Betterment Editors

How Auto-Enrollment in a 401(k) Plan Works: Benefits and What It Means for Your Retirement Savings Dec 5, 2024 3:27:15 PM The best time to start saving for retirement is…now. Features like auto-enrollment and auto-escalation make it easy to save for your golden years with little effort on your part. If you’re unfamiliar with these features, keep reading to see how they can help you start saving today for tomorrow. While auto-enrollment and auto-escalation have been around for years, some employers are now required to turn on these features due to SECURE 2.0, legislation aimed at helping employees save for retirement. These features are designed to automatically enroll employees into their company’s 401(k) plan and increase contributions over time. So, how does auto-enrollment work, and what does it mean for your retirement savings plan? Scroll down to learn more about: What is auto-enrollment Benefits of auto-enrollment How to check if you've been auto-enrolled in your company’s 401(k) Changing your contribution rate How Betterment at Work can help you optimize your saving strategy What is auto-enrollment in a 401(k)? There are plenty of reasons why people hesitate to set money aside for retirement—daily expenses, not knowing how much to save, not knowing how to sign up, to name a few— but auto-enrollment can make it easy to get started. Companies will auto–enroll new hires at a default rate—typically 3-8%—which you can adjust at any time. Once your money is in the market, you’ll benefit from a little thing called compound interest: The interest your money earns also accrues interest over time. Let’s explore other ways auto-enrollment makes saving for retirement easy… Benefits of auto-enrollment in a 401(k): Automatically save for retirement: Starting a new job can be overwhelming with so many new benefits to consider (healthcare, life insurance, etc), but with auto-enrollment, you can start saving for retirement immediately without having to take any action. Employer match contributions: If your employer offers a match, auto-enrollment ensures you won’t miss collecting this sweet financial boost. Tax advantages: Good news! Since 401(k) contributions are made pre-tax, this lowers your taxable income —which can help you hold onto more of your hard-earned cash. Early and consistent long-term saving: You can stay on track with minimal effort, thanks to auto-escalation. If you’re auto-enrolled, your default rate will increase 1% each year, to a maximum set by your employer (no greater than 15%), unless you adjust the contribution rate yourself. Whenever you log in and adjust your contribution rate, auto-escalation is turned off. By incrementally upping your contribution rate, auto-escalation ensures you’re saving more over time—and simplifies the decision-making process. How to check if you’ve been auto-enrolled in your company’s 401(k): If you’ve never logged in before, you’ll first have to activate your account. Visit betterment.com/accountaccess to get started. Once you’re in, you can see the status of your account by selecting the “Retirement” goal from the left-hand side of the screen. Click on “Activity” to review your past contributions. It’s a good idea to monitor your contribution rate, and increase it when you can. Many experts recommend contributing 10–15% of your paycheck towards retirement so you have enough to live on. 10-15% may sound like a lot, so start with anything you’re comfortable with. Many auto-enrollment plans enroll employees at a low contribution rate, like 3% – but it’s important to keep in mind that that’s just a starting point. The point of auto-escalation is to keep it moving into that sweet spot of 10-15% over time. As always, Betterment is here to help you confidently plan for retirement, with the tools and resources you need to make smart decisions for your money. Remember, small, consistent contributions can really add up. With auto-enrollment and auto-escalation, you can put your savings on auto-pilot, so you can focus on the rest of your life. Get started

How employer 401(k) matching works and why it matters Dec 5, 2024 2:03:08 PM Learn how employer 401(k) matching can boost retirement savings, and why this benefit is essential for a secure financial future. A 401(k) match is one of the most valuable benefits employers offer—yet many employees don’t really understand how it works, or how to take advantage of it. In 2023, 68% of U.S. employees surveyed in our Retirement Readiness Report received a 401(k) match—of those who didn’t, a whopping 92% named it as the benefit they’d most like to receive. So, what makes a 401(k) match so enticing? Below, we’ll explore: Different types of 401(k) matches How to make the most of a 401(k) match Vesting schedules How Betterment can help you take advantage of your employer match What is a 401(k) match? A 401(k) match is when employers contribute to your 401(k), matching a percentage of your salary—to help grow your retirement savings. But not all matches are created equal. Knowing what kind of match your employer offers is important, and there are a few variations, including: Dollar-for-Dollar Match: The employer matches each dollar contributed to the 401(k), up to a specified percentage. This amount varies by employer but typically ranges from 3-6% of the employee's salary. Here’s an example: Jack makes $80,000/ year, and puts $8,000 annually into his 401(k), which is 10% of his salary. His employer contributes up to 3% of his salary, or $2,400. Jack’s total contribution for the year, with the employer match, is: $10,400. Partial Match: The employer matches a percentage of the employee’s contributions. For example, the employer might match 50% of contributions, up to 6% of the employee’s salary. Let’s take a look, using Jack’s $80,000 salary: Jack contributes 10% of his salary, or $8,000. 6% of his salary is $4,800. If his employer contributes 50% up to 6% of his salary, the employer contribution is: $2,400/ year. Jack’s total contribution, with the employer match, is: $10,400. Tiered Match: The employer matches a percentage of contributions up to a limit, then offers a different percentage above that threshold. For example, the employer might match 100% up to 3% of the employee's salary, and then 50% on the next 3%. Jack contributes 10% of his $80,000 salary to his 401(k), which is $8,000 per year. His employer matches 100% of the first 3%, which is $2,400, plus 50% on the next 3%, which is $1,200. The employer contribution is $3,600 for the year. Jack’s total contribution, with the employer match, is $11,600. 401(k) Match on Student Loan Payments: With new SECURE 2.0 legislation, employers can now make 401(k) contributions based on qualified student loan payments. This means your student loan payments can unlock retirement savings—even if you’re not contributing directly to your 401(k). Over the last decade, student loan debt has increased by 56%, making it harder for many to save for retirement. Betterment is proud to have been the first to offer a 401(k) match on student loan payments. If Jack earns $80,000 per year and pays $500 per month toward his student loans, totaling $6,000 annually. His employer offers a 100% match on contributions up to 4% of his salary—whether he allocates contributions solely to student loan payments or splits them between student loan payments and 401(k) contributions. Based on Jack’s payments, his employer will contribute $3,200 per year directly to his retirement plan. How to maximize your employer match Once you’ve determined what type of 401(k) match your employer offers, you’ll want to make sure you’re getting the most out of it. Here are some things to keep in mind: Get started as soon as possible: First, you’ll need to claim your 401(k) if you haven’t already. The sooner you start saving, the longer your contributions will have to grow, compounding over time (think of it as a snowball rolling downhill). Contribute enough to get the full 401(k) match: Don’t leave money on the table. Although some experts recommend contributing 10–15% of your paycheck, you can start smaller, increasing when it works for you. Pro tip: If you get a raise, you might want to consider increasing your contributions. Review vesting schedules: Some employers require you to stay with the company for a certain time before the matched funds are completely yours. We’ll dig into more on that below. Traditional vs. Roth 401(k) contributions with a 401(k) match If your employer offers a traditional 401(k) and a Roth 401(k), you can choose where to put your money. With Betterment, employer matching contributions go into a traditional 401(k), but this can vary with other plan providers. These contributions are tax-deferred. You won’t have to pay taxes on them until you withdraw the funds in retirement. Understanding vesting schedules You’ll want to read up on your company’s vesting schedule, so you know when you fully “own” your employer’s contributions to your 401(k). Immediate vesting means there is no waiting period. Once the employer contributions land in your account, they are fully yours. If you leave the company, you can take 100% of the matched contributions with you. With graded vesting, you gradually gain “ownership” over the employer match contributions. For example, you might get 25% after the first year, 50% after the second, and so on. Understanding your company’s vesting schedule is critical for making long-term career decisions. If your employer contributes to your 401(k), Betterment can help you track contributions, optimize your saving strategy, and ensure you’re making the most of your match. Ready to get started? Claim your account at betterment.com/accountaccess. Want to check to see if your employer offers a match? Log in to review your account.

How to turn your retirement savings into retirement income Aug 16, 2024 11:52:34 AM 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 Jul 25, 2024 8:29:52 PM 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 Jul 23, 2024 11:15:03 AM 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.

Investing in Your 40s: 4 Financial Goals You Should Prioritize at Mid-Life May 31, 2024 9:30:54 AM In your 40s, your priorities and investing goals become clearer than ever; it’s your mid-life opportunity to get your goals on track. It’s easy to put off planning for the future when the present is so demanding. Unlike in your 20s and 30s when your retirement seemed like a distant event, your 40s are when your financial responsibilities become palpable—now and for retirement. You may be earning more income than ever, so you can benefit far more from planning your taxes carefully. Perhaps you have increased expenses as a result of homeownership. If you have kids, now may also be the time that you’re thinking about or preparing to pay for college tuition. When all of these elements of your financial life converge, they require some thoughtful planning and strategic investing. Consider the following roadmap to planning your investments wisely during these rewarding years of your life. Here are four ways to think about goals you might prepare for. Preparing for Your Next Phase: Four Goals for Your 40s You may have already made a plan for the future. If so, now is a good time to review it and adjust course if necessary. If you haven’t yet made a plan, it’s not too late to get started. Set aside some time to think about your situation and long-term goals. If you’re married or in a relationship, you likely may need to include your spouse or partner in identifying your goals. Consider the facts: How much are you making? How much do you spend? Will your spending needs be changing in the near future? (Perhaps you're paying for day care right now but can plan to redirect that amount towards savings in a few years instead.) How much are you setting aside for savings, investments, and retirement? What will you need in the next five, 10, or 20 years? Work these factors into your short- and long-term financial goals. Pay off high-interest debt The average credit card interest rate is more than 20%, so paying off any high-interest credit card debt can boost your financial security more than almost any other financial move you make related to savings or investing. Student loans may also be a high-cost form of debt, especially if you borrowed money when rates were higher. If you have a high-interest-rate student loan (say more than 5%), or if you have multiple loans that you’d like to consolidate, you may want to consider refinancing your student debt. These days, lenders offer many options to refinance higher-rate student loans. There’s one form of debt that you don’t necessarily need to repay early, however: your mortgage. This is because mortgage rates are lower than most credit cards and may offer you a tax break. If you itemize deductions, you may be able to subtract mortgage interest from your taxable income. Many people file using the standard deduction, however, so check with your tax professional about what deductions may apply to your situation come tax time. Check that you’re saving enough for retirement If you’ve had several jobs—which means you might have several retirement or 401(k) plans—now is a good time to organize and check how all of your investments have performed. Betterment can help you accomplish this by allowing you to connect and review your outside accounts. Connecting external accounts allows you to see your wealth in one place and align different accounts to your financial goals. Connecting your accounts in Betterment can also help you see higher investment management fees you might be paying, grab opportunities to invest idle cash, and determine how your portfolios are allocated when we are able to pull that data from other institutions. There could also be several potential benefits of consolidating your various retirement accounts into low-fee IRA accounts at Betterment. Because it’s much easier to get on track in your 40s than in your 50s since you have more time to invest, you should also check in on the advice personalized for you in a Betterment retirement goal. Creating a Retirement goal at Betterment allows you to build a customized retirement plan to help you understand how much you’ll need to save for retirement based on when and where you plan on retiring. The plan also considers current and future income—including Social Security income—as well as your 401(k) accounts and other savings. Your plan updates regularly, and when you connect all of your outside accounts, it provides even more personalized retirement guidance. Optimize your taxes In your 40s, you’re likely to be earning more than earlier in your career–which may put you in a higher tax bracket. Reviewing your tax situation can help make sure you are keeping as much of your hard-earned income as you can. Determine if you should be investing in a Roth (after-tax contribution) or traditional (pre-tax contribution) employer plan option, or an IRA. The optimal choice usually depends on your current income versus your expected income in retirement. If your income is higher now than you expect it to be in retirement, it’s generally better to use a traditional 401(k) and take the tax deduction. If your income is similar or less than what you expect in retirement, you should consider choosing a Roth if available. Those without employer plans can generally take traditional IRA deductions no matter what their taxable income is (as long as your spouse doesn’t have one, either). You’ll also want to make sure you take advantage of all the tax credits and deductions that may be available to you. You may also want to check to see whether your company offers tax-free transportation benefits—including subway or bus passes or commuter parking. The value of these benefits isn’t included in your taxable income, so you can save money. You can also save money on a pre-tax basis by contributing to a Health Savings Account (HSA) or Flexible Spending Account (FSA). Health Saving Accounts (HSA) Health savings accounts (HSAs) are like personal savings accounts, but the money in them is used to pay for health care expenses. Only you—not your employer or insurance company—own and control the money in your HSA. The money you deposit into the account is not taxed. To be eligible to open an HSA, you must have a high-deductible insurance plan. Your 401(k) may be tied to your employer, however your HSA is not. As long as your health plan meets the deductible requirement and permits you to open an HSA, and you’re not receiving Medicare benefits or claimed as a dependent on someone else’s tax return, you can open one with various HSA “administrators” or “custodians” such as banks, credit unions, insurance companies, and other financial institutions. You can withdraw the funds tax-free at any time for qualified medical expenses. Flexible Spending Accounts (FSA) A Flexible Spending Account (FSA) is a special account that can be used to save for certain out-of-pocket health care costs. You don’t pay taxes on this money—this is a tax-favored program that some employers offer to their employees. If you have an FSA, remember that in most cases your spending allowance does not carry over from year-to-year. It’s important to find out whether your employer offers a grace period into the next year (typically through mid-March) to spend down your account. Before you waste your tax-free savings on eyeglasses, check what you can buy with FSA money—with and without a prescription. Any unused funds will be forfeited, so it’s a good idea to use up what you can. If you find yourself with more than you can spend, then you might want to adjust how much you’re allocating to your FSA. If you have children, start saving for college—just don’t shortchange your retirement to do it If you have children, you may already be paying for their college tuition, or at least preparing to pay for it. It’s advisable to focus on your own financial security while also doing what you can to save for your kids’ college costs. So, first things first, make sure you’re saving enough for your own retirement. Then if you have money left over, think about tax-deferred college savings plans, such as 529 plans. A 529—named for the section of the tax code that allows for them—can be a great way to save for college because earnings are tax-free if used for qualified education expenses. Some states even allow you to deduct contributions from your state income tax, if you use your state’s plan. (While each state has its own plan, you can use any state’s plan, no matter where your child will go to college.) An alternative is to put money away in your own taxable savings accounts. Some investors prefer this method since it gives them more control over the money if things change, and may be more beneficial for financial aid. Your 40s are all about taking stock of how far you’ve come, re-adjusting your priorities, and getting ready for the next phase of life. By working on your financial goals now, you can gain peace of mind that allows you to concentrate on important things like family, friends, work, and the way you want to spend this rewarding decade of your life.

Investing in Your 30s: 3 Goals You Should Set Today May 31, 2024 9:23:32 AM 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.

Investing in Your 50s: 4 Practical Tips for Retirement Planning May 28, 2024 2:09:07 PM 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.