Hello everyone,
I have a rather large sum of money sitting in a CD making 2.30%. I have been doing some research and I have come acorss this website called www.betterment.com.
I am wondering if I should use this website to do some investing.
I have a 401k account with Fidelity, and a Roth IRA with Vanguard. I am still not 100% clear on investing money vs. retirement investing. I am guessing the money I am going to put in betterment.com (should I choose to open an account) would be non-retirement investing? Either way, should I open an account there or would it better to stick to vanguard?
I will have plenty of money left over after maxing out my Roth IRA, and I would like to put it to some good use.
Thanks!
To the best of my knowledge, there are only a couple advantages that Betterment offers:
1) Some kind of question that will attempt to understand your ability to take risk, and it can suggest a portfolio for you
2) It provides automated tax loss harvesting strategies.
If there are any more that people are aware of, please let me know.
Here's my refute
1) You can find a bunch of questionnaires like this online.
2) Having a 401k not managed by Betterment makes the TLH difficult.
On that second point, the reason is the wash sale rule. In order to claim a capital loss on a security you sold, you cannot buy a substantially identical security 30 days before or after the sale of the security. If you do, the capital losses you can claim are reduced proportional to how much of the substantially identical security you purchased.
The IRS has never provided guidance on what "substantially identical" means. Many people are of the reasonable opinion that two funds tracking the same index are substantially identical, while two funds tracking different indices are not.
The purchase of a security in a 401k or IRA can cause of the wash sale of a security you're trying to tax loss harvest in a taxable account.
So here's the problem. If your 401k is not managed by Betterment (and as far as I know, they don't manage 401k's), then Betterment cannot know what you're buying or selling in your 401k. Meaning you could be creating wash sales, but Betterment will do all of their trades assuming you did not.
To avoid this issue, you have to use funds that track indices that are different from what Betterment uses. But Betterment uses funds that track the most commonly used indices, such as the CRSP US total market (what Vanguard total US tracks), the Dow Jones US Broad market index, CRSP US large value, the S&P 500, etc. So then you're forced to look for funds in your 401k that track indices that are slightly more obscure than these. But 401k's aren't known for providing a wide variety of funds (of course, your 401k may be an exception, I don't know). You may not even be able to find funds that track different indices.
Finally, TLH doesn't actually avoid taxes. It only defers them into the future because you are lowering your cost basis. The reason TLH is a good strategy is because it works out as an interest free loan (assuming your marginal tax rates - both ordinary and LTCG/QDI - remain the same). But Betterment in their white paper of TLH+(TM) ignores this fact.
Betterment adds management fees of 0.35%, 0.25%, or 0.15%. These fees are on top of the fees charged by the underlying funds. There is no need to pay these fees. Learning how to manage your portfolio and how to properly tax loss harvest is easy. Links provided by others previously will guide you on this.