Author Topic: Betterment or Vanguard for Traditional IRA?  (Read 6403 times)

VioletVixen

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Betterment or Vanguard for Traditional IRA?
« on: March 05, 2015, 09:06:58 PM »
Does anyone use Betterment for their Traditional IRA? Do you prefer Vanguard or Betterment for your TIRA, and why?

Dodge

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #1 on: March 05, 2015, 09:10:04 PM »
Either way you're with Vanguard, because Betterment will take your money and invest it in Vanguard for you (after adding their own fee).  Skip the middle man.

Pick a Vanguard LifeStrategy fund that matches the risk you want to take, and let them do all the work for you:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

VioletVixen

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #2 on: March 05, 2015, 09:22:40 PM »
Okay, that's what I thought! But Betterment seems to be the choice for Taxable accounts because they do all of the rebalancing and tax-loss harvesting for you, right?

tj

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #3 on: March 05, 2015, 09:38:47 PM »
Okay, that's what I thought! But Betterment seems to be the choice for Taxable accounts because they do all of the rebalancing and tax-loss harvesting for you, right?

Depends who you ask. There's absolutely zero reason to use Betterment in an IRA.

Dodge

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #4 on: March 06, 2015, 12:25:55 AM »

Okay, that's what I thought! But Betterment seems to be the choice for Taxable accounts because they do all of the rebalancing and tax-loss harvesting for you, right?

Vanguard's LifeStrategy funds also rebalance for you.

From the math I've seen, and done myself, tax loss harvesting does not overcome the -0.35% to -0.15% yearly fee on your portfolio that Betterment will take. This is easy to see, when you consider that tax loss harvesting is temporary (once your account goes up, there are no losses to rebalance), while the percentage fee is forever and grows with your portfolio.

VioletVixen

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #5 on: March 07, 2015, 06:27:54 PM »
Vanguard's LifeStrategy funds also rebalance for you.

From the math I've seen, and done myself, tax loss harvesting does not overcome the -0.35% to -0.15% yearly fee on your portfolio that Betterment will take. This is easy to see, when you consider that tax loss harvesting is temporary (once your account goes up, there are no losses to rebalance), while the percentage fee is forever and grows with your portfolio.

What do you mean tax loss harvesting is temporary? I don't know much about TLH, so how do losses 'disappear' when the account goes up? When it goes up by how much? In your opinion, if I wanted to open a taxable account, I should go with Vanguard and not worry about TLH at all?

madmax

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #6 on: March 08, 2015, 12:45:01 AM »
This is easy to see, when you consider that tax loss harvesting is temporary (once your account goes up, there are no losses to rebalance), while the percentage fee is forever and grows with your portfolio.

Thank you for pointing this out here and on MMM's blog - it was a real eye opener. Other than the fancy UI, there is no reason to use Betterment whatsoever. Also, the thought of trusting an algorithm to make trades in my portfolio makes me real nervous.

JasonS

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #7 on: March 08, 2015, 07:44:31 AM »
Also, I looked into using Betterment but it would make buying similar funds in other non-Betterment accounts impossible.  If Betterment sells any S&P 500 index fund at a loss for you, and then you buy some S&P 500 fund (any fund that tracks the S&P 500) thirty days before or after, say in your 401k, you're breaking wash sale rules.  The IRS will make your life miserable for this indiscretion.
If you go with Betterment, you cannot buy the same classes of index funds in any of your other accounts, period.  This was a deal breaker for me, too constraining.

themagicman

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #8 on: March 08, 2015, 07:58:21 AM »
Also, I looked into using Betterment but it would make buying similar funds in other non-Betterment accounts impossible.  If Betterment sells any S&P 500 index fund at a loss for you, and then you buy some S&P 500 fund (any fund that tracks the S&P 500) thirty days before or after, say in your 401k, you're breaking wash sale rules. 

Are you sure about this? I would not think 401k purchases would affect wash sale

Indexer

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #9 on: March 08, 2015, 09:38:50 AM »
Vanguard's LifeStrategy funds also rebalance for you.

From the math I've seen, and done myself, tax loss harvesting does not overcome the -0.35% to -0.15% yearly fee on your portfolio that Betterment will take. This is easy to see, when you consider that tax loss harvesting is temporary (once your account goes up, there are no losses to rebalance), while the percentage fee is forever and grows with your portfolio.

What do you mean tax loss harvesting is temporary? I don't know much about TLH, so how do losses 'disappear' when the account goes up? When it goes up by how much? In your opinion, if I wanted to open a taxable account, I should go with Vanguard and not worry about TLH at all?

TLH is temporary because you can't do it forever.  Investments trend up in value over time, and TLH only works when they are going down.  So normally you can take advantage of price fluctuations in the first couple years, but 10 years out its highly unlikely you will be able to do it.
Example:  Lets say you have the total stock index with a value of 10k.  It drops to 8k.  Betterment sells it and buys the 500 index + extended market index(which combined are the same as the total).  You harvest the 2k loss.  It goes back up to 10k, and then up from there.  For you to ever be able to TLH those funds again it would have to drop below 8k again.  Lets that happens.  It goes to 6k.  Now Betterment sells the 500 index+extended and buys the total again.  You harvest another 2k.  Now it goes back up to 10k, and eventually 20k.  For you to tax loss harvest that money again you need it to go under 6k, and from 20k down to 6k is a 70% loss which is unheard of for a well diversified index fund. 

So new problem.  When you go to take this money out later when you need it your cost basis is 40% lower.   Now if your FIRE with low reportable income and you keep your capital gains rate at 0 no big deal(and assuming politicians never change that in your lifetime).  The reason I bring this up is when companies report you can see X% higher returns from TLH they never figure this in.  They always assume you never ever pay capital gains on the now very suppressed cost basis... they assume you die before you take the money out. 

Tax Loss harvesting 'can' boost your returns a little in a taxable account but its temporary in that you can only do it early on,  and its not nearly as effective as the companies pushing it would like people to believe. 
« Last Edit: March 08, 2015, 09:40:32 AM by Indexer »

JasonS

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #10 on: March 08, 2015, 11:51:57 AM »
Magicman,
It doesn't matter what fund you're using to buy back the funds that you sold at a loss.  It can be at a different broker in you wife's name and you're still guilty of a wash sale violation in the IRS' eyes.  I suppose it's less likely that they'll catch you in the above scenario, but if they do, you'll be out more $ than Betterment could ever hope to save you using TLH.
I'm not saying Betterment won't work for people, but it definitely limits you're options in the rest of your accounts.

JasonS

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #11 on: March 08, 2015, 11:56:58 AM »
The TLH benefits won't be temporary if you're making monthly investments to your Betterment account. Then every time the fund price drops even a couple percent, there will be some of your purchase that has lost value.

VioletVixen

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #12 on: March 08, 2015, 09:13:29 PM »
TLH is temporary because you can't do it forever.  Investments trend up in value over time, and TLH only works when they are going down.  So normally you can take advantage of price fluctuations in the first couple years, but 10 years out its highly unlikely you will be able to do it.
Example:  Lets say you have the total stock index with a value of 10k.  It drops to 8k.  Betterment sells it and buys the 500 index + extended market index(which combined are the same as the total).  You harvest the 2k loss.  It goes back up to 10k, and then up from there.  For you to ever be able to TLH those funds again it would have to drop below 8k again.  Lets that happens.  It goes to 6k.  Now Betterment sells the 500 index+extended and buys the total again.  You harvest another 2k.  Now it goes back up to 10k, and eventually 20k.  For you to tax loss harvest that money again you need it to go under 6k, and from 20k down to 6k is a 70% loss which is unheard of for a well diversified index fund. 

So new problem.  When you go to take this money out later when you need it your cost basis is 40% lower.   Now if your FIRE with low reportable income and you keep your capital gains rate at 0 no big deal(and assuming politicians never change that in your lifetime).  The reason I bring this up is when companies report you can see X% higher returns from TLH they never figure this in.  They always assume you never ever pay capital gains on the now very suppressed cost basis... they assume you die before you take the money out. 

Tax Loss harvesting 'can' boost your returns a little in a taxable account but its temporary in that you can only do it early on,  and its not nearly as effective as the companies pushing it would like people to believe.

Thanks for the explanation. So, just a regular Vanguard Lifestrategy fund would be best for a taxable account? I didn't really want to get into TLH anyway. Do I need to worry about wash sales with the automatic rebalancing of a Lifestrategy fund?

skyrefuge

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #13 on: March 09, 2015, 09:18:22 AM »
Also, the thought of trusting an algorithm to make trades in my portfolio makes me real nervous.

Using an algorithm to make trades shouldn't make you nervous at all. In fact, using an algorithm is a pretty strong factor for successful long-term investing. Of course, for most of us, our "algorithm" is simply defined in our Investment Policy Statement, and the processor that executes that algorithm is our brains, but the concept is the same. What's the alternative to an algorithm? Making random decisions to buy/sell based on which way the wind is blowing that day? No thanks! (#NotIntendedAsAnEndorsementOfBetterment)

tj

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #14 on: March 09, 2015, 09:41:40 AM »
TLH is temporary because you can't do it forever.  Investments trend up in value over time, and TLH only works when they are going down.  So normally you can take advantage of price fluctuations in the first couple years, but 10 years out its highly unlikely you will be able to do it.
Example:  Lets say you have the total stock index with a value of 10k.  It drops to 8k.  Betterment sells it and buys the 500 index + extended market index(which combined are the same as the total).  You harvest the 2k loss.  It goes back up to 10k, and then up from there.  For you to ever be able to TLH those funds again it would have to drop below 8k again.  Lets that happens.  It goes to 6k.  Now Betterment sells the 500 index+extended and buys the total again.  You harvest another 2k.  Now it goes back up to 10k, and eventually 20k.  For you to tax loss harvest that money again you need it to go under 6k, and from 20k down to 6k is a 70% loss which is unheard of for a well diversified index fund. 

So new problem.  When you go to take this money out later when you need it your cost basis is 40% lower.   Now if your FIRE with low reportable income and you keep your capital gains rate at 0 no big deal(and assuming politicians never change that in your lifetime).  The reason I bring this up is when companies report you can see X% higher returns from TLH they never figure this in.  They always assume you never ever pay capital gains on the now very suppressed cost basis... they assume you die before you take the money out. 

Tax Loss harvesting 'can' boost your returns a little in a taxable account but its temporary in that you can only do it early on,  and its not nearly as effective as the companies pushing it would like people to believe.

Thanks for the explanation. So, just a regular Vanguard Lifestrategy fund would be best for a taxable account? I didn't really want to get into TLH anyway. Do I need to worry about wash sales with the automatic rebalancing of a Lifestrategy fund?

no. Only if you sell in taxable and re buy in ira within the wash sale time period.

skyrefuge

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #15 on: March 09, 2015, 09:47:46 AM »
Also, I looked into using Betterment but it would make buying similar funds in other non-Betterment accounts impossible.  If Betterment sells any S&P 500 index fund at a loss for you, and then you buy some S&P 500 fund (any fund that tracks the S&P 500) thirty days before or after, say in your 401k, you're breaking wash sale rules.

No. The IRS doesn't give a shit if you simply buy and sell the same fund. It's only an issue if you claim the capital loss as a tax deduction. Obviously it's easiest to use TLH if you just blindly claim all losses as tax deductions, and ensuring that you don't repurchase assets sold at a loss is one way to allow that blind operation, but operating blind is probably not the greatest idea to begin with. My point is that it's not "impossible" to buy similar funds in non-Betterment accounts; that action won't trigger the IRS to launch cruise missiles to blow up your house. It just means that you might miss out on the chance to make a few bucks from a tax deduction.

The TLH benefits won't be temporary if you're making monthly investments to your Betterment account. Then every time the fund price drops even a couple percent, there will be some of your purchase that has lost value.

Sure, if you keep investing regularly, you'll keep seeing pieces of money that benefit from TLH, but that doesn't improve the situation. Because then it means that you have more money subject to never-ending fees, which are based on your account size. For any single piece of money, the TLH benefits are temporary, while the expenses are forever. Sum together the effects of all of those pieces of money, and you still lose in the long run.

Imagine each of your monthly investments was actually made by a different person (Jane does January's investment, Frank does February's, etc.), as that person's only lifetime investment with Betterment. It seems you agree that for those individuals, the potential for TLH benefits will disappear after a few years at most, and thus be outweighed by the fees in the long run. So then if you merge all those individuals into a single person with a single account, how could combining all their losses turn it into a win?

VioletVixen

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #16 on: March 09, 2015, 08:30:58 PM »
Also, I looked into using Betterment but it would make buying similar funds in other non-Betterment accounts impossible.  If Betterment sells any S&P 500 index fund at a loss for you, and then you buy some S&P 500 fund (any fund that tracks the S&P 500) thirty days before or after, say in your 401k, you're breaking wash sale rules.

No. The IRS doesn't give a shit if you simply buy and sell the same fund. It's only an issue if you claim the capital loss as a tax deduction. Obviously it's easiest to use TLH if you just blindly claim all losses as tax deductions, and ensuring that you don't repurchase assets sold at a loss is one way to allow that blind operation, but operating blind is probably not the greatest idea to begin with. My point is that it's not "impossible" to buy similar funds in non-Betterment accounts; that action won't trigger the IRS to launch cruise missiles to blow up your house. It just means that you might miss out on the chance to make a few bucks from a tax deduction.

The TLH benefits won't be temporary if you're making monthly investments to your Betterment account. Then every time the fund price drops even a couple percent, there will be some of your purchase that has lost value.

Sure, if you keep investing regularly, you'll keep seeing pieces of money that benefit from TLH, but that doesn't improve the situation. Because then it means that you have more money subject to never-ending fees, which are based on your account size. For any single piece of money, the TLH benefits are temporary, while the expenses are forever. Sum together the effects of all of those pieces of money, and you still lose in the long run.

Imagine each of your monthly investments was actually made by a different person (Jane does January's investment, Frank does February's, etc.), as that person's only lifetime investment with Betterment. It seems you agree that for those individuals, the potential for TLH benefits will disappear after a few years at most, and thus be outweighed by the fees in the long run. So then if you merge all those individuals into a single person with a single account, how could combining all their losses turn it into a win?

Okay, since I still can't wrap my mind around the complexities of TLH/Capital Gains/Wash sale rules, I think it is best for me to just leave that whole deal alone for now if it's not going to benefit me a huge amount, anyway. However, this discussion has me thinking; is it wrong to have the same/similar funds in all of my accounts? Right now I have all tax-sheltered accounts, but what happens if I open a taxable Vanguard Lifestrategy Growth fund (same as my TIRA funds)? When Vanguard automatically rebalances for me in all three accounts (both TIRAs and the one taxable account), am I going to end up having wash sales? This is what I have for investment accounts (I am trying to keep a 80/20 allocation with as little work on my part as possible):


Fidelity 401a (Employer contributes 5%, not a match): $3,115.17

79.95%    SPTN 500 INDEX ADV
           $2,490.72          Stock Investments   Large Cap
                .05% ER

20.05%   SPTN EXT MKT IDX ADV
           $624.45      Stock Investments   Mid-Cap
                .07% ER

Fidelity 403b: $6,433.91 <--95% of this is in Roth 403b, 5% Traditional 403b

72.26%   SPTN TOT MKT IDX ADV
           $4,648.99       Stock Investments    Large Cap
                .05% ER

27.74%   SPTN LT TR IDX ADV
           $1,784.92   Bond Investments  Income
                .1% ER

Traditional IRA (My IRA): $4,104.91

VASGX    Vanguard LifeStrategy Growth Fund Investor Shares
           0.17% ER   

Husband's Traditional IRA: $3,000

VASGX    Vanguard LifeStrategy Growth Fund Investor Shares
           0.17% ER

HSA (HealthEquity): $442

VIGIX  VANGUARD GROWTH INDEX I  : $356

VBMPX VANGUARD TOTAL BOND MARKET IDX INSTLPLS:  $86




skyrefuge

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #17 on: March 09, 2015, 09:26:51 PM »
what happens if I open a taxable Vanguard Lifestrategy Growth fund (same as my TIRA funds)? When Vanguard automatically rebalances for me in all three accounts (both TIRAs and the one taxable account), am I going to end up having wash sales?

No. First, as I said in my post, there is nothing wrong with a wash sale. A wash sale just restricts your ability to take a tax deduction. If you don't care about doing any tax-loss harvesting you can buy and sell whatever you want and create wash sales with reckless abandon (and no, don't actually do that).

Second, a LifeStrategy fund "rebalancing" wouldn't even result in a wash sale in the first place. A fund that sells an underlying component doesn't count as *you* selling that underlying component. Otherwise, no one wanting to do tax-loss harvesting could hold *any* mutual funds, since mutual funds buy and sell their underlying components constantly (imagine a managed fund whose strategy allows it to hold any stock in the universe that it feels like...it would be impossible to avoid buying/selling the same thing it's buying/selling, because there's no way for you to even know what it's buying/selling).

Betterment is different than a LifeStrategy fund because they invest you directly funds that underlie the LifeStrategy funds, so selling those funds does count as you selling it, so it can result in a wash sale.

This is what I have for investment accounts (I am trying to keep a 80/20 allocation with as little work on my part as possible):

This is about the best-looking portfolio I've ever seen posted here! Well done, just keep doing what you're doing, and if you ever get to the point where you care about tax-loss harvesting, by that point you'll know enough about all this crap to know how to avoid wash sales.

VioletVixen

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Re: Betterment or Vanguard for Traditional IRA?
« Reply #18 on: March 10, 2015, 09:28:30 PM »
what happens if I open a taxable Vanguard Lifestrategy Growth fund (same as my TIRA funds)? When Vanguard automatically rebalances for me in all three accounts (both TIRAs and the one taxable account), am I going to end up having wash sales?

No. First, as I said in my post, there is nothing wrong with a wash sale. A wash sale just restricts your ability to take a tax deduction. If you don't care about doing any tax-loss harvesting you can buy and sell whatever you want and create wash sales with reckless abandon (and no, don't actually do that).

Second, a LifeStrategy fund "rebalancing" wouldn't even result in a wash sale in the first place. A fund that sells an underlying component doesn't count as *you* selling that underlying component. Otherwise, no one wanting to do tax-loss harvesting could hold *any* mutual funds, since mutual funds buy and sell their underlying components constantly (imagine a managed fund whose strategy allows it to hold any stock in the universe that it feels like...it would be impossible to avoid buying/selling the same thing it's buying/selling, because there's no way for you to even know what it's buying/selling).

Betterment is different than a LifeStrategy fund because they invest you directly funds that underlie the LifeStrategy funds, so selling those funds does count as you selling it, so it can result in a wash sale.

This is what I have for investment accounts (I am trying to keep a 80/20 allocation with as little work on my part as possible):

This is about the best-looking portfolio I've ever seen posted here! Well done, just keep doing what you're doing, and if you ever get to the point where you care about tax-loss harvesting, by that point you'll know enough about all this crap to know how to avoid wash sales.

Thanks for explaining! And thanks for the compliment. I am really trying to learn, but unfortunately it comes in pieces. Right now I'm running with "index funds and low ER." :)