Adventures in transferring out of Betterment

[EpicCrawfish]

Tl;dr I’m moving to Canada and since Betterment does not allow non-residents to have an account with them I needed to transfer my individual taxable account, Roth IRA, and traditional IRA from Betterment to an institution that would allow me to have an account while living outside the US. This took a lot more work than it should have, so I wanted to post about this in case it helps anyone in the future.

Problem #1: Find someone to accept my accounts
As far as I understand it there’s no legal reason why Betterment (or any other institution) do not allow non-residents to have an unrestricted account. My impression, after talking with representatives and reading online, is that FATCA and other recent regulations have created enough a burden on institutions that they choose to exclude non-residents rather than jump through all the hoops of compliance.

I asked a Betterment representative directly about their policy against providing accounts to non-resident but otherwise eligible customers (i.e. they have a US SSN, pay US taxes, etc.). While they spouted some mumbo-jumbo about how it was due to some SEC regulations they were unable to provide any specifics or back up that claim.

I next tried Fidelity, having heard from others online that they would allow me to hold a full account (i.e. both selling and buying would be allowed). Upon calling them, however, I was told that while they would allow the IRA they would not allow me to hold an individual taxable account. They were also unable to provide any justification as to why, even after putting me on hold to ‘do some research’.

Finally I contacted Vanguard. I was told that I would be welcome to transfer my assets in and that I should expect that once my address changed to be in Canada my taxable account would be restricted against future purchases. I would be free to sell assets, and dividends could be reinvested. I appreciated that the representatives seemed familiar with Vanguard’s policy and felt that being prohibited from buying would be acceptable since there are other avenues through which I could rebalance over time.

Problem #2: Medallion Signature Guarantee (MSG)
Betterment’s policy dictates that for accounts over a certain value a medallion signature guarantee is required on the transfer paperwork. This is different from notarization and demonstrates a monetary guarantee on the part of the guarantor that the signature is authentic. Typically one would obtain this from a branch of their bank. I bank with USAA, and  as they don’t have physical branches this presented a problem. USAA’s customer service was entirely unhelpful in finding an alternative.

Next I called around to banks with local offices. I tried several branches of Chase and was told that the credit card I have through them would not qualify me and that I’d need to open a bank account and keep it in good standing for six months. Wells Fargo had a similar policy and would require me to have an account for two months in order to qualify for a MSG. Wanting something sooner I then tried Homestreet Bank, which is a more local to Seattle. I hold a mortgage through them and thus they were happy to provide a guarantee. Unfortunately, as we were about to sign the documents, I learned that the bank’s guarantee limit was slightly lower than the valuable of my largest Betterment account and thus could not provide guarantee. I was out of luck - back to the drawing board.

Problem #3: Betterment (again)
At this point I got in touch with Betterment again to find out if there was any wiggle room. Perhaps I could do a partial transfer or transfer a portion of my largest account to a donor advised fund to get below Homestreet’s guarantee limit. Betterment, it turns out, does not do partial transfers, so there was no way to reduce the transfer amount in that way. They suggested that I instead sell holdings (which would have incurred about $2k of taxes) to reduce the account value. Not an especially helpful suggestion.

On that call I also learned that Betterment won’t transfer an IRA out in-kind. They justify this saying it’s necessary to “protect their proprietary algorithms”. This is ridiculous on its face. They allow taxable accounts to transfer out in-kind which would obviate whatever protections they were hoping to gain from restricting IRA transfers. Even if it didn’t, anyone could open a Betterment account with a few thousand dollars and get the same information by inspecting their statements. That wouldn’t be the most expensive competitive research ever.

Finally:
At this point I was resigned to opening a bank account with Chase or Wells Fargo and waiting months simply to qualify for a MSG. I called yet another branch of Chase and was informed that my credit card would allow me to obtain a MSG (contradicting what I had been told earlier) and that Chase has no limit on the value of their guarantees. I was able to go in the same day and complete the transfer paperwork.

Lessons

• Betterment is kind of ridiculous. Their excuses about ‘protecting proprietary algorithms’ were absurd. Not supporting partial transfers is frustrating. And the customer service wasn’t anything special. They also changed their rate structure out of the blue this year. All of that would make me hesitant to recommend them to anyone in the future.
• It can be difficult to obtain an MSG, especially if you don’t have a physical bank. It’s worth calling any institution through which you have a credit card or a loan. Be sure to ask what the maximum value of the guarantee is.
• Institutions are squirrely and inconsistent about whether non-residents are allowed to have an account and how restricted the account would be. There is a lot of contradicting information on the internet. It seems that the regulations leading to this behavior are simply too new for institutions to have a coherent solution for non-residents.
• Vanguard has awesome customer service. I never had trouble reaching a real person and everyone was extremely professional.

[mcampbell]

Tl;dr I’m moving to Canada and since Betterment does not allow non-residents to have an account with them I needed to transfer my individual taxable account, Roth IRA, and traditional IRA from Betterment to an institution that would allow me to have an account while living outside the US. This took a lot more work than it should have, so I wanted to post about this in case it helps anyone in the future.

Problem #1: Find someone to accept my accounts
As far as I understand it there’s no legal reason why Betterment (or any other institution) do not allow non-residents to have an unrestricted account. My impression, after talking with representatives and reading online, is that FATCA and other recent regulations have created enough a burden on institutions that they choose to exclude non-residents rather than jump through all the hoops of compliance.

I asked a Betterment representative directly about their policy against providing accounts to non-resident but otherwise eligible customers (i.e. they have a US SSN, pay US taxes, etc.). While they spouted some mumbo-jumbo about how it was due to some SEC regulations they were unable to provide any specifics or back up that claim.

I next tried Fidelity, having heard from others online that they would allow me to hold a full account (i.e. both selling and buying would be allowed). Upon calling them, however, I was told that while they would allow the IRA they would not allow me to hold an individual taxable account. They were also unable to provide any justification as to why, even after putting me on hold to ‘do some research’.

Finally I contacted Vanguard. I was told that I would be welcome to transfer my assets in and that I should expect that once my address changed to be in Canada my taxable account would be restricted against future purchases. I would be free to sell assets, and dividends could be reinvested. I appreciated that the representatives seemed familiar with Vanguard’s policy and felt that being prohibited from buying would be acceptable since there are other avenues through which I could rebalance over time.

Problem #2: Medallion Signature Guarantee (MSG)
Betterment’s policy dictates that for accounts over a certain value a medallion signature guarantee is required on the transfer paperwork. This is different from notarization and demonstrates a monetary guarantee on the part of the guarantor that the signature is authentic. Typically one would obtain this from a branch of their bank. I bank with USAA, and  as they don’t have physical branches this presented a problem. USAA’s customer service was entirely unhelpful in finding an alternative.

Next I called around to banks with local offices. I tried several branches of Chase and was told that the credit card I have through them would not qualify me and that I’d need to open a bank account and keep it in good standing for six months. Wells Fargo had a similar policy and would require me to have an account for two months in order to qualify for a MSG. Wanting something sooner I then tried Homestreet Bank, which is a more local to Seattle. I hold a mortgage through them and thus they were happy to provide a guarantee. Unfortunately, as we were about to sign the documents, I learned that the bank’s guarantee limit was slightly lower than the valuable of my largest Betterment account and thus could not provide guarantee. I was out of luck - back to the drawing board.

Problem #3: Betterment (again)
At this point I got in touch with Betterment again to find out if there was any wiggle room. Perhaps I could do a partial transfer or transfer a portion of my largest account to a donor advised fund to get below Homestreet’s guarantee limit. Betterment, it turns out, does not do partial transfers, so there was no way to reduce the transfer amount in that way. They suggested that I instead sell holdings (which would have incurred about $2k of taxes) to reduce the account value. Not an especially helpful suggestion.

On that call I also learned that Betterment won’t transfer an IRA out in-kind. They justify this saying it’s necessary to “protect their proprietary algorithms”. This is ridiculous on its face. They allow taxable accounts to transfer out in-kind which would obviate whatever protections they were hoping to gain from restricting IRA transfers. Even if it didn’t, anyone could open a Betterment account with a few thousand dollars and get the same information by inspecting their statements. That wouldn’t be the most expensive competitive research ever.

Finally:
At this point I was resigned to opening a bank account with Chase or Wells Fargo and waiting months simply to qualify for a MSG. I called yet another branch of Chase and was informed that my credit card would allow me to obtain a MSG (contradicting what I had been told earlier) and that Chase has no limit on the value of their guarantees. I was able to go in the same day and complete the transfer paperwork.

Lessons

• Betterment is kind of ridiculous. Their excuses about ‘protecting proprietary algorithms’ were absurd. Not supporting partial transfers is frustrating. And the customer service wasn’t anything special. They also changed their rate structure out of the blue this year. All of that would make me hesitant to recommend them to anyone in the future.
• It can be difficult to obtain an MSG, especially if you don’t have a physical bank. It’s worth calling any institution through which you have a credit card or a loan. Be sure to ask what the maximum value of the guarantee is.
• Institutions are squirrely and inconsistent about whether non-residents are allowed to have an account and how restricted the account would be. There is a lot of contradicting information on the internet. It seems that the regulations leading to this behavior are simply too new for institutions to have a coherent solution for non-residents.
• Vanguard has awesome customer service. I never had trouble reaching a real person and everyone was extremely professional.

My money is stuck there also. I tried to transfer it out. However you need some kind of certified letter from another financial institution and most don’t want to do it unless you specifically move your money to them. Vanguard sadly doesn’t do this service


Sent from my iPhone using Tapatalk

[EpicCrawfish]

My money is stuck there also. I tried to transfer it out. However you need some kind of certified letter from another financial institution and most don’t want to do it unless you specifically move your money to them. Vanguard sadly doesn’t do this service

If you do want to get out it's definitely worth calling around to multiple branches of any institution through which you have an account (credit card, mortgage, loan, etc.). One of them will likely be willing to provide the required medallion signature guarantee.

[gerardc]

Please keep us posted on your experience with Vanguard US as a Canadian resident. Also specifics of your tax situation would be helpful.

[Indexer]

Wow, that is terrible!

Here is what I think is happening regarding Canada. Some countries have odd rules if a foreign investment representative talks to one of their residents(doesn't even have to be a citizen) even if it's about foreign investments. Even though you are talking to a US firm about your US investments if you were physically standing in the other country they apply their laws to the conversation. I'm pretty sure Canada is one of those countries. Hence why some firms want to stay out of it completely, and Vanguard is telling you they won't process any new buy orders.

Concerning the transfer, WTF?!?! Betterment is going out of their way to make this transfer as difficult as possible. They don't allow in kind transfers(you're right, their excuse is BS), don't allow partial transfers, and they require an MSG. They don't need to do any of this. They are choosing to make it more complicated. Most firms allow partial transfers, allow in kind transfers, and only ask for MSG in special situations.

[FiveSigmas]

EC, that's a pretty terrible experience. :-(

Thanks, though, for sharing the details -- very illuminating.

(And I too would be interested in how you get along going forward.)

[elysianfields]

Rather than changing your address to someplace in Canada, I would suggest asking a trusted friend to receive mail on my behalf or to fetch my mail from a nearby PO Box once/week.  Depending on how deeply into the Great White North you move, you could also rent a US PO Box just over the border and visit it yourself.

Alternatively, or if you don't have any friends you can trust, you could use a mail scanning service such as the one Go Curry Cracker discusses here:  https://gocurrycracker.com/snail-mail-paper-checks-21st-century/.  Google knows about many other mail scanning services besides the one GCC recommends.

Both options allow you to retain a US mailing address and thereby skip all the problems you're running into, except the Medallion Signature Guarantee, but you don't need that if you don't need to transfer accounts, right?

[EpicCrawfish]

Please keep us posted on your experience with Vanguard US as a Canadian resident. Also specifics of your tax situation would be helpful.

I'll update post-move once I have a read on how things are working out.

Details of our financial situation are basically

• Taxable and non-taxable investment accounts in Betterment, that I've already covered
• 401ks for my wife and me help at Vanguard and Schwab. Both are fine continuing to hold these once we're Canadian residents (presumably since we won't be making contributions at that point)
• Company RSUs (vested and unvested) help at Schwab. Nothing changes here since we'd only ever sell shares
• US Bank accounts that we'll keep, but we'll also need to open Canadian accounts and figure out how to most effectively shuffle money arround (i.e. wire it and pay the fee, Norbert's Gambit, etc.
• A house which we'll sell to realize the gain we have and to simplify our existence somewhat. No interested in managing property or paying to have someone else do it
• Relatively small HSA (uninvested) which so far no one has any perspective on how it will be treated in Canada. Not sure if using it for an eligible expense would be considered taxable income in Canada (since they don't recognize HSAs)

[EpicCrawfish]

Here is what I think is happening regarding Canada. Some countries have odd rules if a foreign investment representative talks to one of their residents(doesn't even have to be a citizen) even if it's about foreign investments. Even though you are talking to a US firm about your US investments if you were physically standing in the other country they apply their laws to the conversation. I'm pretty sure Canada is one of those countries. Hence why some firms want to stay out of it completely, and Vanguard is telling you they won't process any new buy orders.

Concerning the transfer, WTF?!?! Betterment is going out of their way to make this transfer as difficult as possible. They don't allow in kind transfers(you're right, their excuse is BS), don't allow partial transfers, and they require an MSG. They don't need to do any of this. They are choosing to make it more complicated. Most firms allow partial transfers, allow in kind transfers, and only ask for MSG in special situations.

You're speculation seems very plausible and extremely frustrating. And you're absolutely right that Betterment is being willfully obtuse. I was extremely disappointed when they changed their rate structure with no warning last year. I figure it's probably not the last time they make radical user-hostile changes.

[EpicCrawfish]

Rather than changing your address to someplace in Canada, I would suggest asking a trusted friend to receive mail on my behalf or to fetch my mail from a nearby PO Box once/week.  Depending on how deeply into the Great White North you move, you could also rent a US PO Box just over the border and visit it yourself.

Alternatively, or if you don't have any friends you can trust, you could use a mail scanning service such as the one Go Curry Cracker discusses here:  https://gocurrycracker.com/snail-mail-paper-checks-21st-century/.  Google knows about many other mail scanning services besides the one GCC recommends.

Both options allow you to retain a US mailing address and thereby skip all the problems you're running into, except the Medallion Signature Guarantee, but you don't need that if you don't need to transfer accounts, right?

I've definitely considered this. My main concerns are two-fold

• These are accounts that ideally will be around for decades. I don't want to discover at any point that this approach fell afoul of some subtle rules or regulations that could cary costly consequences.
• My wife is a lawyer and any shady behavior (real or perceived) can have real consequences for your ability to practice law. Thus we feel it's best to keep everything well above board.

[elysianfields]

Rather than changing your address to someplace in Canada, I would suggest asking a trusted friend to receive mail on my behalf or to fetch my mail from a nearby PO Box once/week.  Depending on how deeply into the Great White North you move, you could also rent a US PO Box just over the border and visit it yourself.

Alternatively, or if you don't have any friends you can trust, you could use a mail scanning service such as the one Go Curry Cracker discusses here:  https://gocurrycracker.com/snail-mail-paper-checks-21st-century/.  Google knows about many other mail scanning services besides the one GCC recommends.

Both options allow you to retain a US mailing address and thereby skip all the problems you're running into, except the Medallion Signature Guarantee, but you don't need that if you don't need to transfer accounts, right?

I've definitely considered this. My main concerns are two-fold

• These are accounts that ideally will be around for decades. I don't want to discover at any point that this approach fell afoul of some subtle rules or regulations that could cary costly consequences.
• My wife is a lawyer and any shady behavior (real or perceived) can have real consequences for your ability to practice law. Thus we feel it's best to keep everything well above board.

Hi EpicCrawfish,

If you are both US citizens, there's nothing shady or illegal about having your mail go to a drop-box, friend, or relative; you'd also continue to be residents of the last city and state in which you resided before moving to Canada.  If I may offer a couple examples:

1) I work for the US Department of State and have been assigned overseas for several years now.  Employees assigned overseas can give an address for personal mail that is, in short, a government-run drop-box that funnels that personal mail to us through the diplomatic pouch.  None of the financial entities with which we have accounts need to know where we are overseas.  How is this shady?

2) What if, instead of moving to Canada, you simply decided to slow-travel for two years?  You'd still be overseas.  You'd still need someone to receive mail for you.  How would this differ from your move to Canada?

I think you're simply running into the mental lock-in that American financial companies have when they see an account with a non-US address: "They must be foreigners."

In my experience, a few financial enterprises understand the situation and either attempt to accommodate or just don't care, e.g. USAA, PenFed (their members serve in the military or Foreign Service).

As long as you're paying Federal and State taxes correctly under the law, I don't see how not telling them where you happen to live isn't above-board.

Now I wouldn't lie, for example, on a life insurance application if they ask whether you're going to live overseas, just as I wouldn't lie about whether I fly planes or scuba-dive; I wouldn't have merchandise shipped to a mail-forwarder in Oregon just so I could evade sales taxes; I wouldn't rent a mailbox in a ZIP code with lower auto insurance rates; but giving a different address for receiving mail seems to me fundamentally different.

To think of it another way, many colleagues and I use VPNs to obscure our true IP addresses and thereby access financial accounts (believe it or not, some banks won't let you sign in from overseas IP addresses) as if we were in the US.  How is this any different from saying, "My address is [your mother's address]" ?

Perhaps you might draw the line at "I'm not using a VPN so I can stream movies from the US-based version of Netflix because I'm not really a US resident", which I understand from the legal aspect; many of my colleagues do subscribe to such services and then do use a VPN to obscure their IP address.  And while I'd understand an attorney drawing some bright lines in certain places, some such legal limitations just seem silly to me, e.g., ESPN and NFL.com block access to game highlights because I'm "overseas".  But that's a question for a different thread or forum.

As to your HSA question, it doesn't matter where you receive medical care, any eligible medical expenses that are not covered by your insurance (e.g., deductibles, co-pays, and other out of pocket expenses) are still eligible for reimbursement through your HSA (whether immediately or years later).  I'm not going to look those regs up for you, you can either trust me and my thousands of colleagues assigned abroad or do your own research.

That's my take, feel free to PM me if you'd like to discuss this further.

Edited to clarify the HSA information and add the VPN examples.

[mustachianism_is_aredpill]

@EpicCrawfish I'm in a similar boat to you, planning a move from the US to Canada. I'm glad to hear that you were able to keep your Vanguard account.


@elysianfields Do you happen to know what the rules are for US non-citizens' bank and financial institution accounts when they leave? I'm also not a US permanent resident, so I won't be subject to worldwide income taxes once I leave.

I'd prefer if I were not forced to sell my Vanguard holdings and incur capital gains, or worse, have to lock in losses if my move coincides with a recession. Obviously I'd continue filing tax returns and paying any taxes due on the accounts. I don't care about the ability to conduct more trades on Vanguard - I'm content with buying Vanguard ETFs on Canadian brokerages in future.

[chasesfish]

Just an FYI - Medallion Signature Guarantees have been around forever, it was only in the last 10 years or so you were really able to transfer assets around without them. 

That being said, the only people with my rather large banking institution that have them anymore are in the Wealth/Trust division. They'll use the guarantee if you're moving assets to them, otherwise its too risky and not a service you *have* to provide.

The only time I needed one, I was able to get around it due to a physical Fidelity location in a nearby big city.

[Million2000]

Thanks OP for detailing your experiences with Betterment. I've had my suspicions about them since I first started seeing their ads on Mint.com. I had always wondered what it would be like to move assets out if needed, thanks for answering that question. I'll continue to stick with Vanguard, I wouldn't be able to stomach this BS.

[Padonak]

What's a medallion guarantee?

[Indexer]

What's a medallion guarantee?

It's like a notary stamp, but it has financial backing. You can normally get either at your bank.

Notary: normally done by a teller or customer service rep.
Medallion: normally done by the manager.

[elysianfields]

@EpicCrawfish I'm in a similar boat to you, planning a move from the US to Canada. I'm glad to hear that you were able to keep your Vanguard account.


@elysianfields Do you happen to know what the rules are for US non-citizens' bank and financial institution accounts when they leave? I'm also not a US permanent resident, so I won't be subject to worldwide income taxes once I leave.

I'd prefer if I were not forced to sell my Vanguard holdings and incur capital gains, or worse, have to lock in losses if my move coincides with a recession. Obviously I'd continue filing tax returns and paying any taxes due on the accounts. I don't care about the ability to conduct more trades on Vanguard - I'm content with buying Vanguard ETFs on Canadian brokerages in future.

Why worry about it?  Just change your address to a US-based mail-forwarding service and keep your accounts as long as you wish.

[gerardc]

US-based mail forwarding address doesn't always work as it's not considered a physical residence address. Mail forwarding services market their addresses as physical addresses, which is technically true (not PO boxes), but is deceptive because they're not always acceptable as residence addresses and people confuse the two. Some banks/services won't care; some will flag the address and demand a utility bill as proof of residence.

If you currently live in the US and plan to move abroad, the best thing is probably to mark your current (legit) residence as your residence address, and a mail forwarding service as a mailing address in all your services. Then when you move, just don't update your residence address and keep getting your mail at the mailing address. If you've already moved abroad, you can always try to put an old residence address, a friend address or a random address as a residence address and it may not get flagged nor asked for proof. You can also try to use the mail forwarding service as a residence address but then they may flag it and ask for proof, then you wouldn't be able to use an old or random address as your residence without a utility bill or other proof.

However, for Vanguard you should only use a US residence address (regardless of how you managed to put it in their system) if you file a 1040 (resident) tax return for that year, since with a US residence address on file, Vanguard considers you a resident for tax purposes and accordingly does not withhold tax on dividends. If you are a non-resident alien for tax purposes, you should arrange to file a W-8BEN with Vanguard so they can correctly withhold non-resident tax on dividends (30% or 15% if your country has a tax treaty with the US, such as Canada). The easiest way to do this is to use a Canadian residence address with Vanguard. So, you only need to hack around Vanguard address system if it allows you to stay compliant with your tax status. Note that as a Canadian you're always allowed to file a US resident 1040 by treaty, which allows you a higher standard deduction and lower taxes on dividends but requires you to report your worldwide income, which might be an advantage if you're FIREd and your only source of income is US-source dividends, capital gains and IRA distributions.

Also note that if you use a Canadian residence address and Vanguard freezes your account, you won't be able to buy anything (except automatic dividend reinvestment) which doesn't matter during your drawdown period as long as you have other ways to rebalance. You also won't be able to convert traditional IRA money to a Roth IRA at Vanguard (e.g. in a Roth ladder), much less buy new funds in that Roth IRA. So maintaining US tax residence may be useful at the beginning of FIRE while you empty your traditional IRA.

[gerardc]

To @EpicCrawfish and @mustachianism_is_aredpill,

If you are a US citizen or permanent resident, you definitely want to use a US residence address with Vanguard so that they do the right thing with your tax forms and withholding. Set the residence address to a legit residence address and the mailing address to a mail forwarding service, then you're set. Get no withholding, file 1040 and declare worldwide income.

If you are not a US citizen/LPR and wish to move back to Canada, you have 2 options:

1) Become a US non-resident alien for tax purposes. Set a Canadian residence address at Vanguard, file W-8BEN, get 15% withholding on dividends, file 1040NR returns every year to get back a good amount of your withheld taxes, Vanguard will freeze your accounts but you don't have to sell anything right away, however it might be advantageous to sell right after moving to Canada to realize capital gains as they wouldn't be taxable in the US as a non-resident and only the accrued (tiny) portion since moving back to Canada would be taxable in Canada! Huge bargain. Use this option #1 if you plan to work/invest in Canada, want to do away with US resident taxes (reporting foreign accounts and worldwide income) and/or if you have no traditional IRA to rollover.

2) Become a Canadian tax resident but keep filing 1040 the first few years (allowed by treaty). Set or keep a US residence address at Vanguard, business as usual, file 1040 with your worldwide income, rebalance and do Roth conversions freely at Vanguard. Use this option if you're almost FIREd, have IRA money to convert to Roth, and/or have (almost) no income or investments in Canada.

You can also start with #2 and use #1 once your traditional IRA is empty or your plans change.

Hope that helps!