxes on withdrawals from your tax-free accounts, it’s typically best to save these for last. You want as much tax-free money as possible, right? So, while we’re not a tax advisor, and none of this information should be considered advice for your specific situation, the ideal withdrawal order generally-speaking is: Taxable accounts Tax-deferred accounts Tax-free accounts But there are a few exceptions. Incorporating minimum distributions Once you reach a certain age, you must generally begin taking required minimum distributions (RMDs) from your tax-deferred accounts. Failure to do so results in a steep penalty on the amount you were supposed to take. This changes things—but only slightly. At this point, you may want to consider following a new order: Withdraw your RMDs. If you still need more, then pull from taxable accounts. When there’s nothing left in those, start withdrawing from your tax-deferred accounts. Pull money from tax-free accounts. Smoothing out bumps in your tax bracket In retirement, you’ll likely have multiple sources of non-investment income, coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. Since these income streams vary from year to year, your tax bracket may fluctuate throughout retirement. With a little extra planning, you can sometimes use these fluctuations to your advantage. For years where you’re in a lower bracket than usual–say, if you’re retiring before you plan on claiming Social Security benefits–it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions. For years where you’re in a higher tax bracket, like if you sell a home and end up with large capital gains–it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested. How Betterment helps take the guesswork out of your retirement income If all of the above sounds confusing, you’re not alone. It’s why we developed a dynamic income solution specifically for retirees. Our expert-built technology factors in the unique goal details that you provide when creating your retirement account to help advise you on the optimal amount for withdrawal over the coming year, with the intention of fostering year-to-year income consistency. And it’s all managed through our existing platform, making for a seamless process. You can even set up automatic withdrawals from your Betterment account to your checking account, helping you maintain a personalized payment schedule.
-
How to invest during market highs
How to invest during market highs Betterment experts weigh in on how to override anxiety, and be invested when the market climbs. While we invest for our own reasons, we get into the market to take advantage of potential price appreciation and income produced by financial assets. But anxiety can get the best of even the most eager investors. What if I buy when the market peaks, and then immediately declines? Sound familiar? As any investor knows, psychological aspects can cloud one’s judgment when it comes to money. We’re encouraged to minimize risk and maximize returns, whenever possible. So, a market that’s going up-up-up, can leave some investors feeling hesitant about paying premium prices—instead of opting for undervalued stocks, or lower price points. So how do we override the Fear of Purchasing at All-time Highs (or FOPAH, for short)? Is it best to dive in, or wait for a potential pullback? Our investment experts believe one of the best things you can do is face your fear, wading into the market. In practice, it can take a long time before that pullback comes, during which there may be further positive market returns. For instance, between 2012 and 2017, the S&P 500 did not experience a pullback greater than 12%. Oftentimes when a pullback does arrive, it’s not heralded as a positive outcome—but an ominous event, accompanied by scary headlines that spark new fears of further downturn. This can all lead to additional hesitancy around buying stocks. While there's no "perfect" time to invest, we can still be confident that choosing a diversified portfolio of investments is a smart way to help achieve long-term financial goals. To ease your fears, work out approximately how much time you’ll need to save up for your own goals. Long-term goals, like saving for college or a deposit on a house, can take time. And that’s a good thing! The longer your time horizon (the period of time you plan to keep your savings invested in the market), the more confident you can be that your money will grow by the point you want to withdraw it. Even if the market has already recently run up when you go to invest, a prolonged time horizon should help quell a pullback in the nearterm. Despite volatility, the stock market tends to trend upwards over longer periods. By maintaining a long-term perspective, you can position yourself to benefit from the market's long-term growth potential, which can outweigh short-term losses. Dating back to 1988, if you decided to invest on any given trading day, 65% of those days would have resulted in a positive investment return over the following month. The share of days with positive returns goes up as that trailing holding period extends. Historically, no matter when an investment was made between 1988 and 2009, the market was higher 100% the time just 15 years later. Short-term goals, like saving for a vacation or a home reno, have a shorter time horizon—meaning your money has less time to grow in the market. However, it's worth remembering that historically, investing at all-time highs has not resulted in lower future returns compared to investing on any other given day. After the S&P 500 reaches an all-time high, average returns tend to be slightly higher than during periods when the index has not soared so high. Practical steps to help ease your anxiety: Set up recurring deposits: When you commit to investing a fixed amount of money at set intervals over time, your losses could potentially be smaller if the market does dive in the near term. Plus, you will still have cash ready to buy at lower prices. While this comes with the risk of later buying at higher prices, it can help override the emotional pressure of trying to time the market. Diversify: Consider adding other asset classes, regions, and company sizes in your portfolio (as we do at Betterment). Our automated portfolio rebalancing is designed to maintain your investment portfolio's target asset allocation over time. Betterment continuously monitors your portfolio to see if the current allocation deviates from your target allocation—due to market fluctuations or changes in the value of your investments. Our auto-adjust feature can also help right-size the risk level of your portfolio by reducing the share of the portfolio allocated to more volatile stocks, and increasing the share allocated to bonds as your time horizon shortens.
-
How an IRA can fit into your retirement strategy
How an IRA can fit into your retirement strategy You already have access to a Betterment 401(k) through your employer. But if you’re not sure what the difference is between your 401(k) and IRA, we’ll lay it all out for you here. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have for the earnings on your investment to compound before you reach retirement age. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. Your employer already offers a 401(k) through Betterment—nice! But you may also want to have an IRA too, for a more robust plan. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but just about anyone can open an IRA. A 401(k) is what’s known as an employer-sponsored retirement plan: It’s only available through an employer. Other differences between these two types of accounts are that: Employers may offer a matching contribution into your 401(k) account, based on what you contribute 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an IRA, you determine exactly when and how to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) almost always has to come from your paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2024 is $7,000 if you’re under 50, or $8,000 if you’re 50 or older. For a 401(k), the contribution limit for 2024 is $23,000 if you’re under 50, or $30,500 if you’re 50 or older. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA in retirement, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an IRA is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now—and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: Why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you achieve greater returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. Calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center. So what’s right for you? Since your employer offers a 401(k) through Betterment, it’s typically best to start there. Some employers auto-enroll new hires, meaning that paycheck contributions start automatically. Whether your employer auto-enrolls or not, you’ll need to start by claiming your 401(k) account. Once you claim your account, you can set or adjust the contribution rate. Get started here: betterment.com/accountaccess. After you’ve got your 401(k) up and running, you might want to consider contributing to an IRA as well. On your dashboard, select “Add new” in the left-hand navigation, then choose: IRA. Follow the prompts to select which type of IRA you want, and sync a bank account to contribute from. You’ll have access to the same investment options available in your 401(k). Retirement can feel hard to plan for, but Betterment has plenty of investing options to make it easy to save for. We’re here to help you work towards for the retirement of your dreams.
Explore our article library
Getting started
-
![]()
Investing in Your 20s: 4 Major Financial Questions Answered
Investing in Your 20s: 4 Major Financial Questions Answered When you're in your 20s, you may be starting to invest or you might have some existing assets you need to take better care of. Pay attention to these major issues. For most of us, our 20s is the first decade of life where investing might become a priority. You may have just graduated college, and having landed your first few full-time jobs, you’re starting to get serious about putting your money to work. More likely than not, you’re motivated and eager to start forging your financial future. Unfortunately, eagerness alone isn’t enough to be a successful investor. Once you make the decision to start investing, and you’ve done a bit of research, dozens of new questions emerge. Questions like, “Should I invest or pay down debt?” or “What should I do to start a nest egg?” In this article, we’ll cover the top four questions we hear from investors in their twenties that we believe are important questions to be asking—and answering. “Should I invest aggressively just because I’m young?” “Should I pay down my debts or start investing?” “Should I contribute to a Roth or Traditional retirement account?” “How long should it take to see results?” Let’s explore these to help you develop a clearer path through your 20s. “Should I invest aggressively just because I’m young?” Young investors often hear that they should invest aggressively because they “have time on their side.” That usually means investing in a high percentage of stocks and a small percentage of bonds or cash. While the logic is sound, it’s really only half of the story. And the half that is missing is the most important part: the foundation of your finances. The portion of your money that is for long-term goals, such as retirement, should most likely be invested aggressively. But in your twenties you have other financial goals besides just retirement. Let’s look at some common goals that should not have aggressive, high risk investments just because you’re young. Emergency fund. It’s extremely important to build up an emergency fund that covers 3-6 months of your expenses. We usually recommend your emergency fund should be kept in a lower risk option, like a high yield savings account or low risk investment account. Wedding costs. According to the U.S. Census Bureau, the median age of a first marriage for men is 29, and for women, it’s 27. You don’t want to have to delay matrimony just because the stock market took a dip, so money set aside for these goals should also probably be invested conservatively. A home down payment. The median age for purchasing a first home is age 33, according to the the National Association of Realtors. That means most people should start saving for that house in their twenties. When saving for a relatively short-term goal—especially one as important as your first home—it likely doesn’t make sense to invest very aggressively. So how should you invest for these shorter-term goals? If you plan on keeping your savings in cash, make sure your money is working for you. Consider using a cash account like Cash Reserve, which could earn a higher rate than traditional savings accounts. If you want to invest your money, you should separate your savings into different buckets for each goal, and invest each bucket according to its time horizon. An example looks like this. The above graph is Betterment’s recommendation for how stock-to-bond allocations should change over time for a major purchase goal. And don’t forget to adjust your risk as your goal gets closer—or if you use Betterment, we’ll adjust your risk automatically with the exception of our BlackRock Target Income portfolio. “Should I pay down my debts or start investing?” The right risk level for your investments depends not just on your age, but on the purpose of that particular bucket of money. But should you even be investing in the first place? Or, would it be better to focus on paying down debt? In some cases, paying down debt should be prioritized over investing, but that’s not always the case. Here’s one example: “Should I pay down a 4.5% mortgage or contribute to my 401(k) to get a 100% employer match?” Mathematically, the employer match is usually the right move. The return on a 100% employer match is usually better than saving 4.5% by paying extra on your mortgage if you’re planning to pay the same amount for either option. It comes down to what is the most optimal use of your next dollar. We've discussed the topic in more detail previously, but the quick summary is that, when deciding to pay off debt or invest, use this prioritized framework: Always make your minimum debt payments on time. Maximise the match in your employer-sponsored retirement plan. Pay off high-cost debt. Build your emergency fund. Save for retirement. Save for your other goals (home purchase, kid’s college). “Should I contribute to a Roth or Traditional retirement account?” Speaking of employer matches in your retirement account, which type of retirement account is best for you? Should you choose a Roth retirement account (e.g. Roth 401(k), Roth IRA) in your twenties? Or should you use a traditional account? As a quick refresher, here’s how Roth and traditional retirement accounts generally work: Traditional: Contributions to these accounts are usually pre-tax. In exchange for this upfront tax break, you usually must pay taxes on all future withdrawals. Roth: Contributions to these accounts are generally after-tax. Instead of getting a tax break today, all of the future earnings and qualified withdrawals will be tax-free. So you can’t avoid paying taxes, but at least you can choose when you pay them. Either now when you make the contribution, or in the future when you make the withdrawal. As a general rule: If your current tax bracket is higher than your expected tax bracket in retirement, you should choose the Traditional option. If your current tax bracket is the same or lower than your expected tax bracket in retirement, you should choose the Roth option. The good news is that Betterment’s retirement planning tool can do this all for you and recommend which is likely best for your situation. We estimate your current and future tax bracket, and even factor in additional factors like employer matches, fees and even your spouse’s accounts, if applicable. “How long should it take to see investing results?” Humans are wired to seek immediate gratification. We want to see results and we want them fast. The investments we choose are no different. We want to see our money grow, even double or triple as fast as possible! We are always taught of the magic of compound interest, and how if you save $x amount over time, you’ll have so much money by the time you retire. That is great for initial motivation, but it’s important to understand that most of that growth happens later in life. In fact very little growth occurs while you are just starting. The graph below shows what happens over 30 years if you save $250/month in today’s dollars and earn a 7% rate of return. By the end you’ll have over $372,000! But it’s not until year 5 that you would earn more money than you contributed that year. And it would take 18 years for the total earnings in your account to be larger than your total contributions. How Compounding Works: Contributions vs. Future Earnings The figure shows a hypothetical example of compounding, based on a $3,000 annual contribution over 30 years with an assumed growth rate of 7%, compounded each year. Performance is provided for illustrative purposes, and performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. Content is meant for educational purposes on the power of compound interest over time, and not intended to be taken as advice or a recommendation for any specific investment product or strategy. The point is it can take time to see the fruits of your investing labor. That’s entirely normal. But don’t let that discourage you. Some things you can do early on to help are to make your saving automatic and reduce your fees. Both of these things will help you save more and make your money work harder. Use Your 20s To Your Advantage Your 20s are an important time in your financial life. It is the decade where you can build a strong foundation for decades to come. Whether that’s choosing the proper risk level for your goals, deciding to pay down debt or invest, or selecting the right retirement accounts. Making the right decisions now can save you the headache of having to correct these things later. Lastly, remember to stay the course. It can take time to see the type of growth you want in your account. -
![]()
How to pick a 401(k) contribution rate
How to pick a 401(k) contribution rate Your 401(k) contribution rate - also known as a deferral rate or savings rate - is a key part of a successful retirement strategy. You’ve taken that first step and have set up your Betterment 401(k) account - well done! One important piece to consider next is your contribution rate - how much from each paycheck will go into your account? With your Betterment 401(k), you could use a percentage or a fixed dollar amount, whichever you prefer. Here are a few other things to consider: Were you automatically enrolled? Many employers choose to automatically enroll their employees in the plan with a default contribution rate of 3% – if you're not sure, please check with your employer or take a look in your Retirement goal. Keep in mind, whatever the default contribution rate is, it’s just a starting point. You can (and probably should) increase that contribution rate at any time in your account. At least a decade without a paycheck Most experts recommend contributing 10%–15% of your paycheck to have enough to last you through retirement - which could be 20-30 years considering how long people are living! If you retire at age 65, with a healthy lifestyle and no major risk factors, you could live well into your 80s or 90s. That means you'll want to set yourself up for living off your personal savings and investments for about 20 years! Starting small is better than nothing If 10-15% of your paycheck sounds absurd to you right now - deep breath, think of that as something to aim for. You can start with something smaller, maybe 5 or 6%, and slowly but surely increase your savings rate every year – your birthday? Give yourself a gift and increase it by 1%. Your work anniversary? Cheers to you, bump it up again. And those 1% increases can actually be a big deal. Go for the max Because of its tax benefits, the IRS sets a limit on how much you can put into your 401(k) every year. So you could aim to contribute as much as the IRS allows! For people 50 and over, the limit is higher, which is referred to as “catch-up contributions.” And if you really want to be an over-achiever, you can also contribute to an IRA, an individual retirement account, to save even more. Tax considerations With your Betterment 401(k), you can make contributions into a traditional 401(k) account and/or a Roth 401(k). There are tax benefits to both: Traditional 401(k): Contributions are deducted from your paycheck before taxes are withheld, which can lower your taxable income. Both your contributions and investment earnings are “tax-deferred,” meaning you won’t pay taxes on what you contributed to the account as well as any earnings until you withdraw the money at retirement. In other words, save on taxes now, pay taxes later. Roth 401(k): Contributions are made with after-tax dollars so your withdrawals—both the contributions and earnings—are tax-free once you decide to retire (minimum age, 59½), and as long as you’ve held the Roth account for at least five years. In other words, pay taxes now, no taxes later. Remember that you can use both! Say you want to contribute 10% towards your retirement? You can put 5% into a traditional 401(k) and 5% into the Roth 401(k). This is one way you can balance your tax exposure. If you already have your account set up, log in today to adjust your contribution rate or reassess your traditional and Roth contributions. Haven’t started saving in your Betterment 401(k) yet? Check your email for an access link from Betterment, or get in touch: Send us an email: support@betterment.com Give us a call: (718) 400-6898, Monday through Friday, 9:00am-6:00pm ET -
![]()
Welcome to Your 529 Education Savings Benefit
Welcome to Your 529 Education Savings Benefit Use this step-by-step guide to get started We’re excited you’re here and ready to get set up with a 529! You can enroll in a new 529 plan, select plan-specific investments, connect existing 529 accounts, and automate payroll deductions all within the Betterment app. Use the step-by-step guide below to get started. Setting up a new 529 Get started Log in to your account, and choose: Add new goal. Click on 529 Plan. Answer a few questions about your savings goals. Choose your 529 plan Betterment will display one or more 529 plans you might be interested in based on your location, your beneficiary’s age, and any income tax benefits that may be available to you. You can pick one of those, or review all other options. If you choose a plan that can be integrated within the Betterment experience, you’ll move on to the steps below. Note that integrated 529 accounts and their plans are not managed by Betterment and instead are held and managed by program administrators of each 529 plan. If your selected plan is not eligible to integrate, you can still access and connect it to Betterment manually, and take advantage of Betterment’s other products alongside your education savings account. Select a portfolio Within each plan, there are two types of investment options: Choose a portfolio that’s managed for you by the plan investment manager and automatically adjusts over time. Choose to manage your own portfolio to reflect your time frame and desired risk level. This option gives you more direct control. Enroll in a plan Complete paperwork: Confirm details about yourself and any beneficiaries. All set! Check out your new goal in your Betterment dashboard! Connecting an existing 529 account Get started Log in to your account, and choose: Add new goal. Click on the 529 Goal. Click on Connect an existing 529 (If you choose a plan that can be integrated within the Betterment experience, you’ll move on to the steps below. Note that integrated 529 accounts and their plans are not managed by Betterment and instead are held and managed by program administrators of each 529 plan. If your selected plan is not eligible to integrate, you can still access and connect it to Betterment manually, and take advantage of Betterment’s other products alongside your education savings account.) Tell us your account number. Read and sign our Terms and Conditions. Authorize Betterment to access your account. In the Betterment app, you will now see your 529 plan in your dashboard. Set up contributions Navigate to set up contributions or deposits. You have two ways to contribute toward your 529 account: through payroll deductions or by linking a bank account within Betterment: Payroll deductions (post-tax): These payments are eligible for an employer match, if your employer offers one. Select Payroll deduction to have contributions automatically come out of your paycheck. Choose a 529 account to contribute to. Decide how much money you want to contribute per pay period. Review and approve your contribution rate. Linked bank account: Select Linked bank account Choose a 529 account to contribute to. Decide how much you want to contribute and at what frequency. Review and approve your contribution rate. Dashboard overview Overview tab: View all of your 529 accounts and balances. Note that payments typically take 5-7 days to process. Activity tab: See your Betterment payment activity. Settings tab: See your 529 account details and link your Betterment account directly to your 529 plan account in order to navigate back and forth seamlessly.
Investing with Betterment
-
![]()
Get to know your portfolio options
Get to know your portfolio options Betterment helps take the stress out of investing with a range of expert-built portfolio options, made of generally low-cost ETFs (exchange-traded funds). Given the breadth of available choices, it’s natural to wonder which portfolio is right for your financial situation. The good news is each option has been designed to help investors, like you, reach their financial goals. While all of our portfolios combining stocks and bonds possess similar expected risk and return profiles, Betterment will recommend an investment allocation for you, based on the time horizon and goal type you select. You can also adjust your diversification and risk preferences. For most portfolios that hold both stocks and bonds, our “auto-adjust” feature systematically glides your portfolio(s) to a lower overall risk level as you get closer to, enter, and progress through retirement. This feature is very similar to a “glidepath,” which is found in target-date funds (TDFs). It’s great for those that want to “set it, and forget it.” With that, let’s review your portfolio options. Core Well-diversified, low-cost, and built for long-term investing, the Core portfolio features a broad collection of ETFs made of thousands of stocks and bonds from around the world. This is the default investment option for those who do not specify a portfolio strategy. Innovative Technology A well-diversified portfolio allocated similarly to the Core portfolio, but with a subset of stocks allocated to high-growth potential companies such as clean energy, semiconductors, robots, virtual reality, blockchain, and nanotechnology. This comes with increased exposure to risk. Value Tilt A well-diversified portfolio allocated similarly to the Core portfolio, but with a subset of the stocks allocation focused on potentially undervalued U.S. companies, according to certain financial metrics. Broad Impact A well-diversified portfolio that invests in companies that rank highly on environmental, social, and corporate governance (ESG) criteria. Climate Impact A well-diversified portfolio that invests in companies working to lower carbon emissions, fund green projects, and divest from holders of fossil fuel reserves—while still designed for potential long-term growth. Social Impact A well-diversified portfolio that invests in companies actively working toward minority empowerment and gender diversity as part of its long-term strategy. Goldman Sachs Smart Beta Targets companies that have potential to outperform the broader market over the long term. Diverse and relatively low-cost, this portfolio comes with higher exposure to risk. BlackRock Target Income A 100% bond portfolio with different income yields to help protect you against stock market volatility. This portfolio option is more suitable for investors with shorter time horizons, or for those that are seeking to generate income. Flexible portfolio A Flexible portfolio gives you more control over your investments, and allows you to modify the individual asset class weights to best fit your preferences. We’ll provide guidance on the risk exposure and diversification of your portfolio, based on your adjustments. See when using a Flexible portfolio might be right for you. After you make a portfolio selection, Betterment will handle the rest. Here are some things to keep in mind: All portfolios benefit from auto-rebalancing, which returns the value of all allocated funds back to the target weight (after the portfolio drifts with market movements). Rebalancing may be subject to a drift threshold and account balance minimum. Although changing a portfolio’s asset allocation and fund selection can cause changes in the portfolio’s performance, Betterment has designed each portfolio to be suitable in terms of its riskiness and return potential for a given time horizon and level of risk. Which is to say, you should feel comfortable choosing a portfolio based on your convictions and values. If you’re uncertain where to start, the Betterment Core portfolio is a great way to go—and it is the portfolio used by the majority of Betterment users. Keep in mind: As your investment fiduciary, Betterment monitors market action and portfolio performance, and will periodically update asset allocation or include more cost-efficient underlying funds to help optimize your portfolio performance. We’re here to help you make decisions that bring your goals into focus, and be invested in your future. -
![]()
Why diversify outside of the US?
Why diversify outside of the US? The outperformance of US stocks in recent history has led some investors to question whether they should invest outside the US at all, yet there remains compelling reasons to diversify globally. US investors often think of the S&P 500 Index (an index of the largest companies in the US by market capitalization) when referring to the performance of the stock market. This is not surprising to hear as most US based investors exhibit a “home bias”, where they focus their investing domestically and less on international. In a Vanguard 2020 study, households they surveyed had 81% of their portfolio allocations invested in the US. On top of that, US stocks have set a high bar for performance globally, outpacing the gains in stocks across Europe, Japan, and emerging markets over the last decade. It’s become natural to ask, “Can’t I get better returns just sticking with US stocks? Why would my Betterment portfolio have any allocation to companies outside of the US?” Currently, Betterment’s Core portfolio strategy in the 100% stock allocation has a target allocation of more than 40% in international equities. Below, this piece will cover reasons diversifying internationally makes sense, including: The global market portfolio is a starting point for asset allocation There’s no guarantee that US stocks will continue to outperform Diversification creates the potential for more consistent returns Investing in the global market portfolio The short answer is that Betterment constructs all of our portfolios to be representative of the makeup of global investable assets as a whole, and you’ll find that around 40% of the world’s equity assets are invested outside of the US. International investments play an important role in reducing the risk of concentration in any one particular country within your portfolio. There’s no guarantee of continued US outperformance We’ve all heard the phrase “past performance is not indicative of future results.” For instance, stocks of one region can string together multiple years of outperformance relative to others before that trend reverses and it enters a period of underperformance. The chart below illustrates this tug of war between US and international developed stocks. While the outperformance experienced by US stocks over the last decade is striking, international developed stocks dominated in the wake of the dot com bubble in the decade before that. “International stocks” is represented by the MSCI EAFE Index. “US stocks” is represented by the MSCI US Index. Past performance is not indicative of future results. You cannot invest directly in the index. Going back further into history, in the ‘80s international developed stocks actually outperformed US stocks to the same extent that US stocks have outperformed since 2009. We believe, and many on Wall Street will admit, that trying to time these cycles can be extremely difficult and a more consistent return may be achieved by holding exposure to each geographical region’s stocks over the long-term. Before US stocks’ strong run in recent history, investors may have been tempted to allocate more to emerging market stocks based on their momentum during the 2000s. Emerging market stocks had higher returns than US equities in eight of the ten years before 2011. If an investor piled into emerging market stocks in 2011 because of their decade long track record of outperformance, they would have largely missed out on the strong gains in the US over the following 10 years. There also may be reason to believe that markets outside the US have the potential to post strong gains over the next decade. Based on certain valuation metrics, US stocks appear more expensive than their global peers. For example, companies in places such as emerging markets source much of their revenue from quickly growing economies, which may enhance profitability in the future. Diversification helps avoid drawdowns and creates the potential for consistent returns International markets are not perfectly correlated with the US, meaning they do not move in lockstep. Allocating to markets around the world therefore promotes diversification, helping buffer portfolios from the heightened volatility of individual markets. The chart below ranks the returns of Betterment’s tenured Core portfolio strategy against different regions and asset classes across calendar years, illustrating diversification in action. The Core portfolio, with a 90% allocation to stocks and 10% allocation to bonds, consistently avoided losses compared to the poorest performing assets of recent history. This was also evident in 2020 where diversification provided downside protection as the US fell into a short recession and battled a pandemic. Investors focused on using the S&P 500 Index to benchmark performance will highlight that the index outperformed our Core portfolio in the time periods displayed. And while the strength of the US market is undeniable, it is important to not overlook the fact that our Core portfolio still has a sizable allocation to the US. Having a strategic, well-diversified portfolio allows investors to obtain exposure to not only markets that outperform like the US, but also to international stock markets and other asset classes that can dampen the downside in years where US stocks underperform. S&P 500” (US Large Caps) is represented by the S&P 500 Index. “EM” (emerging markets) is represented by the MSCI Emerging Markets Index. “US Small Caps” is represented by the Russell 2000 Index. “EAFE” (international developed markets) is represented by the MSCI EAFE Index. “US REITs” is represented by the MSCI US REIT Index. “US High Yield” is represented by the Bloomberg US Corporate High Yield Index. “Global Agg bonds” is represented by the Bloomberg Barclays Global Aggregate Bond Index. “Commodities” is represented by the Bloomberg Commodity Index. “BMT Core 90/10” represents the Betterment Core Portfolio strategy in the 90% stocks/ 10% bonds taxable allocation. Performance information for the Betterment allocation is based on the time-weighted returns of Betterment taxable portfolios with primary tickers that are at the target allocation every market day (this assumes portfolios are rebalanced daily at market closing prices). Dividends are assumed to be reinvested in the fund from which the dividend was distributed. Betterment allocations reflect portfolio holdings as of periods stated and include an annual 0.25% management fee. This does not include deposits or withdrawals over the performance period. These allocations are not representative of the performance of any actual Betterment account and actual client experience may vary because of factors including, individual deposits and withdrawals, secondary tickers associated with tax loss harvesting, allowed portfolio drift, transactions that do not occur at close of day prices, and differences in holdings between IRA and taxable portfolios. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Market conditions can and will impact performance. Past performance is not indicative of future results. Market performance information is based on the returns of indexes tracked by Betterment, using returns data from sources and time periods listed. Performance is provided for illustrative purposes to represent broad market returns for asset classes that may not be used in all Betterment portfolios. The asset class performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used for each asset class in the Betterment portfolio will differ from the performance of the broad market index returns reflected here. Past performance is not indicative of future results. You cannot invest directly in the index. At Betterment, we build portfolios and provide advice on portfolio allocations that should be suitable for each investor’s risk tolerance to help them reach their investment goals. Diversifying across stock markets, whether in the US or elsewhere in the world, helps in that continuous effort. It may be tempting to chase the high returns that US stocks have posted in recent history, anticipating that the US equity market will continue to outperform, but investors should recognize that future outperformance is near impossible to predict and that they should position themselves for a wide range of possible outcomes accordingly. This is why as a foundation of Betterment’s portfolio construction process, we start with a diversified global market portfolio. -
![]()
How to invest during market highs
How to invest during market highs Betterment experts weigh in on how to override anxiety, and be invested when the market climbs. While we invest for our own reasons, we get into the market to take advantage of potential price appreciation and income produced by financial assets. But anxiety can get the best of even the most eager investors. What if I buy when the market peaks, and then immediately declines? Sound familiar? As any investor knows, psychological aspects can cloud one’s judgment when it comes to money. We’re encouraged to minimize risk and maximize returns, whenever possible. So, a market that’s going up-up-up, can leave some investors feeling hesitant about paying premium prices—instead of opting for undervalued stocks, or lower price points. So how do we override the Fear of Purchasing at All-time Highs (or FOPAH, for short)? Is it best to dive in, or wait for a potential pullback? Our investment experts believe one of the best things you can do is face your fear, wading into the market. In practice, it can take a long time before that pullback comes, during which there may be further positive market returns. For instance, between 2012 and 2017, the S&P 500 did not experience a pullback greater than 12%. Oftentimes when a pullback does arrive, it’s not heralded as a positive outcome—but an ominous event, accompanied by scary headlines that spark new fears of further downturn. This can all lead to additional hesitancy around buying stocks. While there's no "perfect" time to invest, we can still be confident that choosing a diversified portfolio of investments is a smart way to help achieve long-term financial goals. To ease your fears, work out approximately how much time you’ll need to save up for your own goals. Long-term goals, like saving for college or a deposit on a house, can take time. And that’s a good thing! The longer your time horizon (the period of time you plan to keep your savings invested in the market), the more confident you can be that your money will grow by the point you want to withdraw it. Even if the market has already recently run up when you go to invest, a prolonged time horizon should help quell a pullback in the nearterm. Despite volatility, the stock market tends to trend upwards over longer periods. By maintaining a long-term perspective, you can position yourself to benefit from the market's long-term growth potential, which can outweigh short-term losses. Dating back to 1988, if you decided to invest on any given trading day, 65% of those days would have resulted in a positive investment return over the following month. The share of days with positive returns goes up as that trailing holding period extends. Historically, no matter when an investment was made between 1988 and 2009, the market was higher 100% the time just 15 years later. Short-term goals, like saving for a vacation or a home reno, have a shorter time horizon—meaning your money has less time to grow in the market. However, it's worth remembering that historically, investing at all-time highs has not resulted in lower future returns compared to investing on any other given day. After the S&P 500 reaches an all-time high, average returns tend to be slightly higher than during periods when the index has not soared so high. Practical steps to help ease your anxiety: Set up recurring deposits: When you commit to investing a fixed amount of money at set intervals over time, your losses could potentially be smaller if the market does dive in the near term. Plus, you will still have cash ready to buy at lower prices. While this comes with the risk of later buying at higher prices, it can help override the emotional pressure of trying to time the market. Diversify: Consider adding other asset classes, regions, and company sizes in your portfolio (as we do at Betterment). Our automated portfolio rebalancing is designed to maintain your investment portfolio's target asset allocation over time. Betterment continuously monitors your portfolio to see if the current allocation deviates from your target allocation—due to market fluctuations or changes in the value of your investments. Our auto-adjust feature can also help right-size the risk level of your portfolio by reducing the share of the portfolio allocated to more volatile stocks, and increasing the share allocated to bonds as your time horizon shortens.
Next-level planning
-
![]()
Investing in Your 30s: 3 Goals You Should Set Today
Investing in Your 30s: 3 Goals You Should Set Today It’s never too early or too late to start investing for a better future. Here’s what you need to know about investing in your 30s. In your 30s, your finances get real. Your income may have increased significantly since your first job. You might have investments, stock compensation, or a small business. You may be using or have access to different kinds of financial accounts (e.g. 401(k), IRA, Roth IRA, HSA, 529, UTMA). In this decade of your life, chances are you’ll get married, and even start a family. Even if you’ve taken this complexity in stride, it’s good to take a step back to review where you are and where you want to go. This review of your plan (or reminder to create a plan) is essential to setting up your financial situation for future decades of financial success. Don’t Delay Creating A Plan: Three Goals For Your 30s As always, the best thing to do is start with your financial goals. Keep in mind that goals change through time, and this review is an important step to make updates based on where you are now. If you don’t have any goals yet, or need some guidance on which investing objectives might be important for you, here are three to consider. Emergency Fund Sometimes your plan doesn’t go as planned, and having an adequate emergency fund can help ensure those hiccups don’t affect the rest of your goals. An emergency fund should contain enough money to cover your basic expenses for a minimum of three to six months. You may need more than that estimate depending on your career, which may or may not be one in which finding new work happens quickly. Also, depending on how much risk you want to take with these funds, you may need a buffer on top of that amount. Retirement Most people don’t want to work forever. Even if you enjoy your work, you’ll likely work less as you age, presumably reducing your income. To maintain your standard of living, or spend more on travel, hobbies or grandkids, you’ll need to spend from savings. Saving for your retirement early in your career—especially in your 30s–is essential. Thanks to medical improvements and healthier living, we are living longer in retirement, which means we need to save even more. Luckily, you have a secret weapon—compounding—but you have to use it. Compounding can be simply understood as “interest earning interest,”a snowball effect that can build your account balance more quickly over time. The earlier you start saving, the more time you have, and the more compounding can work for you. In your goal review, you’ll want to make sure you are on track to retire according to your plan, and make savings adjustments if not. You’ll also want to make sure you are using the best retirement accounts for your current financial situation, such as your workplace retirement plan, an IRA, or a Roth IRA. Your household income, tax rate, future tax rate and availability of accounts for you and your spouse will determine what is best for you. As you consider your goals, you may want to check out Betterment's retirement planning tools, which helps answer all of these questions. Also, if you’ve changed jobs, make sure you are not leaving your retirement savings behind, especially if it has high fees. Often, consolidating your old 401(k)s and IRAs into one account can make it easier to manage, and might even reduce your costs. You can consolidate retirement accounts tax-free with a rollover. If you have questions about your plan or the results using our tools, consider getting help from an expert through our Advice Packages. Major Purchases A wedding, a house, a big trip, or college for your kids. Each of these goals has a different amount needed, and a different time horizon. Our goal-based savings advice can help you figure out how to invest and how much to save each month to achieve them. Take the chance in your goal review to decide which of these goals is most important to you, and make sure you set them up as goals in your Betterment account. Our goal features allow you to see, track, and manage each goal, even if the savings aren’t at Betterment. -
![]()
How an IRA can fit into your retirement strategy
How an IRA can fit into your retirement strategy You already have access to a Betterment 401(k) through your employer. But if you’re not sure what the difference is between your 401(k) and IRA, we’ll lay it all out for you here. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have for the earnings on your investment to compound before you reach retirement age. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. Your employer already offers a 401(k) through Betterment—nice! But you may also want to have an IRA too, for a more robust plan. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but just about anyone can open an IRA. A 401(k) is what’s known as an employer-sponsored retirement plan: It’s only available through an employer. Other differences between these two types of accounts are that: Employers may offer a matching contribution into your 401(k) account, based on what you contribute 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an IRA, you determine exactly when and how to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) almost always has to come from your paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2024 is $7,000 if you’re under 50, or $8,000 if you’re 50 or older. For a 401(k), the contribution limit for 2024 is $23,000 if you’re under 50, or $30,500 if you’re 50 or older. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA in retirement, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an IRA is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now—and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: Why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you achieve greater returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. Calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center. So what’s right for you? Since your employer offers a 401(k) through Betterment, it’s typically best to start there. Some employers auto-enroll new hires, meaning that paycheck contributions start automatically. Whether your employer auto-enrolls or not, you’ll need to start by claiming your 401(k) account. Once you claim your account, you can set or adjust the contribution rate. Get started here: betterment.com/accountaccess. After you’ve got your 401(k) up and running, you might want to consider contributing to an IRA as well. On your dashboard, select “Add new” in the left-hand navigation, then choose: IRA. Follow the prompts to select which type of IRA you want, and sync a bank account to contribute from. You’ll have access to the same investment options available in your 401(k). Retirement can feel hard to plan for, but Betterment has plenty of investing options to make it easy to save for. We’re here to help you work towards for the retirement of your dreams. -
![]()
Rolling over is more than a dog trick
Rolling over is more than a dog trick Three reasons why rolling over 401(k)s from former employers may make sense. Have money sitting in 401(k) accounts from former employers? If so, you’re not alone. Recent research estimates that there are more than 24 million “forgotten” 401(k) accounts, holding approximately $1.35 trillion dollars. Are any of those dollars yours? If so, you should consider rolling any old 401(k) into your new Betterment 401(k) – here’s why: 1. Get a comprehensive view of your retirement savings When you have accounts here, there and anywhere, it’s hard to get a handle on where you stand. By rolling them over to your Betterment account and consolidating your retirement assets in one place, you can ensure your portfolio is appropriately diversified, monitor your progress, and rest assured that your investments aren’t competing or canceling each other out. 2. Avoid fees! Every 401(k) plan comes with fees. If you have multiple 401(k)s, you are paying fees for all of those accounts! Betterment has fees too –but we use low-cost exchange-traded funds (ETFs) in our portfolios, helping to keep fees low. 3. Access personalized financial advice and service Whether you want to talk investment strategy or review your retirement account, Betterment has CERTIFIED FINANCIAL PLANNER™ professionals and a customer support team that’s easy to reach when you need them. Your plan may include complimentary access to our team of CFPs® or you can book a call for a one-time fee. Other options Since you have access to a Betterment 401(k) through your employer, it could make sense for you to roll old 401(k)s into your Betterment 401(k) for all the reasons outlined above. But you do have other options: Leave it where it is. Roll it into an IRA (Individual Retirement Account), either with Betterment or another financial institution. Cash it out – this will come with taxes and potentially fees, and your money will no longer be invested (and potentially growing) for your retirement. Ready to roll? In just a few clicks, you can start the rollover process to Betterment and be set up with an appropriate investment strategy for you. You’ll receive a personalized set of rollover instructions via email, with no paperwork required by us. Have a different kind of account to roll over? No problem. You can roll over your IRAs, pensions, 401(a)s, 457(b)s, profit sharing plans, stock plans, and Thrift Savings Plans (TSPs) to Betterment using the same simple process. If you've already claimed your account, you can click here to start your rollover. If you have any questions along the way, our team is ready to help: Send us an email: support@betterment.com Give us a call: (718) 400-6898, Monday through Friday, 9:00am-6:00pm ET
Preparing to retire
-
![]()
Investing in Your 50s: 4 Practical Tips for Retirement Planning
Investing in Your 50s: 4 Practical Tips for Retirement Planning In your 50s, assess your retirement plan, lifestyle, earnings, and support for family. Practice goal-based investing to help meet your objectives. As you enter your 50s, you may feel like your long-term goals are coming within reach, and it’s up to you to make sure those objectives are realized. Now is also a perfect time to see how your investments and retirement savings are shaping up. If you’ve cut back on savings to meet big expenses, such as home repairs and (if you have children) college tuition, you now have an opportunity to make up lost ground. You might also think about how you want to live after you retire. Will you relocate? Will you downsize or stay put? If you have children, how much are you willing to support them as they enter adulthood? These decisions all matter when deciding how to strategize your investments for this important decade of your life. Four Goals for Your 50s Your 50s can be a truly productive and efficient time for your investments. Focus on achieving these four key goals to make these years truly count in retirement. Goal 1: Assess Your Retirement Accounts If you’ve put retirement savings on the back burner, or just want to make a push for greater financial security—the good news is that you can make larger contributions toward employer retirement accounts (401(k), 403(b), etc.) at age 50 and over, thanks to the IRS rules on catch-up contributions. If you’re already contributing the maximum to your employer plans and still want to save more for retirement, consider opening a traditional or Roth IRA. These are individual retirement accounts that are subject to their own contribution limits, but also allow for a catch-up contribution at age 50 or older. You may also wish to simplify your investments by consolidating your retirement accounts with IRA rollovers. Doing so can help you get more organized, streamline recordkeeping and make it easier to implement an overall retirement strategy. Plus, by consolidating now, you can help avoid complications after age 72, when you’ll have to make Required Minimum Distributions from all the tax-deferred retirement accounts you own. Goal 2: Evaluate Your Lifestyle and Pre-Retirement Finances When you’re in your 50s, you may still be a ways from retirement, however you’ll want to consider how to support yourself when you do begin that stage of your life. If you’ve just begun calculating how much you’ll need to save for a comfortable retirement, consider the following tips and tools. Tips and Tools for Estimating Income Needs Make a rough estimate of how much you spend on housing, food, utilities, health care, clothing, and incidentals. Nowadays, tools such as Mint® and Prosper include budgeting features that can help you see these expenditures. Subtract what you can expect to receive from Social Security. You can estimate your benefit with this calculator. Subtract any defined pension plan benefits or other sources of income you expect to receive in retirement. Subtract what you can safely withdraw each year from your retirement savings. Consider robust retirement planning tools, which can help you understand how much you’ll need to save for a comfortable retirement based on current and future income from all sources, and even your location. If there’s a gap between your income needs and your anticipated retirement income, you may need to make adjustments in the form of cutting expenses, working more years before retiring, increasing the current amounts you’re investing for retirement, and re-evaluating your investment strategy. Think About Taxes Your income may peak in your 50s, which can also push you into higher tax brackets. This makes tax-saving strategies like these potentially more valuable than ever: Putting more into tax-advantaged investing vehicles like 401(k)s or traditional IRAs. Donating appreciated assets to charities. Implementing tax-efficient investment strategies within your investments, such as tax loss harvesting* and asset location. Betterment automates both of these strategies and offers features to customers with no additional management fee. Define Your Lifestyle Your 50s are a great time to think about your current and desired lifestyle. As you near retirement, you’ll want to continue doing the things you love to do, or perhaps be able to start doing more and build on those passions. Perhaps you know you’ll be traveling more frequently. If you are socially active and enjoy entertainment activities such as dining out and going to the theater, those interests likely won’t change. Instead, you’ll want to enjoy doing all the things you love to do, but with the peace of mind knowing that you won’t be infringing on your retirement reserves. Say you want to start a new business when you leave your job. You’re not alone; more than a third of new entrepreneurs starting businesses in 2021 were between the ages of 55 and 64 according to research by the Kauffman Foundation. To get ready, you’ll want to start building or leveraging your contacts, creating a business plan, and setting up a workspace. You may also wish to consider relocating during retirement. Living in a warmer part of the country or moving closer to family is certainly appealing. Downsizing to a smaller home or even an apartment could cut down on utilities, property taxes, and maintenance. You might need one car instead of two—or none at all—if you relocate to a neighborhood surrounded by amenities within walking distance. If you sell your primary home, you can take advantage of a break on capital gains —even if you don’t use the money to buy another one. If you’ve lived in the same house for at least two out of the last five years, you can exclude capital gains of up to $250,000 per individual and $500,000 per married couple from your income taxes, according to the IRS. Goal 3: Chart Your Pre-Retirement Investment Strategy After you’ve determined how much you’ll need for a comfortable retirement, now’s also a good time to begin thinking about how you’ll use the assets you’ve accumulated to generate income after you retire. If you have shorter-term financial objectives over the next two to five years—such as paying for your kids’ college tuition, or a major home repair—you’ll have to plan accordingly. For these milestones, consider goal-based investing, where each goal will have different exposure to market risk depending on the time allocated for reaching that goal. Goal-based investing matches your time horizon to your asset allocation, which means you take on an appropriate amount of risk for your respective goals. Investments for short-term goals may be better allocated to less volatile assets such as bonds, while longer-term goals have the ability to absorb greater risks but also achieve greater returns. When you misallocate, it can lead to saving too much or too little, missing out on returns with too conservative an allocation, or missing your goal if you take on too much risk. Setting long investment goals shouldn’t be taken lightly. This is a moment of self-evaluation. In order to invest for the future, you must cut back on spending your wealth now. That means tomorrow’s goals in retirement must outweigh the pleasures of today’s spending. If you’re a Betterment customer, it’s easy to get started with goal-based investing. Simply set up a goal with your desired time horizon and target balance and Betterment will recommend an investment approach tailored to this information. Goal 4: Set Clear Expectations with Children If you have children, there’s nothing more satisfying than watching your kids turn into motivated adults with passions to pursue. As a parent, you’ll naturally want to prepare them with everything you can to help them succeed in the world. You may be wrapping up paying for their college tuition, which is no easy feat given that these costs – even at public in-state universities – now average in the tens of thousands of dollars per year. As your kids move through college, take the time to have a serious discussion with them about what they plan to do after graduation. If graduate school is on the horizon, talk to them about how they’ll pay for it and how much help from you, if any, they can expect. Unlike undergraduate programs, graduate programs assess financial aid requirements by looking at only the student’s assets and incomes, not the parents’, so your finances won't be considered. You’ll also want to set expectations about other kinds of support—such as any help in paying for their health insurance premiums up to a certain age, or their mobile phone plan, or even whether toward major purchases like a home or car. It’s great to help out your children, but you’ll want to make sure you’re not jeopardizing your own security. Your 50s may demand a lot from you, but taking the time to properly assess your investments, personal financial situation, lifestyle, and, if applicable, your support for children, can be truly rewarding in your retirement years. By tackling these four goals now, you can help set yourself up to meet your current responsibilities and increase your chances of a more financially secure and comfortable life in the decades to come. -
![]()
What is a Required Minimum Distribution?
What is a Required Minimum Distribution? In exchange for all of the tax advantages 401(k)s provided during your accumulation years, by law, you will need to start taking distributions from your account when you turn 72. 401(k) plans can help you save for retirement in a tax-advantaged way. However, the Internal Revenue Service (IRS) requires that you start taking withdrawals from their qualified retirement accounts when you reach the age 72. These withdrawals are called required minimum distributions (RMDs). Why do I have to take RMDs? In exchange for the tax advantages you enjoy by contributing to your 401(k) plan, the IRS requests collection of taxes on these amounts when you turn 72. The IRS taxes RMDs as ordinary income, meaning withdrawals will count towards your total taxable income for the year. Generally, the IRS collects taxes on the gains in retirement accounts such as 401(k)s. However, if Roth 401(k) account assets are held for at least 5 years, Roth 401(k) funds are not taxed. Because there are taxes being paid to the government, these distributions are NOT eligible for rollover to another account. How much do I have to withdraw? RMDs are calculated based on your age and your account balance as of the end of the previous year. To determine the required distribution amount, Betterment divides your previous year’s ending account balance by your life expectancy factor (based on your age) from the IRS’ uniform lifetime table. If you had no balance at the end of the previous year, then your first RMD will not occur until the following year. Additionally, if you have taken a cash distribution from your 401(k) account in any given year you are subject to an RMD, and that distribution amount is equal to or greater than the RMD amount, that distribution will qualify as the required amount and no additional distribution is required. Does everyone who turns 72 need to take an RMD? Turning 72 in a given year doesn’t mean that you have to take an RMD. Only those who turn 72 in a given year AND meet any of the following criteria must take an RMD: You have taken an RMD in previous years. If so, then you must take an RMD by December 31 of every year. You own more than 5% of the company sponsoring the 401(k) plan. If so, then you must take an RMD by December 31 every year. You have left the company (terminated or retired) in the year you turned 72. If so, then the first RMD does not need to occur until April 1 (otherwise known as the Required Beginning Date) of the following year, but must occur consecutively by December 31 for every year. Example: John turned 72 on June 1, 2022. John also decided to leave his company on August 1, 2022. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2023. The next RMD must occur by December 31, 2023 and every year thereafter. You are a beneficiary or alternate payee of an account holder who meets the above criteria. If you are 72 and still employed, you do NOT need to take an RMD. What are the consequences of not taking an RMD? Failure to take an RMD for a given year will result in a penalty of 50% of the amount not taken on time by the IRS. How do I take an RMD? Betterment will automatically process your RMD if we see that you are over age 72 and no longer actively employed with your employer. If you have the option to take an RMD - age 72 but still employed - your employer can provide you with a form to submit a request. If you have a linked bank account on file, the RMD will be deposited into that account; if we do not have a bank account on file, a check will be mailed to the address in your account. -
![]()
How to turn your retirement savings into retirement income
How to turn your retirement savings into retirement income An income strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens. Retirement planning doesn’t end when you retire. To have the retirement you’ve been dreaming of, you need to ensure your savings will last. And how much you withdraw each month isn’t all that matters. In this guide we’ll cover: What a retirement income plan is How much to withdraw each year Which accounts you should withdraw from first Why changes in the market affect you differently in retirement How to handle a market downturn when you’re nearing retirement How Betterment helps take the guesswork out of your retirement income What is retirement income planning? You’ll likely spend decades saving and investing for retirement. But when that big moment comes, what happens next? If you’ve been diligently setting aside cash, you might have upwards of a million dollars to manage. That’s certainly something to be proud of: It puts you in a great position—and also comes with new responsibilities. Think of it this way: You’ve been getting a paycheck from your employer regularly for 30 to 40 years. Now you’re the one cutting those checks. So,how do you make the most of your assets? What is the best way to turn them into a stream of sustainable income that will, hopefully, last you through retirement? “Retirement income planning” is a broad phrase to help you think about how to prepare for the “spend down” years (as opposed to the “saving up” years). Financial professionals used to refer to the “three-legged stool” of retirement income planning: Social Security, a pension, and personal savings. Considering that pensions are hardly used anymore, and the future of Social Security is murky, we’re more-or-less down to one leg: personal savings. But in today’s world, personal savings can incorporate a few different cash streams – personal investment accounts, Individual Retirement Accounts (IRAs), and of course – a 401(k). All of which can play a role in your retirement income plan. Why changes in the market affect you differently in retirement Stock markets can swing up or down at any time. They’re volatile. When you’re saving for a distant retirement, you usually don’t have to worry as much about temporary dips. But during retirement, market volatility can have a greater effect on your savings. An investment account is a collection of individual assets. When you make a withdrawal from your retirement account, you’re selling off assets to equal the amount you want to withdraw. So say the market is going through a temporary dip. Since you’re retired, you have to continue making withdrawals in order to maintain your income. During the dip, your investment assets may have less value, so you have to sell more of them to equal the same amount of money. When the market goes back up, you have fewer assets that benefit from the rebound. The opposite is true, too. When the market is up, you don’t have to sell as many of your assets to maintain your income. There will always be good years and bad years in the market. How your withdrawals line up with the market’s volatility is called the “sequence of returns.” Unfortunately, you can’t control it. In many ways, it’s the luck of the withdrawal. Still, there are ways to help decrease the potential impact of a bad sequence of returns. How to limit bad timing from ruining your retirement The last thing you want is to retire and then lose your savings to market volatility. Consider taking some steps to try and protect your retirement from a bad sequence of returns. Adjust your level of risk As you near or enter retirement, it’s likely time to start dialing down your stock-to-bond allocation. Invest too heavily in stocks, and your retirement savings could tank right when you need them. Betterment generally recommends turning down your ratio to about 56% stocks in early retirement, then gradually decreasing to about 30% toward the end of retirement. Rebalance your portfolio During retirement, the two most common cash flows in/out of your investment accounts will likely be dividends you earn and withdrawals you make. If you’re strategic, you can use these cash flows as opportunities to rebalance your portfolio. For example, if stocks are down at the moment, you likely want to withdraw from your bonds instead. This can help prevent you from selling stocks at a loss. Alternatively, if stocks are rallying, you may want to reinvest your dividends into bonds (instead of cashing them out) in order to bring your portfolio back into balance with your preferred ratio of stocks to bonds. Keep an emergency fund Even in retirement, it’s important to have an emergency fund. If you keep a separate account in your portfolio with enough money to cover three to six months of expenses, you can likely cushion—or ride out altogether—the blow of a bad sequence of returns. Supplement your income Hopefully, you’ll have enough retirement savings to produce a steady income from withdrawals. But it’s nice to have other income sources, too, to minimize your reliance on investment withdrawals in the first place. While there still is Social Security—it’s future is murky. Maybe you have a pension you can withdraw from, too. Or a part-time job. Or rental properties. Along with the other precautions above, these additional income sources can help counter bad returns early in retirement. While you can’t control your sequence of returns, you can control the order you withdraw from your accounts. And that’s important, too. How much should you withdraw each year Deciding how much to withdraw annually from your 401(k) once you’re retired involves balancing anticipated expenses with available savings. You’ll want to consider tax implications, market fluctuations, inflation, health/longevity, and additional income streams (more on this below). A good place to start is with the 4% rule, which entails withdrawing 4% of your retirement savings in the first year, then adjusting the amount annually for inflation. Keep in mind: the 4% rule typically assumes your portfolio is split almost evenly between stocks and bonds, and that your funds are held in a tax-deferred account, such as a traditional IRA or 401(k), where withdrawals are taxable. Although the 4% rule has been popular for decades, it's applicability has been challenged in recent years. Longer lifespans, healthcare costs, inflation rates, and additional income streams have all changed the economic landscape. Ultimately, there is no one-size-fits-all answer to how much you should withdraw annually in retirement. A financial advisor can help you create a roadmap that’s right for you in retirement. Which accounts to withdraw from first In retirement, taxes are usually one of your biggest expenses. They’re right up there with healthcare costs. When it comes to your retirement savings, there are three “tax pools” your accounts can fall under: Taxable accounts: individual accounts, joint accounts, and trusts. Tax-deferred accounts: individual retirement accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans Tax-free accounts: Roth IRAs, Roth 401(k)s Each of these account types (taxable, tax-deferred, and tax-free) are taxed differently—and that’s important to understand when you start making withdrawals. When you have funds in all three tax pools, this is known as “tax diversification.” This strategy can create some unique opportunities for managing your retirement income. For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. With a tax-deferred account like a Traditional 401(k), you usually pay taxes on the full amount you withdraw, so with each withdrawal, taxes take more away from your portfolio’s future earning potential. Since you don’t have to pay taxes on withdrawals from your tax-free accounts, it’s typically best to save these for last. You want as much tax-free money as possible, right? So, while we’re not a tax advisor, and none of this information should be considered advice for your specific situation, the ideal withdrawal order generally-speaking is: Taxable accounts Tax-deferred accounts Tax-free accounts But there are a few exceptions. Incorporating minimum distributions Once you reach a certain age, you must generally begin taking required minimum distributions (RMDs) from your tax-deferred accounts. Failure to do so results in a steep penalty on the amount you were supposed to take. This changes things—but only slightly. At this point, you may want to consider following a new order: Withdraw your RMDs. If you still need more, then pull from taxable accounts. When there’s nothing left in those, start withdrawing from your tax-deferred accounts. Pull money from tax-free accounts. Smoothing out bumps in your tax bracket In retirement, you’ll likely have multiple sources of non-investment income, coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. Since these income streams vary from year to year, your tax bracket may fluctuate throughout retirement. With a little extra planning, you can sometimes use these fluctuations to your advantage. For years where you’re in a lower bracket than usual–say, if you’re retiring before you plan on claiming Social Security benefits–it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions. For years where you’re in a higher tax bracket, like if you sell a home and end up with large capital gains–it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested. How Betterment helps take the guesswork out of your retirement income If all of the above sounds confusing, you’re not alone. It’s why we developed a dynamic income solution specifically for retirees. Our expert-built technology factors in the unique goal details that you provide when creating your retirement account to help advise you on the optimal amount for withdrawal over the coming year, with the intention of fostering year-to-year income consistency. And it’s all managed through our existing platform, making for a seamless process. You can even set up automatic withdrawals from your Betterment account to your checking account, helping you maintain a personalized payment schedule.
Explore our latest videos and webinar recordings
Investing with Betterment
Gain a better understanding of Betterment's approach to investing and how we construct our portfolios.
An overview of the Betterment platform
We're more than your 401(k) provider.
How to claim your Betterment 401(k)
A step-by-step demo of how to set up your account when logging in for the first time.
Investment options for your 401(k)
We make it easy to invest like a pro. Learn what investment options are available and what might be the best fit for your retirement.
Tips on making the most of your 401(k)
Unlock the potential of your 401(k) with expert tips on contribution rates, portfolio choices, and rollover options to help you achieve the retirement you want.
Why should you invest in your 401(k)?
A 401(k) is one of the most effective ways to save for retirement. Here's how we've made it simple for you to get started and put your money to work.