Why diversify outside of the US? Sep 21, 2022 10:33:00 AM The outperformance of US stocks in recent history has led some investors to question whether they should invest outside the US at all, yet there remains compelling reasons to diversify globally. US investors often think of the S&P 500 Index (an index of the largest companies in the US by market capitalization) when referring to the performance of the stock market. This is not surprising to hear as most US based investors exhibit a “home bias”, where they focus their investing domestically and less on international. In a Vanguard 2020 study, households they surveyed had 81% of their portfolio allocations invested in the US. On top of that, US stocks have set a high bar for performance globally, outpacing the gains in stocks across Europe, Japan, and emerging markets over the last decade. It’s become natural to ask, “Can’t I get better returns just sticking with US stocks? Why would my Betterment portfolio have any allocation to companies outside of the US?” Currently, Betterment’s Core portfolio strategy in the 100% stock allocation has a target allocation of more than 40% in international equities. Below, this piece will cover reasons diversifying internationally makes sense, including: The global market portfolio is a starting point for asset allocation There’s no guarantee that US stocks will continue to outperfor Diversification creates the potential for more consistent returns Investing in the global market portfolio The short answer is that Betterment constructs all of our portfolios to be representative of the makeup of global investable assets as a whole, and you’ll find that around 40% of the world’s equity assets are invested outside of the US. International investments play an important role in reducing the risk of concentration in any one particular country within your portfolio. There’s no guarantee of continued US outperformance We’ve all heard the phrase “past performance is not indicative of future results.” For instance, stocks of one region can string together multiple years of outperformance relative to others before that trend reverses and it enters a period of underperformance. The chart below illustrates this tug of war between US and international developed stocks. While the outperformance experienced by US stocks over the last decade is striking, international developed stocks dominated in the wake of the dot com bubble in the decade before that. “International stocks” is represented by the MSCI EAFE Index. “US stocks” is represented by the MSCI US Index. Past performance is not indicative of future results. You cannot invest directly in the index. Going back further into history, in the ‘80s international developed stocks actually outperformed US stocks to the same extent that US stocks have outperformed since 2009. We believe, and many on Wall Street will admit, that trying to time these cycles can be extremely difficult and a more consistent return may be achieved by holding exposure to each geographical region’s stocks over the long-term. Before US stocks’ strong run in recent history, investors may have been tempted to allocate more to emerging market stocks based on their momentum during the 2000s. Emerging market stocks had higher returns than US equities in eight of the ten years before 2011. If an investor piled into emerging market stocks in 2011 because of their decade long track record of outperformance, they would have largely missed out on the strong gains in the US over the following 10 years. There also may be reason to believe that markets outside the US have the potential to post strong gains over the next decade. Based on certain valuation metrics, US stocks appear more expensive than their global peers. For example, companies in places such as emerging markets source much of their revenue from quickly growing economies, which may enhance profitability in the future. Diversification helps avoid drawdowns and creates the potential for consistent returns International markets are not perfectly correlated with the US, meaning they do not move in lockstep. Allocating to markets around the world therefore promotes diversification, helping buffer portfolios from the heightened volatility of individual markets. The chart below ranks the returns of Betterment’s tenured Core portfolio strategy against different regions and asset classes across calendar years, illustrating diversification in action. The Core portfolio, with a 90% allocation to stocks and 10% allocation to bonds, consistently avoided losses compared to the poorest performing assets of recent history. This was also evident in 2020 where diversification provided downside protection as the US fell into a short recession and battled a pandemic. Investors focused on using the S&P 500 Index to benchmark performance will highlight that the index outperformed our Core portfolio in the time periods displayed. And while the strength of the US market is undeniable, it is important to not overlook the fact that our Core portfolio still has a sizable allocation to the US. Having a strategic, well-diversified portfolio allows investors to obtain exposure to not only markets that outperform like the US, but also to international stock markets and other asset classes that can dampen the downside in years where US stocks underperform. S&P 500” (US Large Caps) is represented by the S&P 500 Index. “EM” (emerging markets) is represented by the MSCI Emerging Markets Index. “US Small Caps” is represented by the Russell 2000 Index. “EAFE” (international developed markets) is represented by the MSCI EAFE Index. “US REITs” is represented by the MSCI US REIT Index. “US High Yield” is represented by the Bloomberg US Corporate High Yield Index. “Global Agg bonds” is represented by the Bloomberg Barclays Global Aggregate Bond Index. “Commodities” is represented by the Bloomberg Commodity Index. “BMT Core 90/10” represents the Betterment Core Portfolio strategy in the 90% stocks/ 10% bonds taxable allocation. Performance information for the Betterment allocation is based on the time-weighted returns of Betterment taxable portfolios with primary tickers that are at the target allocation every market day (this assumes portfolios are rebalanced daily at market closing prices). Dividends are assumed to be reinvested in the fund from which the dividend was distributed. Betterment allocations reflect portfolio holdings as of periods stated and include an annual 0.25% management fee. This does not include deposits or withdrawals over the performance period. These allocations are not representative of the performance of any actual Betterment account and actual client experience may vary because of factors including, individual deposits and withdrawals, secondary tickers associated with tax loss harvesting, allowed portfolio drift, transactions that do not occur at close of day prices, and differences in holdings between IRA and taxable portfolios. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Market conditions can and will impact performance. Past performance is not indicative of future results. Market performance information is based on the returns of indexes tracked by Betterment, using returns data from sources and time periods listed. Performance is provided for illustrative purposes to represent broad market returns for asset classes that may not be used in all Betterment portfolios. The asset class performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used for each asset class in the Betterment portfolio will differ from the performance of the broad market index returns reflected here. Past performance is not indicative of future results. You cannot invest directly in the index. At Betterment, we build portfolios and provide advice on portfolio allocations that should be suitable for each investor’s risk tolerance to help them reach their investment goals. Diversifying across stock markets, whether in the US or elsewhere in the world, helps in that continuous effort. It may be tempting to chase the high returns that US stocks have posted in recent history, anticipating that the US equity market will continue to outperform, but investors should recognize that future outperformance is near impossible to predict and that they should position themselves for a wide range of possible outcomes accordingly. This is why as a foundation of Betterment’s portfolio construction process, we start with a diversified global market portfolio.

What is a Required Minimum Distribution? Sep 15, 2022 4:47:00 PM In exchange for all of the tax advantages 401(k)s provided during your accumulation years, by law, you will need to start taking distributions from your account when you turn 72. 401(k) plans can help you save for retirement in a tax-advantaged way. However, the Internal Revenue Service (IRS) requires that you start taking withdrawals from their qualified retirement accounts when you reach the age 72. These withdrawals are called required minimum distributions (RMDs). Why do I have to take RMDs? In exchange for the tax advantages you enjoy by contributing to your 401(k) plan, the IRS requests collection of taxes on these amounts when you turn 72. The IRS taxes RMDs as ordinary income, meaning withdrawals will count towards your total taxable income for the year.  Generally, the IRS collects taxes on the gains in retirement accounts such as 401(k)s. However, if Roth 401(k) account assets are held for at least 5 years, Roth 401(k) funds are not taxed. Because there are taxes being paid to the government, these distributions are NOT eligible for rollover to another account.  How much do I have to withdraw? RMDs are calculated based on your age and your account balance as of the end of the previous year. To determine the required distribution amount, Betterment divides your previous year’s ending account balance by your life expectancy factor (based on your age) from the IRS’ uniform lifetime table. If you had no balance at the end of the previous year, then your first RMD will not occur until the following year. Additionally, if you have taken a cash distribution from your 401(k) account in any given year you are subject to an RMD, and that distribution amount is equal to or greater than the RMD amount, that distribution will qualify as the required amount and no additional distribution is required. Does everyone who turns 72 need to take an RMD? Turning 72 in a given year doesn’t mean that you have to take an RMD. Only those who turn 72 in a given year AND meet any of the following criteria must take an RMD:   You have taken an RMD in previous years. If so, then you must take an RMD by December 31 of every year. You own more than 5% of the company sponsoring the 401(k) plan. If so, then you must take an RMD by December 31 every year.  You have left the company (terminated or retired) in the year you turned 72. If so, then the first RMD does not need to occur until April 1 (otherwise known as the Required Beginning Date) of the following year, but must occur consecutively by December 31 for every year.  Example: John turned 72 on June 1, 2022. John also decided to leave his company on August 1, 2022. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2023. The next RMD must occur by December 31, 2023 and every year thereafter.  You are a beneficiary or alternate payee of an account holder who meets the above criteria.  If you are 72 and still employed, you do NOT need to take an RMD. What are the consequences of not taking an RMD? Failure to take an RMD for a given year will result in a penalty of 50% of the amount not taken on time by the IRS. How do I take an RMD? Betterment will automatically process your RMD if we see that you are over age 72 and no longer actively employed with your employer. If you have the option to take an RMD - age 72 but still employed - your employer can provide you with a form to submit a request. If you have a linked bank account on file, the RMD will be deposited into that account; if we do not have a bank account on file, a check will be mailed to the address in your account.

Traditional and Roth 401(k)s Sep 14, 2022 1:51:06 PM Not sure what the difference is between traditional and Roth contributions for your 401(k)? We’ll explain. Ever hear the terms traditional 401(k) and Roth 401(k) thrown around and wonder – what are they? Should I be using them? Are these the keys to untold levels of wealth and financial security?!  Easy does it. There are no secret weapons or silver bullets for securing a financially fit future. That said, traditional 401(k)s and Roth 401(k)s can be important tools when building your retirement strategy, so let’s make sure you know what they are. And a fun fact to know right away: you can use both.  What do they have in common?   A traditional 401(k) and Roth 401(k) are tax-advantaged accounts that allow you to save and invest for retirement (the tax advantages given to these types of accounts are not available in many other investing accounts). They’re available to you as a workplace benefit offered by your employer, and they’re funded with contributions from your paycheck – you set the amount, either as a dollar or a percent. The idea behind both is that they make it easier to save and invest for retirement automatically, like a built-in part of your budget.  So what’s the difference?  The difference is in how they are tax-advantaged. Traditional 401(k) contributions are made with pre-tax dollars, while Roth 401(k) contributions are made with after-tax dollars. Here’s an example. Let’s say you earn $40,000 a year and make contributions into a traditional 401(k). The contributions go into the account before your paycheck is taxed (“pre-tax”), lowering your taxable income. So if you save $3,000 throughout the year, you’d be paying taxes on $37,000 rather than $40,000.  In addition, the money that you contribute—and any earnings—grow tax deferred until you withdraw it in retirement. At that time, your withdrawals are considered ordinary income and you’ll pay federal and possibly state taxes depending upon where you live. And, if you want to withdraw money before you turn age 59 ½, you’ll also be subject to a 10% penalty unless you qualify for an exception.  If you decide to contribute to a Roth 401(k), the money is deducted from your paycheck after taxes have been taken out. So your paycheck is taxed now, reflecting your full salary of $40,000, which includes the contributions into the Roth 401(k) account.  Roth 401(k) tax benefits come into play when you withdraw the money at retirement. Because you already paid taxes, you can withdraw contributions—and any earnings—tax-free if you’re age 59 ½ or older and have held your Roth 401(k) account for at least five years. Short answer: Traditional 401(k)s can lower your taxes now, but you’ll likely pay taxes when you withdraw the money at retirement. Roth 401(k)s don’t save you on taxes today, but you likely won’t have to pay taxes when you withdraw the money at retirement.  Which type of account should I use?  It ultimately depends on your unique financial situation and retirement goals. Betterment is not a tax advisor, and we encourage you to consult one if you want help reviewing your finances and goals. As a general rule: If you expect to be in a lower tax bracket in retirement, consider contributing pre-tax dollars into a traditional 401(k) account now, and you’ll pay taxes later. If you expect to be in a higher tax bracket in retirement, consider contributing after-tax dollars into a Roth 401(k) account, and pay your taxes now. What if I’m not sure if my tax bracket will be higher or lower in the future? You’re definitely not alone! In which case, it may make sense to invest in both. You’re allowed to make contributions to both types of accounts, spreading your tax exposure around. 5% in a traditional 401(k) and 5% in a Roth 401(k) would give you a 10% total contribution rate (in line with what many experts recommend).   What if I want to withdraw my money early—that is, before I turn age 59 ½? Let’s start with the Roth 401(k). Because you already paid taxes on your contributions, you can generally withdraw that portion of the money tax-free.  The portion of the withdrawal that represents your contributions to the account will generally be not taxed (and not subject to the 10% penalty). The portion of the withdrawal that represents earnings will be taxable and potentially subject to the 10% penalty. Most early withdrawals from a traditional 401(k) are taxed as ordinary income plus a 10% penalty. There are some exceptions, such as permanent disability. The tax advantages and ramifications of retirement accounts can be complicated. As Betterment is not a tax advisor, we encourage you to consult one to help you make this important decision.  One more fun fact - former U.S. Senator from Delaware, William Roth, is the father of after-tax retirement accounts. Enjoy sharing that little bit of trivia at your next cocktail party, on us.