It’s been two years since I started investing with Betterment, and I feel their service is ever better now than when I started. I love a company that makes investing easy and adds benefits and features without increasing costs. For beginning investors or those who are too busy to research and rebalance, investing is made easy with Betterment.
Why We Invest Outside of our 401(k)
You can read about my first year of investing with Betterment here, but basically, the reason we put money into a non-tax advantaged account is for flexibility. Jim and I plan to retire before age 59.5 and might need to withdraw funds before our tax advantaged accounts are eligible for penalty free withdrawals. \
We have an emergency fund in a regular savings account, but it’s nice to have some of our liquid money earning interest. While we plan to let this money grow for many more years, we could withdraw it for a good business opportunity or to buy another rental property.
If you have no investments, I would start out with a 401(k) if your work offers it and gives you any sort of a match. If you are investing outside of a work plan, Betterment might be a good option.
How Betterment Works
Betterment uses goal-based investing that caters to specific needs and time frames. Once you sign up for an account, you’ll be able to choose from a selection of goals that each have different investment portfolios. Betterment says, and I agree, that when you can attach a real outcome to the purpose of your saving, you’re more likely to actually work toward that goal rather than when blind saving.
Based on your goals and selected risk tolerance, Betterment uses a “robo-advisor” in the form of algorithms to diversify and rebalance assets. By not using an active manager, Betterment is able to charge lower fees than many online brokerages.
Saving Taxes for Everyone
Betterment has added a couple of new features recently that make their platform even more attractive. Tax loss harvesting is tool where losses are realized to offset capital gains. If that sounds like Greek, don’t worry, I feel the same way. I’m not knowledgeable enough to practice this strategy on my own, so it’s nice to have it offered for free. This service used to be only for larger investors, but now, every account at Betterment has access to tax loss harvesting.
I got my first email recently that some of my losers were harvested to save taxes. No one wants to pay the government more than they have to, so this is a definite plus in my book.
Betterment Now Has SEP IRA’s
For those who are self employed or earn money from side hustles, a SEP IRA is an excellent way to save on income taxes and build wealth. Earning more money does no good if you spend it all, so I would encourage everyone to let the power of compound interest grow today’s dollars for future use.
If you are a small business owner, freelancer, consultant, or sole proprietor with only one employee, you can open a SEP at Betterment. You’ll need to fill out a Form 5305-SEP for your records, which the website provides. Choose your risk tolerance, set up a deposit, and, voila, you have an account. For 2015, you can contribute 20 percent of your net earned income from self employment up to $53,000.
I am not an expert so please consult IRS guidelines or an accountant if you have any questions about eligibility or contributions. Betterment also offers traditional or Roth IRAs if you don’t qualify for a SEP.
If you are thinking about setting up a SEP IRA at Betterment, they are currently offering up to 12 months free of any fees if you use this link.
Fees and Returns
Betterment fees are based on the size of your account and how much you contribute. For accounts under $10,000, the fee is $3 per month or 0.35% if you set up a monthly contribution of at least $100. From $10,000 to $100,000, the fee drops to 0.25% with no auto deposit required. For accounts over $100,000, the fee is 0.15%.
Fees are not as cheap as some Vanguard ETF’s but there are no trade, rebalance, or transaction fees, which is great for beginning or small investors. There is nothing worse than working up enough income to invest and finding that fees are taking a huge chunk of your investment!
Returns are just as good if not better than similar stock and bond funds. My returns are down currently because of a dip in the stock market, but since opening my account, my 80/20 stock/bond mix has returned 21%.
Today is the Best Day To Start Investing
Well, actually yesterday was the best day, but today is almost as good. Earning and spending without a purpose is just a small step above not having money. Have a goal for your money. Think about investing something today.
If you’d like to get started with Betterment, click here and you can have an account within 5 minutes!
For those of you who are self employed, do you have a SEP IRA? Do you have a current goal you’re saving for?