Kicking Betterment and Recalibrating Asset Allocation

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Topic Author
Anacyclosis
Posts: 5
Joined: Mon Aug 01, 2022 5:16 pm

Kicking Betterment and Recalibrating Asset Allocation

Post by Anacyclosis »

Hi everyone,

First, a big thank you in advance -- discovering the Bogleheads forum (and picking up a copy of The Bogleheads' Guide to Investing) has been a real eye-opener, especially as my investing power starts kicking into a higher gear. While this learning process has cast some uncomfortable light on investment mistakes (some of which are addressed below), I'm glad to have caught these mistakes relatively early on and look forward to learning even more.

As the title of this post suggests, I'm fundamentally rethinking my existing asset allocation and am particularly interested in exploring alternatives to my taxable Betterment account. In case helpful, I've outlined my current holdings below.

Financial Overview:

Age: 33
Income: $350-400k/year
Spouse's Income: $50k/year
Tax Bracket: 32% (Federal); 6.85% (State); 3.88% (Local)
Tax Status: Married, Filing Jointly
Location: NYC
Debt: roughly $7k in student loans remaining (not in any hurry to pay these off since students loans aren't accruing interest, but will slay this dragon once the deferment period eventually ends)


Tax-Advantaged Accounts [note that I max these out each year]

Pre-Tax 401k: $55k [Vanguard Target Retirement 2055 Trust II; 90-10 stock/bond allocation]

Roth IRA: $32k [100% in VTSAX]

NY 529 Plan: $10k [Vanguard 88/12 stock-bond allocation] [just started funding this year to account for birth of child]

Taxable Accounts

Betterment: $111k [90/10 stock-bond allocation] [holdings can be viewed here: https://www.betterment.com/core-portfolio]

Fidelity Brokerage: $7k [100% stock; $5k of which is an infrastructure ETF and the rest in shares of individual companies. These holdings consist of "fun"/speculative investments that weren't particularly thoughtful/disciplined, and I wouldn't have made any of them knowing what I know now.]

Emergency Fund/Down-Payment Fund

HYSA: $100k

I-Bonds: $40k

[note that my Emergency Fund is oversized in anticipation of making a downpayment on a primary home in the next 3-5 years]

My Questions/Concerns:

(1). Kicking Betterment: Having read the many thoughtful discussions on this website with regard to Betterment, I've reached the conclusion that automatic tax harvesting/rebalancing isn't worth the relatively high exchange ratio of 25bps. My inclination is therefore to exchange for a simpler, more traditional 2-3 fund portfolio of Vanguard index funds (or functional equivalents). Of course, I've also learned that it can be a headache to unwind a Betterment portfolio.

Some related considerations: My Betterment holdings are relatively new -- I accelerated investments in this taxable account in the latter half of last year/very early this year, which means that my investments have taken a relatively big hit this year (i.e. roughly $10k under water overall). The (possible) silver lining is that this may be an opportune time to sell my Betterment holdings as I may be able to leverage the loss for 2022 tax purposes and then use the proceeds to build a new, more tax-optimized taxable portfolio. Does that sound right, or is there some other factor that would prevent me from enjoying a relatively pain-free (and tax-efficient) divorce from Betterment?

(2). Wash Sale Rules: Betterment's holdings are already weighted heavily towards Vanguard index funds. This consideration, coupled with the fact that Betterment is pretty aggressive with its tax harvesting, would seem to elevate the risk of triggering Wash Sale Rules if/when I purchase any Vanguard index funds to replace my Betterment holdings. With this in mind, when building my new taxable portfolio, would it be worthwhile to find non-Vanguard index funds that are similarly calibrated so that I sidestepped the Wash Sale issue entirely? Or is this not worth the effort/potential tax savings?

(3). Bond Allocations: In general, I think I'm comfortable with a 90/10 stock-to-bond investment allocation, but I'm now better attuned to the benefits of holding bond investments in tax-advantaged accounts. As I'm inclined not to tinker with my target-retirement-age 401k, I believe this would mean that a sensible alternative would be to rebalance my Roth IRA so that it houses most/all of my bond investments (other than what's currently in my 401k) and keep my taxable accounts equities-focused. Do I have that generally right, or is this a gross oversimplification (or downright wrong)?

Relatedly, the conventional wisdom seems to be that a Vanguard Total Bond Market Index Fund is sufficient for most investors, but I'd be grateful for the group's thoughts on whether mixing in munis makes sense given my income/location in a high tax state (NY).

(4). As noted above, my emergency fund is disproportionately large with a view towards buying a house in the next couple of years. Given the combination of inflation/high interest rates, I'm at a bit of a loss as to how to safely/responsibly deploy these funds in "safe" investments that are at least somewhat inflation-protected. I'm maxing out investments in I-Bonds, and some Bogleheads have suggested putting a portion of my emergency fund in VMFXX or in short-term treasuries, but I'd appreciate the group's thoughts on whether there are other investment strategies that would act as good complements to the existing combination of HYSA + I-Bonds.

Thanks again in advance. To the extent there are good resources on the site that will help answer any of these questions, please feel free to just point me in the right direction (but I'd of course welcome any/all thoughts and suggestions).
Last edited by Anacyclosis on Wed Aug 03, 2022 10:30 am, edited 1 time in total.
Strayshot
Posts: 793
Joined: Thu Mar 05, 2015 8:04 am
Location: New Mexico

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by Strayshot »

Research of your username sent me into a rabbithole, so congrats on that! Your age, income, and investments look like a physician out of residency for a year or few, or maybe just out of a fellowship?

1) the earlier you unwind out of betterment the easier your life will be, you are right in making the switch now. If you think 10% is a “big hit” you should start recalibrating the word big!

2) it is simple to find equivalent index or ETF representations from fidelity, Schwab, etc depending who you’d like to hold your taxable brokerage account. I would go that path if needed.

3) at 10% representation a bond component has a negligible impact on your AA. I would go a different path and for simplicity ignore bonds entirely for now or (if the analysis makes sense) focus on munis for the tax savings. You want your highest return asset classes in your Roth, so the bonds should stay in taxable if you keep them. I’d worry about a shift to bonds much closer to retirement much like the glide path of most target date funds

4) your EF plan is on track for a home purchase, stick with it. As painful as the thought of making an extra 5% or more on the large HYSA balance, remember that comes with risk. Would you rather have the potential of an extra 30k towards your home, or the potential of a loss of half of the overall balance? The only certain path is the one you are on.

:sharebeer
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retiredjg
Posts: 48768
Joined: Thu Jan 10, 2008 12:56 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by retiredjg »

Welcome to the forum. :happy

Some critical information is missing - your tax filing status, your tax bracket (which we can figure out if needed) and your spouse's accounts (if any). Please use the edit button to add this information to the original post.

Absolutely use this downturn if you are ready to get rid of the Betterment account. It is always nice to get rid of something you don't want without paying taxes.


Since you hold Total Stock in your Roth IRA, chances are there have already been wash sales triggered by Betterment's tax loss harvesting. The same may be true for the 529 account (although not everyone agrees that a 529 would be involved in a wash sale).

If you want to avoid future wash sales, I suggest that you (at least temporarily) exchange your Roth IRA into the Vanguard Target Retirement 2055 before liquidating your Betterment account. Then wait 30 days before doing anything with the Roth IRA.

After that you can set up your accounts like this:

Taxable
Total Stock Index
Total International Index
NY muni bond fund if you want

401k
Target 2055

or

500 index
bond allocation

Roth IRA
500 index
Extended Market index if you want it to complete your 500 index


If you set it up this way and do not ever use 500 Index or Extended Market in your taxable account, you don't not have to consider wash sales and how to avoid them (or how to deal with them on your taxes).

About putting bonds in your Roth IRA...It would not bother me to put a target fund with 10% bonds in Roth IRA. And that would make your portfolio very easy to manage. Some people prefer to hold only stocks and stock funds in Roth IRA to take advantage of the expected larger tax free growth.



Consider if you want the 529 to be allocated for the time needed rather than with your retirement portfolio.
Topic Author
Anacyclosis
Posts: 5
Joined: Mon Aug 01, 2022 5:16 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by Anacyclosis »

Strayshot wrote: Tue Aug 02, 2022 7:39 am Research of your username sent me into a rabbithole, so congrats on that! Your age, income, and investments look like a physician out of residency for a year or few, or maybe just out of a fellowship?

1) the earlier you unwind out of betterment the easier your life will be, you are right in making the switch now. If you think 10% is a “big hit” you should start recalibrating the word big!

2) it is simple to find equivalent index or ETF representations from fidelity, Schwab, etc depending who you’d like to hold your taxable brokerage account. I would go that path if needed.

3) at 10% representation a bond component has a negligible impact on your AA. I would go a different path and for simplicity ignore bonds entirely for now or (if the analysis makes sense) focus on munis for the tax savings. You want your highest return asset classes in your Roth, so the bonds should stay in taxable if you keep them. I’d worry about a shift to bonds much closer to retirement much like the glide path of most target date funds

4) your EF plan is on track for a home purchase, stick with it. As painful as the thought of making an extra 5% or more on the large HYSA balance, remember that comes with risk. Would you rather have the potential of an extra 30k towards your home, or the potential of a loss of half of the overall balance? The only certain path is the one you are on.

:sharebeer
Sorry for sending you down the rabbit hole, but hope it was interesting! The term itself, translated literally, just refers to things following a cyclical pattern -- which I think applies to markets like so many other aspects of life -- but it of course has a specific connotation in political philosophy. And thanks for these helpful suggestions! I'm actually a corporate lawyer, but many of my early investment decisions were informed by reading financial websites/blogs run by physicians. (Interestingly, there seems to be less of a personal finance subculture in lawyer circles -- or maybe I just haven't been looking in the right places.)
Topic Author
Anacyclosis
Posts: 5
Joined: Mon Aug 01, 2022 5:16 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by Anacyclosis »

retiredjg wrote: Tue Aug 02, 2022 8:54 am Welcome to the forum. :happy

Some critical information is missing - your tax filing status, your tax bracket (which we can figure out if needed) and your spouse's accounts (if any). Please use the edit button to add this information to the original post.

Absolutely use this downturn if you are ready to get rid of the Betterment account. It is always nice to get rid of something you don't want without paying taxes.


Since you hold Total Stock in your Roth IRA, chances are there have already been wash sales triggered by Betterment's tax loss harvesting. The same may be true for the 529 account (although not everyone agrees that a 529 would be involved in a wash sale).

If you want to avoid future wash sales, I suggest that you (at least temporarily) exchange your Roth IRA into the Vanguard Target Retirement 2055 before liquidating your Betterment account. Then wait 30 days before doing anything with the Roth IRA.

After that you can set up your accounts like this:

Taxable
Total Stock Index
Total International Index
NY muni bond fund if you want

401k
Target 2055

or

500 index
bond allocation

Roth IRA
500 index
Extended Market index if you want it to complete your 500 index


If you set it up this way and do not ever use 500 Index or Extended Market in your taxable account, you don't not have to consider wash sales and how to avoid them (or how to deal with them on your taxes).

About putting bonds in your Roth IRA...It would not bother me to put a target fund with 10% bonds in Roth IRA. And that would make your portfolio very easy to manage. Some people prefer to hold only stocks and stock funds in Roth IRA to take advantage of the expected larger tax free growth.



Consider if you want the 529 to be allocated for the time needed rather than with your retirement portfolio.
Thanks very much! I've updated my original post per your suggestion. One of my biggest personal finance regrets to date is not doing more to encourage my spouse to invest in her 403(b) plan. Given our income differential, the failure to do so seems especially foolish. We've learned from our mistake, but my spouse has only started paying into her plan this year, so holdings are quite modest. The plan itself is underwhelming, but we are exploring the "escape hatch" route whereby she transfers her plan to a better sponsor. Anyway, to simplify things a bit, I've omitted this info from the post and combined our Roth IRA holdings rather than listing them out separately (since holdings are the same).

Glad to hear the consensus so far is to liquidate Betterment. That's what I'll plan to do.

I think the suggestion with regard to the Roth IRA also makes sense, but to confirm I fully understand: Is the idea that I could exchange my Roth IRA's Total Market holdings for Target Retirement 2055 shares without triggering the Wash Sale Rule (the idea being that the exchange process itself isn't treated as analogous to a true sale/liquidation)? This in turn would mean that Wash Sale Rule would only potentially apply if/when I changed my Roth IRA holdings (e.g., by purchasing new shares following the liquidation of my Betterment account). Just want to make sure I follow!

Thanks also for the tip re: the 529 plan. Makes sense.
User avatar
retiredjg
Posts: 48768
Joined: Thu Jan 10, 2008 12:56 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by retiredjg »

Anacyclosis wrote: Thu Aug 04, 2022 12:27 am Thanks very much! I've updated my original post per your suggestion. One of my biggest personal finance regrets to date is not doing more to encourage my spouse to invest in her 403(b) plan. Given our income differential, the failure to do so seems especially foolish. We've learned from our mistake, but my spouse has only started paying into her plan this year, so holdings are quite modest.
The income differential is irrelevant. It is your tax bracket that makes using even a mediocre 403b worthwhile. Deferring tax at 32% and paying tax on that income later at something less than 32% means you end up with more money.

The plan itself is underwhelming, but we are exploring the "escape hatch" route whereby she transfers her plan to a better sponsor.
Finding the best sponsor for a 403b account is important and people here may be able to help with that. You might want to start a separate thread about just that one question.


I think the suggestion with regard to the Roth IRA also makes sense, but to confirm I fully understand: Is the idea that I could exchange my Roth IRA's Total Market holdings for Target Retirement 2055 shares without triggering the Wash Sale Rule (the idea being that the exchange process itself isn't treated as analogous to a true sale/liquidation)? This in turn would mean that Wash Sale Rule would only potentially apply if/when I changed my Roth IRA holdings (e.g., by purchasing new shares following the liquidation of my Betterment account). Just want to make sure I follow!
You do not hold a target fund in your Betterment taxable account. If you...

1. move your other accounts to a target fund and
2. then liquidate Betterment and immediately buy total stock and/or total international in taxable
3. wait 30 days
4. buy what you want in the other accounts

...it is not possible to have a wash sale.

After that, if you do not hold the same fund in taxable and in your other accounts you cannot have a wash sale.

I think you are confused about what a wash sale is. A wash sale is never triggered by selling something in an IRA. A wash sale can only occur after selling something in a taxable account at a loss.


Since you like the target funds, a good portfolio can be created by holding a target fund in all accounts except taxable (this assumes you can find a usable cost target fund in Her 403b). In taxable, you do not want a target fund - they are not tax efficient. I would use total stock, total international, and the NY muni fund.
lazyinvestor30
Posts: 60
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Re: Kicking Betterment and Recalibrating Asset Allocation

Post by lazyinvestor30 »

I have done this before - which is move from betterment to fidelity. My suggestion would be actually not to liquidate, but transfer all assets in kind to fidelity. Then you will see there might be some ETFs you might want to keep and not sell like VTI for example.

Once you have done this - you can post back with all the cost basis information and folks can give you best options on which to sell and which to keep based on your eventual goal.

Just liquidating everything in betterment might actually be sub optimal
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retiredjg
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Re: Kicking Betterment and Recalibrating Asset Allocation

Post by retiredjg »

I agree with lazyinvestor30. I was not thinking in terms of your need to actually move the holdings to a new custodian. I was focusing more on just getting rid of them.

Yes, move in-kind, then sell. This means your money will not be out of the market very long. The only things I would keep (since you have losses and not a great deal of gains) are total stock and total international.
Topic Author
Anacyclosis
Posts: 5
Joined: Mon Aug 01, 2022 5:16 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by Anacyclosis »

The income differential is irrelevant. It is your tax bracket that makes using even a mediocre 403b worthwhile. Deferring tax at 32% and paying tax on that income later at something less than 32% means you end up with more money.
100%, I wasn't precise with my language but agreed.
Finding the best sponsor for a 403b account is important and people here may be able to help with that. You might want to start a separate thread about just that one question.
I will follow this advice, thank you!


You do not hold a target fund in your Betterment taxable account. If you...

1. move your other accounts to a target fund and
2. then liquidate Betterment and immediately buy total stock and/or total international in taxable
3. wait 30 days
4. buy what you want in the other accounts

...it is not possible to have a wash sale.

After that, if you do not hold the same fund in taxable and in your other accounts you cannot have a wash sale.

I think you are confused about what a wash sale is. A wash sale is never triggered by selling something in an IRA. A wash sale can only occur after selling something in a taxable account at a loss.
Ah, I think I follow now -- while a wash sale cannot be triggered by selling something in a tax deferred/exempted account (which makes sense since a gain/loss isn't realized at such time), it could be triggered by selling something in a taxable account (at a loss) and then purchasing an equivalent security in a tax deferred/exempted account. Your suggested sequencing ensures that this scenario is avoided.

Since you like the target funds, a good portfolio can be created by holding a target fund in all accounts except taxable (this assumes you can find a usable cost target fund in Her 403b). In taxable, you do not want a target fund - they are not tax efficient. I would use total stock, total international, and the NY muni fund.
Understood, many thanks!
Topic Author
Anacyclosis
Posts: 5
Joined: Mon Aug 01, 2022 5:16 pm

Re: Kicking Betterment and Recalibrating Asset Allocation

Post by Anacyclosis »

retiredjg wrote: Thu Aug 04, 2022 8:40 am I agree with lazyinvestor30. I was not thinking in terms of your need to actually move the holdings to a new custodian. I was focusing more on just getting rid of them.

Yes, move in-kind, then sell. This means your money will not be out of the market very long. The only things I would keep (since you have losses and not a great deal of gains) are total stock and total international.
Thanks, both! I feel like I have a good game plan now. :beer
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