But here’s the big takeaway: That money is yours, and those savings stay with you whenever you quit a job.
If you have less than $1,000 in your 401(k)
If your 401(k) has less than $1,000 when you quit a job, the IRS allows the plan administrator to automatically withdraw your money and send you a check, minus 20% in taxes, per the IRS.
You can also initiate a rollover: a direct transfer of your money from a 401(k) account to another tax-advantaged retirement account. (More on rollover deadlines and tax implications later.) The easiest way to roll over your money is to contact your 401(k) administrator and have them handle it.
Communicate your preferences quickly, though — if your 401(k) account has a low balance, most companies won’t delay closing the account and cutting you a check, according to CNBC.
If you have between $1,000 and $5,000 in your 401(k)
If your 401(k) has between $1,000 and $5,000 when you quit, your employer may move your money into an individual retirement account, or IRA, according to the IRS.
If you don’t have an IRA, some employers will automatically open an account for you and deposit your funds into the account. If you do have an IRA, you initiate the rollover by contacting your 401(k) administrator.
You can also withdraw your money, but you’ll pay 20% in federal income tax, as well as a 10% early withdrawal penalty (unless you’re at least 59 ½ years old), according to the IRS.
🤓Nerdy Tip
An IRA is a tax-advantaged retirement account that an individual typically sets up, unlike a 401(k) account, which an employer sets up.
If you have at least $5,000 in your 401(k)
If your 401(k) account has at least $5,000 when you quit a job, your employer isn’t allowed to move your money without your consent. What happens next is up to you. There are a few things you can do with your money, according to the investment advisor Vanguard:
Roll over your money into a new retirement account
Leave your money in your old 401(k)
Cash out your 401(k) — and potentially pay a 10% federal penalty tax
Let’s dig into those options.
Rolling your money into a new 401(k) or IRA
What is a rollover?
Reminder: A 401(k) rollover is the process of moving money from your 401(k) account into another retirement account.
So, say you’re leaving your job for a different position, and your new employer offers a 401(k) plan. You can roll over your old 401(k)’s funds into a new 401(k) account, if your new employer allows this, according to the IRS.
Or you can roll over your old 401(k) to an IRA. This type of account typically offers more investment options than a 401(k), says Christopher Manske, a certified financial planner and the president and founder of Manske Wealth Management in Houston.
“In your individual retirement account, you’re going to have a lot more flexibility to tailor the investments to the wide world of what’s available out there,” Manske says.
Whether you roll over your retirement savings into an IRA or new 401(k), moving your money to a single fund can make it easier to manage your money and keep track of your retirement savings.
That’s as opposed to simply keeping your old 401(k) open, which becomes one more account to manage. (We’ll dive into that option in a bit.)
How to roll over funds — and avoid tax missteps
If a rollover sounds like a solid option, contact the administrators of both your old 401(k) and the other retirement account — either your new 401(k) or an IRA. Tell them you’d like to roll over your funds.
They’ll collect information from you and initiate a direct rollover, which means one institution directly transfers funds to another institution, according to Fidelity.
This is as opposed to an indirect rollover, meaning your 401(k) plan administrator sends you a check, and you personally deposit the 401(k) funds into another retirement account. In that case, your plan administrator would likely withhold 20% of your 401(k) funds for taxes.
With this indirect rollover, you then have 60 days to deposit the complete 401(k) account balance — including the amount kept for taxes — into the new account. So to deposit the full amount, you would need to come up with the 20% portion yourself. Then you’d get a refund for that amount come tax time.
If you miss the 60-day deadline, you’d likely get penalized for early withdrawal and have to pay income taxes on the distribution, according to Capitalize, a 401(k) rollover resource.
One last important note: Whether you choose a direct or indirect rollover, if you move money from your old 401(k) account to a Roth IRA — a specific kind of IRA — you’ll have to pay income tax on that transfer, according to the IRS. (This doesn’t apply if you’re rolling over your funds from a Roth 401(k), though.)
Leaving your money in your old 401(k)
Another option? Do nothing.
Your 401(k) account isn’t going to disappear once you quit a job; that money will always be there. But once you leave the job that set up the 401(k) account, you can’t make any more deposits, per Vanguard.
While leaving your 401(k) on autopilot is the simplest option, it may not be in your best interest. Assuming you’ll continue investing in another account or have a new 401(k) at your next employer, it will be harder to track your finances in more places.
And some 401(k) plan providers may charge you fees if you’re no longer an active employee, according to Charles Schwab, the financial services firm.
“I can’t think of any pros of leaving it there,” Manske says. “You’re not really connected formally to that company anymore, so why would you keep your money there? They don’t have a reason to keep you happy.”
Cash out your 401(k) — which is rarely recommended
Yes, you can withdraw the cash from your 401(k) whenever you want. But there are significant downsides to this option.
Pulling out money from your 401(k) before retirement can trigger hefty taxes, says Joe Buhrmann, certified financial planner and senior financial planning consultant at Fidelity’s eMoney Advisor.
Any withdrawals from a 401(k) before you reach the age of 59 ½ are considered early withdrawals and are slapped with a 10% penalty tax, per the IRS. That’s in addition to federal income taxes and, depending on where you live, state income taxes.
“Hypothetically, on a $50,000 401(k), you might lose as much as $20,000 to taxes and penalties and be left with $30,000,” Buhrmann says.
If you urgently need cash, that might be a reason to withdraw some money from your 401(k). But doing so should be regarded as a last resort, Manske says.
There are other ways to get money quickly that don’t come with taxes and penalties, such as community loans, gig work, and more.
Buhrmann encourages individuals to not just consider the immediate losses that come with withdrawing your 401(k), but also the long-term earnings they’re missing out on.
“They’re not just having to pay some taxes and pay some penalties,” Manske says.
Delta Air Lines is implementing some major changes to its SkyMiles program. The airline is overhauling how members qualify for elite status. In making the changes, Delta will do away with requirements for Medallion Qualifying Miles (MQMs) and Segments (MQSs). Instead, SkyMiles members will qualify for Medallion elite status solely through Medallion Qualifying Dollars (MQDs).
Customers will be able to earn MQDs through spending on flights, rental cars and hotels booked through Delta Air Lines, along with everyday spending charged to co-branded Delta credit cards.
The changes take effect Jan. 1, 2024. Delta officials say the move is designed to simplify the program.
“One of the consistent pieces of feedback is to earn status can sometimes be complicated,” says Dwight James, Delta’s senior vice president for customer engagement and loyalty. He explained customer feedback also prompted Delta to add more rewards for loyalty beyond traditional air travel.
In conjunction with the SkyMiles overhaul, Delta plans to significantly restrict access to its Sky Club airport lounges, which have been plagued by overcrowding in recent years. And company officials told NerdWallet that more changes to its elite status benefits are on the way, too.
Here’s what you need to know about the changes.
How to earn elite status with Delta in 2024
In perhaps the most significant change, Delta will tie elite status qualification more closely — indeed, solely — to spending. Starting in 2024, MQDs will be the lone measurement for how members qualify for Medallion elite status.
How to earn Medallion Qualifying Dollars
Delta members will be able to earn MQDs through a variety of avenues:
Terms apply.
2024 Delta elite status requirements
Since MQDs are the only metric for reaching Medallion elite status, Delta will roll out new benchmarks.
Members will qualify for 2025 elite status upon reaching the following benchmarks in 2024:
Silver Medallion: 6,000 MQDs.
Gold Medallion: 12,000 MQDs.
Platinum Medallion: 18,000 MQDs.
Diamond Medallion: 35,000 MQDs.
What happens to MQMs?
Since MQMs will be going away, SkyMiles members with rollover MQMs from 2023 will have a one-time choice to convert their MQMs into redeemable miles, MQDs or a combination of both.
Million Miler Status changes
Delta is also making some changes for Million Miler Status members. Starting next year, Million Miler members will be in the number three priority position for complimentary upgrades. That means they will now get selected for upgrades over Delta SkyMiles Reserve credit cardholders and Delta corporate travelers.
Any MQMs earned toward the status will remain, and going forward, all flight miles earned will be added to customers’ Million Miler balance.
2024 Delta Sky Club access changes
Delta has tweaked its Sky Club access policies next year in an effort to stem overcrowding — an issue the company has worked to address for years.
“Visit growth has outpaced seat growth,” James acknowledged, noting Delta’s hope to preserve the “elevated experience,” especially for Delta’s most premium customers.
Credit card or group
Sky Club access changes
Delta SkyMiles® Reserve American Express Card or Delta SkyMiles® Reserve Business American Express Card members
Cardholders will receive 10 visits per program year.
Members can earn unlimited visits after spending $75,000 on the card in a calendar year. Once earned, unlimited visits will last through Jan. 31 of the following year.
Delta SkyMiles® Platinum American Express Card and Delta SkyMiles® Platinum Business American Express Card members
Cardholders no longer receive access to Sky Club.
The Platinum Card® from American Express and The Business Platinum Card® from American Express members
Starting Feb. 1, 2025, members will receive six visits per program year.
Members can earn unlimited access after spending $75,000 in a program year. Unlimited access remains through Jan. 31 of the following year. Spend tracking begins Jan. 1, 2024.
Travelers with a basic economy ticket
No Sky Club access.
What these changes mean for Delta flyers
Delta’s changes for next year represent a major overhaul for the SkyMiles program. In tying elite status qualification more closely to spending, Delta’s changes have some resemblance to American Airlines’ shift to Loyalty Points for its AAdvantage program. In theory, you could now reach Medallion status while flying sparingly.
Delta says the changes are a way to appeal to a higher number of members while continuing to emphasize its premium customers and rewarding other travel engagement with the company, which James notes is up 50% since 2018.
“This program is something that we think we have built very uniquely for all levels of membership, whether you’re a new member or Medallion,” he says.
The people affected perhaps the most negatively by the changes are the Delta SkyMiles® Platinum American Express Card and Delta SkyMiles® Platinum Business American Express Card members, who will lose Sky Club access as part of the company’s ongoing effort to reduce overcrowding.
Meanwhile, what elite status tiers will look like in the future may change a bit, too. Company officials say they’ll announce additional and revamped elite status benefits at a later date.
(Top photo courtesy of Delta Air Lines)
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2023, including those best for:
When you inherit a 401(k) retirement account, there are tax rules and other guidelines that beneficiaries must follow in order to make the most of their inheritance.
Inheriting a 401(k) isn’t like getting a simple inheritance, e.g. cash, property, or jewelry. How you as the beneficiary must handle the account is determined by your relationship to the deceased, your age, and other factors.
Understanding the tax treatment of an inherited 401(k) is especially important, as 401(k) accounts are tax-deferred vehicles, so regardless of your status as a beneficiary you will owe taxes on the withdrawals from the account, now or later.
What Is an Inherited 401(k)?
As the name suggests, an inherited 401(k) is an employer-sponsored retirement plan that is bequeathed to an individual, either a spouse or a non-spouse.
When an individual sets up their 401(k) to begin with, they generally fill out a beneficiary form. This form may include their spouse (if the account holder was married), children, siblings, or others.
In most cases, when the account holder of a 401(k) dies, the account is automatically bequeathed to the surviving spouse, unless the will specifies otherwise. This is not the case if your partner dies and you weren’t married. In that case, the 401(k) does not pass to the surviving partner, unless they are officially designated as an account beneficiary.
What to Do If You’re Inheriting a 401(k)
The rules for inheriting a 401(k) are different when you inherit the account from a spouse versus someone who wasn’t your spouse. Depending on your relationship, you’ll have different options for what you can do with the money and how those options affect your tax situation.
Remember, a 401(k) is a tax-deferred retirement account, and the beneficiary will owe taxes on any withdrawals from that account, based on their marginal tax rate. 💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.
Inheriting a 401(k) From a Spouse
A spouse has a number of options when inheriting an IRA. But be careful; there are a number of wrinkles given that the rules have changed in the last few years.
• You could rollover the inherited 401(k) into your own 401(k) or into an inherited IRA: For most spouses, taking control of an inherited 401(k) by rolling over the funds is often the smartest choice. A rollover gives the money more time to grow, which could be useful as part of your own retirement strategy. Also, rollovers do not incur penalties or taxes. (But if you convert funds from a traditional 401(k) to a Roth 401(k) or a Roth IRA, you will likely owe taxes on the conversion to a Roth account.)
Also remember that once the rollover is complete, traditional 401(k) or IRA rules apply, meaning you’ll face a 10% penalty for early withdrawals before age 59 ½.
And when you reach age 73, you must start taking required minimum distributions (RMDs). Because RMD rules have recently changed, owing to the SECURE Act 2.0, it may be wise to consult a financial professional to determine the strategy that’s best for you.
Recommended: How to Make a Will
• Take a lump sum distribution: Withdrawing all the money at once will not incur a 10% early withdrawal penalty as long as you’re over 59 ½, but you’ll owe income tax on the money in the year you withdraw it — and the amount you withdraw could put you into a higher tax bracket.
• You can reject or disclaim the inherited account, passing it to the next beneficiary.
• Last, you could leave the inherited 401(k) where it is: If you don’t touch or transfer the inherited 401(k), you are required to take RMDs if you’re at least 73. If you’re not yet 73, other rules apply and you may want to consult a professional.
Inheriting a 401(k) from a Non-Spouse
The options for a non-spouse beneficiary (e.g. a child, sibling, etc.) are far more limited. For example, as a non-spouse beneficiary you cannot rollover an inherited 401(k) into your own retirement account.
• You can “disclaim” or basically reject the inherited account.
• If the account holder died in 2019 or earlier, you can take withdrawals for up to 5 years — as long as the account is empty after the 5-year period. If the account holder died in 2020 or after, you have 10 years to withdraw all the funds. You must start taking withdrawals starting no later than Dec. 31 of the year after the death of the account holder. These rules are known as the 5-year and 10-year rules.
• A positive point to remember: If you are a non-spouse beneficiary and younger than 59 ½ at the time the withdrawals begin, you won’t face a 10% penalty for early withdrawals.
The exception to this rule is if you’re a minor child, chronically ill or disabled, or not more than 10 years younger than the deceased, you can take distributions throughout your life. 💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
How RMDs Impact Inherited 401(k)s
If the account holder died prior to Jan. 1, 2020, anyone can use the so-called “life expectancy method” to withdraw funds from an inherited IRA. That means taking required minimum distributions, or RMDs, based on your own life expectancy per the IRS Single Life Table (Publication 590-B).
But if the account holder died after Dec. 31, 2019, the SECURE Act (also known as the “Setting Every Community Up for Retirement Enhancement Act of 2019”) outlines different withdrawal rules for those who are defined as eligible designated beneficiaries.
What Is an Eligible Designated Beneficiary?
To be an eligible-designated beneficiary, and be allowed to take RMDs based on your own life expectancy, an individual must be one of the following:
• A surviving spouse
• No more than 10 years younger than the original account holder at the time of their death
• Chronically ill
• Disabled
• A minor child
Individuals who are not eligible-designated beneficiaries must distribute (i.e. withdraw) all the funds in the account by December 31st of the 10th year of the account owner’s death.
Eligible-designated beneficiaries are exempt from the 10-year rule: With the exception of minor children, they can take distributions over their life expectancy.
Minor children must take any remaining distributions within 10 years after their 18th birthday.
How to Handle Unclaimed Financial Assets
What if someone dies, leaving a 401(k) or other assets, but without a will or other legally binding document outlining the distribution of those assets?
That money, or the assets in question, may become “unclaimed” after a designated period of time. Unclaimed assets may include money, but can also refer to bank or retirement accounts, property (e.g. real estate or vehicles), physical assets such as jewelry.
Unclaimed assets are often turned over to the state where that person lived. However, it is possible for relatives to claim the assets through the appropriate channels. In most cases, it’s incumbent on the claimant to provide supporting evidence for their claim, since the deceased did not leave a will or other documentation officially bequeathing the money to that person.
The Takeaway
Inheriting a 401(k) can be a wonderful and sometimes unexpected financial gift. It’s also a complicated one. For anyone who inherits a 401(k) — spouse or otherwise — it can be helpful to review the options for what to do with the account, in addition to the rules that come with each choice.
In some cases, the beneficiary may have to take required distributions (withdrawals) based on their age. In some cases, those required withdrawals may be waived. In almost all cases, withdrawals from the inherited 401(k) will be taxed at the heir’s marginal tax rate.
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By Prof. Viral V. Acharya, C.V. Starr Professor of Economics, Department of Finance, New York University Stern School of Business (NYU-Stern), and Satish Mansukhani, Managing Director, Investment Strategy, Rithm Capital
Since the onset of the Federal Reserve’s (the Fed’s) monetary tightening in 2022, the 30-year fixed mortgage rate in the United States (US) has gapped out to 7 percent. Around 300 basis points (bps) at present above the 10-year US Treasury yield (see Figure 1), this spread has historically been stable at around 200 bps; this was the case even during the pre-pandemic interest-rate hikes (2016-19) and quantitative tightening (QT, 2017-20) episodes.
Why is this time different?
We explain below that the current break from this trend is caused critically by the interplay of the Fed’s and domestic banks’ balance sheets. Changes in the risk appetites of institutional investors (bank and non-bank) and the profitability considerations of mortgage lenders have combined with this interplay to produce an unprecedentedly fast and amplified passthrough of monetary tightening to mortgage rates.
Deconstructing the 30-year mortgage rate
In addition to the 10-year Treasury yield, the 30-year primary mortgage rate serves as a commonly cited benchmark for the US economy and financial markets. Two contributors drive the spread between this mortgage rate and the Treasury yield.
The first contributor is the yield offered on the benchmark mortgage-backed securities (MBS) issued by government-sponsored enterprises Fannie Mae and Freddie Mac—the so-called “agency MBS basis”. This basis reflects the risk appetites of institutional investors to absorb or “warehouse” mortgage interest-rate risks on their balance sheets.
The second contributor is the profitability margin for mortgage lenders, known as the “primary-secondary spread”. It captures not only the market power of lenders in mortgage markets but also the banking sector’s balance-sheet constraints in intermediating for the real economy.
Consider, in turn, the 10-year Treasury yields and each of these contributors to the mortgage spread.
Punch #1: Higher 10-year US Treasury yields, driven up by real rates
Excessive monetary and fiscal stimulus throughout the pandemic combined with supply-side shocks to induce a surge in inflation since 2021. Until the last few months, this bout of inflation appeared rather unrelenting. In response, the Fed has tightened its monetary policy aggressively to cool inflation and the economy, and the 10-year Treasury yields, which were just 50 bps in 2020, are now close to 4 percent, a full 350 bps higher.
Viewed through another lens, the 10-year real rate has risen from a pandemic low of negative 100 bps to a post-GFC (Global Financial Crisis of 2007-08) high of 150 bps. Immediately before the pandemic, and even during the rate-hike and QT episodes of the mid-2010s, this real rate stood at barely 50 bps. The overall rise in real rates has also lifted mortgage rates.
Punch #2: A wider agency MBS basis, driven by higher volatility and a reversal in technicals
The agency MBS basis can be considered the market price of the unique option presented to US borrowers to refinance their mortgages or lock in attractive fixed rates (as is the case currently). The higher the volatility and the wider the outlook for the range of interest rates, the higher the price of this option. Compared to the mid-2010s’ rate hikes and QT, agency MBS spreads are 60 to 80 bps wider today.
For about 12 months after the onset of monetary tightening in March 2022, the 30-day rolling correlation of the agency MBS basis to interest-rate volatility (MOVE Index) remained high, ranging from 60 to 80 percent (that the two series were highly correlated until March 2023 can be seen in Figure 2).
However, the “technicals” of the MBS market today have shifted dramatically, with the Fed and domestic banks as the largest holders of this asset class. A key US bank dynamic has emerged since March 2023, given the collapses of three regional banks: Silicon Valley Bank (SVB), First Republic Bank and Signature Bank. In their wake, the agency MBS basis’s correlation to rate volatility has dipped, as seen by the rising agency MBS basis and declining MOVE Index. In contrast, the correlation of basis to the inverse of the stock valuation of regional banks has risen (again, see the individual series in Figure 2), reaching a peak of 35 percent in May 2023, marking the low in the regional bank index and simultaneously a high in the basis.
Punch #3: Wider mortgage-lender margins, driven by low volumes and high volatility
Turning to mortgage-lender margins, mortgage lending is a volume business in terms of the profits it generates for lenders and largely depends on refinancing transactions. Today’s high mortgage rates place a significant disincentive in the economics of the majority of US borrowers who have “locked in” at post-pandemic ultra-low rates, shriveling down lender volumes to mostly purchase transactions. The resulting low volume of home sales is thus translating into high competition among mortgage lenders.
High competition suggests banks should be willing to tighten margins. However, lender margins are modestly higher today than in the mid-2010s’ rate-hike and QT episodes, ranging back then between 90 and 100 bps compared to the present 110 and 120 bps. A key factor driving this margin wider is (again!) higher rate volatility, which increases the pipeline hedging costs of mortgage lenders during the period they commit to making a loan to closing and eventually pooling the loan into an MBS through securitization. This balance-sheet effect seems to have swamped the competitive effect.
Amplifying it all: banks’ and the Fed’s balance sheets moving in tandem
An additional factor has, however, made the confluence of these three effects even more potent.
The GFC, notably the distress in the housing and mortgage sectors, depleted both the capital and liquidity of banks, the largest mortgage lenders then. The nature of the post-GFC regulations and rules, notably the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act), has made it costlier for banks to step into mortgages and MBS. In fact, a number of banks stepped away altogether from mortgage lending and servicing. The Fed filled this gap with some of its post-GFC quantitative-easing (QE) programs to support the mortgage and housing sectors. This backdrop led to relatively low levels of stable growth in the bank ownership of mortgages and MBS leading into the mid-2010s (see Figure 3).
However, as the Fed then halted QE and eventually embarked on QT, other rules, especially the favorable treatment of agency MBS as “high-quality liquid assets” in calculating the liquidity coverage ratio (LCR), led to a rise in the banks’ demands for MBS. This helped stabilize the MBS sector. And although banks made some (unrecognized) losses on their securities holdings by the end of the tightening cycle, cumulatively, the losses remained in aggregate below $75 billion.
Progression from this period into the pandemic saw the balance-sheet holdings of banks and the Fed paralleling (again, see Figure 3). The substantial stimulus led to an abundance of deposits (insured and uninsured) and low-yielding reserves at banks—but due to low demand in 2020, also a relative absence of sufficiently higher-yielding corporate loans in which to invest. The ultra-low rates and flat yield curve thus led to a search for yields, driving banks to buy Treasuries and agency MBS instead.
The post-pandemic monetary tightening of 2022 thus started with a far greater concentration of liquid-asset holdings in the hands of two large, correlated sets of balance sheets—namely, the Fed’s and the banks’. At present, new MBS issuances essentially have demand from neither, implying that the agency MBS basis is driven almost entirely by the risk appetites of non-bank institutional investors. As these investors are far more prone to rollover risks from heightened volatility, they demand greater risk premiums than banks typically would. This has significantly amplified the triple punch delivered to mortgage rates by monetary tightening.
What’s next?
An important lesson is that the unprecedented scale of fiscal and monetary stimulus during the pandemic worked through the commercial-banking system, creating the path dependency in how monetary tightening is now playing out, especially for mortgage markets.
Paradoxically, as mortgage rates rise, the willingness of labor in the US to adjust to sectoral demands lessens as the lock-in effects of ultra-low mortgage rates keep households from moving. This, in turn, keeps labor markets tight, wages high and inflation stubborn.
The Fed is thus caught between a rock and a hard place, with the demand- and supply-side effects of its tightening working in opposite directions. Which way will the pendulum swing? It is hard to know, but this may precisely be why interest-rate volatility has remained high.
ABOUT THE AUTHORS
Prof. Viral V. Acharya is the C.V. Starr Professor of Economics in the Department of Finance at the New York University Stern School of Business (NYU-Stern). He was the Deputy Governor at the Reserve Bank of India (RBI) from January 2017 to July 2019, in charge of Monetary Policy, Financial Markets, Financial Stability and Research.
Satish Mansukhani is the Managing Director, Investment Strategy, at Rithm Capital, a financial-services firm headquartered in New York City. In his prior roles as a sell-side strategist at Bank of America, Credit Suisse and Bear Stearns, Satish was perennially ranked for his work by Institutional Investor magazine.
In a letter to a group of founders and shareholders, New York-based asset management firm Sculptor Capital Management said their request to inspect the company’s books and records pertaining to its acquisition by Rithm Capital was “improper” and motivated by founder Daniel Och’s “long-standing resentment” of being exited from the company.
Sculptor also said in the letter sent on Tuesday that Och and the other shareholders have requested millions of dollars in cash for legal expenses incurred during the process of being acquired by Rithm Capital. Och and shareholders also requested a prepayment related to a tax agreement tied to the company’s IPO in 2007.
Och, shareholders and Rithm Capital did not reply to requests for comment.
The letter from Sculptor is the latest chapter of a dispute between the asset management firm, Och and other shareholders since Rithm — the real estate investment trust that operates NewRez, Caliberand several other businesses —announced a deal to acquire Sculptor for $639 million in July. If regulators approve, it will bring Sculptor’s $34 billion in assets under management to Rithm.
“While ostensibly requesting information about the sales process described in the Company’s preliminary proxy statement, your Demand for books and records is set against historical context that makes clear that purpose is pretextual, and that the true purpose is the continuation of what the company views as Mr. Och’s well-publicized, years’ long smear campaign against the Company’s management,” the letter states.
Och, who founded Sculptor in 1994, stepped down as CEO in 2018. In 2016, an Africa-based subsidiary entered into an agreement with the Department of Justice (DOJ) to pay a criminal penalty of more than $213 million in connection with a bribery scheme involving officials in the Democratic Republic of Congo and Libya.
Och, who is still an active shareholder, and other former executives sued the firm in 2022 over CEO Jimmy Levin’s $145.8 million compensation.
Och, who was previously a mentor to Levin, now finds himself on the opposite side of a dispute with Levin in which the Rithm deal is a key issue.
On August 16, a group of shareholders, including Och, Harold Kelly, Richard Lyon, James O’Conner and Zoltan Varga, sent a letter to Sculptor’s special committee of the board of directors saying the deal with Rithm “substantially undervalues the company.”
They noted that on December 17, 2021, when “the Board of Directors approved the exorbitant compensation package” for Levin, the stock was trading at $20.02.
“Just over 18 months later, the Board now has approved a deal that would pay the public shareholders $11.15 per share, just a fraction of what the stock was once worth.”
In the letter, Och and the other shareholders said they were working with Rithm to see whether deal terms could be improved. Absent “material changes,” the group will “vigorously oppose this transaction,” they wrote.
On August 21, Sculptor replied in a proxy statement that it received multiple takeover bids higher than the Rithm offer, some valuing the company at more than $700 million. Sculptor did not accept these bids due to burdensome conditions, lack of secured financing, or, according to the company, because Och and other founding partners rejected its terms.
Och and other shareholders, in subsequent correspondence, demanded that Sculptor release books and records on August 22.
“The suggestion that there were other credible bids that provided greater value and certainty of closing, with or without current management, is distorted — no such bid exists,” Sculptor said in response to the request. “Nor does Rithm’s bid crystallize supposed losses from the adoption of Mr. Levin’s compensation package. Mr. Levin has also agreed to substantial reductions in his compensation to support a Rithm transaction.”
Sculptor said in its letter that Och and the other shareholders asked Rithm to agree to advance tens of millions of dollars as a prepayment at the favorable discount rate of the company’s Tax Receivable Agreement.
Och and shareholders also demanded Rithm pay an additional $5.5 million in cash for the group’s legal expenses supposedly incurred in connection with the company’s sales process.
“The transaction under discussion between the Och Group and Rithm would have included the option for a rollover in order to allow you to avoid recognizing significant taxable gain received in the transaction. Notably missing from those discussions were meaningful concessions by any of you for the benefit of public stockholders,” Sculptor states in its letter.
If you’re looking for comprehensive financial planning advice, but you don’t want to pay the high fees typically charged by financial advisors, Facet may be exactly the service you’re looking for. They provide all the services of traditional financial planners, but at much lower fees. And they’ll even include investment management in the package. This can be especially beneficial for those with portfolios under $500,000, since traditional financial planners often won’t work with smaller clients.
In this comprehensive Facet review, we’ll break down their comprehensive service offering, and help you decide whether this type of financial planning is right for you.
About Facet
Based in Baltimore, Facet was launched in 2016, to serve those who are looking for something of a hybrid between automated, online investment platforms (robo advisors) and full-service financial advisors. Instead of focusing only on investment management, they provide holistic financial management, covering all aspects of your financial life.
Also Read: Wealthfront Review – Low Cost Robo Investing and Financial Planning
But rather than charging annual fees based on a percentage of your assets under management, they instead charge a flat annual membership fee.
And unlike robo advisors, where your portfolio is invested on an automated basis with very little direct human contact, you’ll instead work directly with a dedicated Certified Financial Planner™ professional. The CFP® professional will work with you to establish your financial goals, and immediate and future needs, then come up with an action plan to help you get to where you want to go.
Investment management is available and it’s included as part of the basic annual membership fee. For that reason, it’s not possible to do a direct price comparison between Facet and robo advisors, most of whom don’t offer life financial planning advice.
Related: Personal Capital Review – A Free Wealth Management Tool
How Facet Works
When you sign up with Facet you’ll work directly with a dedicated CFP® professional. However, all contact is either by phone, video chat or email. There are no in person meetings, though due to technology that’s becoming increasingly unnecessary.
You don’t need a certain minimum amount of investable funds to work with Facet either. You can work with them even if you don’t have anything to invest. This is unlike traditional financial planning services, which typically require large minimum account balances to provide advice.
All information relating to your financial situation will appear on an intuitive dashboard, enabling you to get a 360° view of your financial life on the platform.
If you do choose the investment management option, one big advantage is that they do provide investment recommendations for employer-sponsored retirement plans, like 401(k)s. They can’t directly manage employer plans, but the advice they provide will help you better manage your plan going forward.
Financial Services Provided by Facet
As you’ll see, Facet goes well beyond simple investment management provided by robo advisors. They provide investment management, but also comprehensive financial planning services, including the following:
Retirement Planning: Your CFP® professional will put together an action plan to help you reach your retirement goals, as well as help you to understand the strategies behind it.
Education Planning: If you have children, they’ll present options to pay for their future education.
Life Planning: Your Facet advisor will help you to plan for what’s most important in your life.
Asset Management: This is the investment management part of the Facet program. It will include constructing a well-diversified portfolio to help you achieve your long-term goals.
Income Tax Planning: This service involves minimizing the impact of taxes while implementing your financial plan and investing activities.
Insurance Planning: If you don’t know a whole lot about insurance, your financial advisor can help. They’ll recommend the best types of plans to provide specific protections you need for yourself and your family.
Estate Planning: Facet will work with your personal attorney to create an estate plan to provide for your loved ones after your death.
Legacy Planning: This involves creating a plan to make provisions for either your family or a favorite charity. It will enable you to structure your finances in such a way that you will be able to provide for the people or organizations you care for most.
Retirement Income: Apart from retirement planning, it’s also important to successfully manage income in retirement. Your financial advisor will take into consideration your income from Social Security and pensions, in creating a distribution plan from your retirement savings.
A Facet CFP® professional can even help you choose your employee benefits and provide assistance in making the right decisions with your company’s stock option plan.
Also Read: Blooom Review – Finally, a Robo-Advisor for Your 401(k)
Facet Investment Strategy
If you sign up for Facet to take advantage of the financial planning services, you’ll also get investment management at no additional cost. Investment funds are managed through four major brokerages, including Fidelity, Charles Schwab, TD Ameritrade, and Apex. There is no minimum initial investment requirement.
Because those are among the largest investment firms in the industry, there’s a good chance you invest with one of them already. But if you don’t, and you want to take advantage of Facet investment management, you’ll need to transfer your current account to one of those four platforms.
Investments will be managed using primarily mutual funds and exchange traded funds (ETFs), though the company does indicate use of individual stocks and bonds are possible on a discretionary basis.
Portfolios are designed based on your personal investment risk tolerance, as well as your time horizon and investment goals. Your portfolio may be constructed based on the following risk levels:
Aggressive
Moderately Aggressive
Moderate
Conservative
Your portfolio will be fully managed by Facet, including periodic reviews, which will be conducted at least annually. More frequent reviews may take place based on a change in your personal investment objectives, as well as in response to investment market conditions, or upon request.
Other Facet Features and Benefits
Investment accounts that can be managed: Taxable brokerage accounts, and any self-directed retirement plans, including traditional, Roth, rollover, SEP and SIMPLE IRAs, as well as solo 401(k) plans. And though they can’t manage them directly, Facet will provide management assistance with employer-sponsored plans, like 401(k) and 403(b) plans.
Availability: All 50 states, plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
Customer contact: One of the advantages of working with Facet is that you will have a direct line to your dedicated CFP® professional. When you call in, it won’t be to a call-in center. Contact is by phone, videoconference, or email, all of which are available mornings, evenings, and even on weekends.
Fees: Membership fees will vary by the services you need performed, and are not determined by the size of your portfolio.
Prices range from $2,400/year ($167/month) to $8,000/year ($667/month). Most members fall in the middle of that range.
There are no cancellation fees – but any annual fees already paid will not be returned.
How to Sign Up with Facet
To sign up with Facet you’ll start by scheduling a 30-minute introductory call with a dedicated CFP® professional. That person will work with you to determine your needs and goals, as well as your budget for the service.
When you schedule your introductory call, you’ll be required to provide basic information, as well as financial information, such as investment accounts, and to list important financial goals.
If a Facet membership feels right to you and you agree to sign up, you’ll go through Facet’s digital onboarding process which is a guided experience that consolidates all your key information in one place. The full process takes 30 – 45 minutes but you can leave and revisit the process at your convenience. Once the digital onboarding is complete, the first meeting with your planner will be scheduled. They will come to this meeting prepared after reviewing all the information you submitted during the digital onboarding process and can start discussing your financial priorities.
The CFP will create an individually designed financial plan, though the creation of that plan may require several direct sessions to complete. Once again, the fees you’ll pay for that plan will depend on the individual services you want.
The CFP will create an individually designed financial plan, though the creation of that plan may require several direct sessions to complete.
Facet Pros and Con
Flat fee structure — This will work very well for those with larger portfolios.
No minimum to begin investing — There are no upfront fees.
Full service financial planning — Facet takes a holistic view of your entire financial life, rather than focusing exclusively on investment management. Investment management is included in your complete financial planning package.
The company is a fiduciary — This legally requires them to represent your best interests, and not to promote their own products to generate additional income.
Works with major investment brokers — Facet works with four big investment platforms.
Can be pricey — The flat fee structure will be high for those with smaller portfolios.
No face-to-face meetings — All contact is by phone, email or video chat.
Difficult to estimate costs — Since fees are based on the level of service, actual costs can be difficult to determine upfront.
Alternatives to Facet
If you’re interested in what Facet has to offer, but you’d like to check out the competition, we recommend the following financial management services:
Probably the most popular investment platform among robo advisors with personal financial advice is Empower. The platform is free to use, if you’re looking for budgeting tools and limited investment advice. But with a minimum initial investment of $100,000, you can take advantage of Empower Wealth Management, that provides full investment management. And with at least $200,000, you can have regular access to financial advisors. Management fees start at 0.89% for a portfolio up to $1 million, but slide down to 0.49% for portfolios greater than $10 million.
Betterment’s Premium plan works similar to Personal Capital, but at a lower fee. They charge an annual management fee equal to 0.40% of your account balance, and there’s no upfront fee. That means you can have a $250,000 portfolio managed for $1,000 per year. The service provides automated portfolio management (robo advisor), with unlimited access to Betterment certified financial planners. Qualification requires a minimum account balance of $100,000.
But at an even lower fee structure is Vanguard Personal Advisor Services. The minimum required investment is $50,000, and the annual fee is just 0.30%, sliding all the way down to 0.05% for portfolios of $25 million or more. An investor with $250,000 can have his or her portfolio managed for just $750 per year. The service offers unlimited access to personal financial advisors, including a dedicated advisor if your portfolio is $500,000 or more.
Facet vs. Robo Advisor
Those considering Facet might find themselves debating between Facet and a robo advisor for managing their money. The truth is that both types of service have something to offer different customers.
A robo advisor is an algorithm that manages your investments based on a risk tolerance that is set upon signing up for the service. Robo advisors occasionally offer personalized advice, but this often comes with a fee. At best, you’ll have limited access to a financial planner. Fees are usually set based on a percentage of what you invest, plus set fees (although exact details depend on the robo advisor).
Whether or not you want a robo advisor depends on whether you want to take a hands-on or hands-off approach to managing your money. Robo advisors are automated investment strategies, and are therefore a very hands-off approach. Facet allows you more freedom to customize your plan, with real access to human advice, and a fee structure that isn’t only based on how much you invest.
Both types of investment have a lot to offer, so it will depend on the person to decide which is most suited to their personal risk tolerance and investing goals.
What Others are Saying – Facet Reviews
To get a better understanding of what people think about Facet, it helps to look at third-party reviews. Reviews are a great way to get a non-biased perspective of what others are saying about Facet. Prospective clients will be happy to learn that Facet reviews are mostly positive overall.
Better Business Bureau has Facet at an A+ rating. A+ is the highest rating available on BBB’s 100-point rating scale. The rating scale is based on an aggregate of factors, including the business’s complaint history, transparent business practices, time in business, advertising issues, licensing and government actions, and more. An A+ is an encouraging sign for prospective customers of Facet.
Business Insider has also given Facet a positive review. They state that Facet is “best for comprehensive financial advice and those with modest or sizable assets”. Business Insider had overall positive things to say about the service, but also said that those with modest assets or one-off questions may not benefit from Facet. Business Insider gave Facet a rating of 4.6/5.
Facet FAQs
What is a Certified Financial Planner™ professional, and why is having one so important?
CFP® professionals are required to be certified, and have experience in all aspects of financial planning. Not only can they provide the information you’ll need, but they can recommend third-party sources for additional advice when necessary. A dedicated CFP® professional is part coach, part advocate and all partner. Working with a CFP® professional means you never have to deal with financial concerns alone.
Why is it important that Facet is a Fiduciary?
A fiduciary is a financial professional with a legal and ethical relationship of trust to you as a client. They’re legally required to make financial recommendations in your best interest alone. All Facet CFP® professionals are fiduciaries.
Why do I need Facet when I can just use a robo advisor to manage my portfolio?
Because Facet will provide investment management services, comparable to a robo advisor, but they also work with you to better manage your entire financial life. For example, they can provide investment advice on how to better manage your employer-sponsored retirement plan. They can also work with you in other critical areas of your life, such as insurance, estate planning, and preparing for your children’s college educations.
How does Facet help me manage my employer sponsored retirement plan?
Facet doesn’t directly manage your retirement plan. But they can provide you with advice on portfolio allocation, as well as selecting from the best investment options in your plan. This may include certain funds that will create a more well-balanced portfolio, as well as include investments with lower fees.
How do I know a Facet CFP® professional will work in my best interest?
As fiduciaries, Facet CFP® professionals are legally required to work in the best interest of their clients. Additionally, because Facet charges flat fees, there are no worries associated with CFP® professional giving you bad advice to profit off commissions. Facet also boasts a rigorous recruitment process to vet every person they hire, putting a particular emphasis on kindness and honesty.
Related: How to Evaluate an Investment Portfolio
Is Facet the Right Choice for You?
If you’re looking for an investment advisor, but you also want comprehensive financial advice, schedule your introductory call is worth checking out. They provide professional level financial advice, including retirement planning, estate planning, education planning, and income tax planning for a fraction of what you’ll pay to an independent CFP® professional.
It’s also an excellent choice if you’re not simply looking for the type of automated investment management provided by robo advisors.
However, if you’re mainly interested in investment management, the value of the service may depend primarily on the size of your investment portfolio. For example, if you have a $1 million portfolio under management, and your total annual membership fee is $2,400, the fee will work out to be 0.24%, which is lower than most robo advisors.
But if your portfolio size is $100,000, and you pay the same $2,400 annual membership fee for Facet, it will be the equivalent of a 2.4% annual fee. That’s many times higher than what robo advisors will charge, and even higher than traditional human investment advisors.
However, you also have to consider the value of the financial planning advice being provided. If you’re looking for ongoing financial advice, the Facet fee will be well worth paying. But if you’re looking for one-time advice for very specific areas of financial planning, and mostly interested in ongoing investment management, it may be more cost-effective to invest through a robo advisor, and to get the needed financial planning advice from an independent CFP® professional.
At the end of the day, you need to consider your own financial goals, personal risk tolerance, and what you want from a financial services provider. Only with a proper understanding of these personal preferences can you make the choice that’s right for you.
Betterment and Betterment are not only two of the most popular robo advisors in the industry, but they may very well be the most innovative in the field. Though they represent two of the first robo advisors, both have built out their platforms and now offer robust portfolio options and other services to their clients.
Though they each have their own nuances–and specializations–you really can’t go wrong with either platform. Each will take complete control of your portfolio, managing every aspect of it for a very low annual fee. When you sign up with either service, your only responsibility will be to fund your account on a regular basis.
But what if you’re either new to robo advisors or you’re considering a switch from another one? If you’re researching robo advisors, the information will inevitably lead to Betterment and Wealthfront. So let’s take a look at the two heavyweights in the robo advisor space and see which might be a better fit for your portfolio. Listen to the Podcast of this Article
About Betterment
Betterment is not only the original robo advisor, but its also the largest independent robo (along with Wealthfront), with $21 billion in assets under management. The company is based in New York City and began operations in 2008.
As a robo advisor, Betterment is an automated, online investment platform that handles all aspects of investment management for you. When you sign up for the service, you complete a questionnaire that will help determine your investment goals, time horizon, and investment risk tolerance. From that information, Betterment creates a portfolio of stocks and bonds to meet your investor profile.
They dont actually invest your money in individual securities, but instead through exchange-traded funds (ETFs), each representing a specific asset class. They can build an entire portfolio for you through about a dozen funds that will give you exposure to the entire global financial markets.
All this is done for a low annual management fee. Your only responsibility will be to fund that your account on a regular basis and let Betterment handle all the management details for you.
Better Business Bureau rates Betterment as A+, which is the highest rating in a range from A+ to F. The company also scores 4.8 stars out of 5 by more than 20,000 users on the App Store, and 4.5 stars out of 5 by more than 4,500 users on Google Play.
About Wealthfront
Wealthfront is, with Betterment, the largest independent robo advisor, and Betterment’s primary competitor. In fact, with over $24 billion in assets under management, its now slightly larger than Betterment. The company is based in Redwood City, California, and launched operations in 2011.
As a robo advisor, it works much the same as Betterment, creating a portfolio for you based on your answers to a questionnaire when you open your account. Wealthfront will also manage your account using a small number of ETFs spread across various asset classes. But on larger accounts, they’ll also add individual stocks to get greater benefit from tax-loss harvesting.
Like Betterment and virtually all robo advisors, Wealthfronts basic investment strategy is based on Modern Portfolio Theory (MPT), which emphasizes asset allocation over individual security selection.
Similar to Betterment, and really all robo advisors, your account will receive full investment management for a very low annual fee. Your only responsibility will be to fund your account on a regular basis.
Unfortunately, Wealthfront has a Better Business Bureau rating of F, due to unanswered complaints. However, the company gets 4.9 stars out of 5 from more than 9,000 users on the App Store, and 4.8 stars out of 5 by more than 2,700 users on Google Play.
Investment Strategies Betterment vs Wealthfront
Betterment Investment Strategy
Betterment offers two plan levels, Digital and Premium. Premium is available for minimum account balances of $100,000, while Digital is open to all account balances. Like many robo advisors, Betterment has evolved past building and managing a basic portfolio comprised of a mix of stocks and bonds.
For example, if you choose the Premium Plan, you’ll have access to live financial advisors. But there are many other services and plans to choose from.
Read More: Betterment Promotions
Basic portfolio mix
Your portfolio will be invested in as many as six stock asset classes/ETFs and eight bond asset classes/EFTs.
Stocks:
US Total Stock Market
US Value Stocks Large Cap
US Value Stocks Mid Cap
US Value Stocks Small Cap
International Developed Markets Stocks
International Emerging Markets Stocks
Bonds:
US High-quality Bonds
US Municipal Bonds
US Inflation-Protected Bonds
US High-Yield Corporate Bonds
US Short-term Treasury Bonds
US Short-term Investment-Grade Bonds
International Developed Markets Bonds
International Emerging Markets Bonds
Use of value stocks
Notice that three of the six stock asset classes involve value stocks. This is a specialization of Betterment and represents a time-honored stock market investment strategy. Value stocks are investments in companies with stock prices that are low in relation to their competitors by various standard measurements. But the companies are deemed to be fundamentally sound, and therefore likely to outperform the general market once the investment community realizes the true value of the stocks.
In this way, Betterment makes an attempt to outperform the general market, such as the S&P 500 or even some broader indices.
Smart Beta
This is another investment strategy Betterment uses with the potential to outperform the general market. This specific portfolio is managed by Goldman Sachs. Smart Beta is a form of active portfolio management, which seeks high-quality companies with low volatility, strong momentum, and good value.
Since its a higher risk/high reward type of investing, it requires a minimum portfolio of $100,000.
Socially responsible investing (SRI)
This is an investment option increasingly being offered by robo advisors. However, with Betterment only a portion of your portfolio will be invested in SRI. They replace the ETFs in the International Emerging Market Stocks and US Value Stocks Large Cap with ETFs that specialize in socially responsible investing in those sectors.
Learn More: The Pros and Cons of Socially Responsible Investing
Flexible Portfolios
If you want more control over your investment portfolio, you can choose this option. It allows you to adjust the individual asset class weights in your portfolio allocation. Its also designed for more advanced investors and gives you an opportunity to increase allocations in asset classes you believe are likely to outperform the market.
BlackRock Target Income
For investors looking for income and safety of principal, Betterment offers this portfolio, which consists of 100% of bonds. There is some risk of principal in this portfolio but it’s designed to be minimal. You can even choose the level of risk and return you want. It won’t provide the type of long-term gains you’ll get from a stock portfolio, but it will offer the kind of steady income that will work especially well for retirees.
Tax-loss Harvesting
Tax-loss harvesting is a year-end strategy in which asset classes with losses are sold (and later replaced with comparable ones) to offset gains in winning asset classes. The strategy helps to defer taxable capital gains on growing asset classes.
Betterment makes this strategy available on all account balances. However, it’s only offered on taxable accounts since it’s completely unnecessary for tax-sheltered retirement plans.
Betterment Everyday Cash Reserve
If you’re looking to add a cash option to your investment portfolio, you can do it through Betterment Cash Reserve. The account is eligible for FDIC insurance up to $1 million. The minimum deposit is $10, and offers unlimited transfers, both in and out of your account.
Betterment Checking
The Betterment Checking account gives you the flexibility to manage your money in a way that best fits your financial goals. You’ll get this account with a debit card and you can use it to pay in person or online. You’ll also get FDIC insurance on your money.
The Betterment Checking account is an innovative way to manage your money. It’s faster, more secure, and requires zero minimum balance requirements. You can now deposit checks using their streamlined mobile app. Just take a picture and deposit checks will be there for you on the other side.
Wealthfront Investment Strategy
Unlike Betterment, Wealthfront has a single plan for all investors, with an annual management fee of 0.25% on all account balances. And like Betterment, Wealthfront has expanded its investment options menu in many different directions.
Basic Portfolio Mix
Wealthfront uses 11 asset classes in the construction of its portfolios, including four stock funds, five bond funds, plus real estate and natural resources.
The allocation looks like this:
Stocks:
US Stocks
Foreign Stocks
Emerging Market Stocks
Dividend Stocks
Bonds:
Treasury Inflation-Protected Securities (TIPS)
Municipal Bonds (on taxable investment accounts only)
Corporate Bonds
U.S. Government Bonds
Emerging Market Bonds
Alternatives:
Real Estate
Natural Resources
Use of Alternative Investments
Wealthfront includes real estate and natural resources in its portfolio composition. The real estate sector invests in companies that provide exposure to commercial property, apartment complexes, and retail space. Natural resources are held in ETFs representing that sector.
The combination of the two offers a stronger diversification away from a portfolio comprised entirely of stocks and bonds, largely because they offer protection in an inflationary environment. It’s possible for these sectors to perform well when the general financial markets are not.
Smart Beta
The Smart Beta option attempts to outperform the general financial markets. The strategy deemphasizes market capitalization in the creation of a portfolio. For example, rather than using the capitalization allocations of certain companies within the S&P 500, the strategy might increase some allocations and decrease others. It’s more of an active investment strategy and requires a minimum investment portfolio of $500,000.
Wealthfront Risk Parity
This is another investment strategy for investors with larger accounts and a greater appetite for risk. Its been shown to provide higher long-term returns, but it may use leverage to increase those returns.
Stock-level Tax-loss Harvesting
Tax-loss harvesting is available on all taxable investment accounts. But Stock-level Tax-loss Harvesting is available to larger accounts to provide more aggressive tax deferral.
This is a fairly complex investment strategy, but it involves the use of individual stocks to take greater advantage of tax-loss harvesting. The use of individual stocks will make it easier to buy and sell securities to minimize capital gains taxes. Depending on the specific plan, the required minimum investment ranges between $100,000 and $500,000.
Wealthfront Path
This is a software-based financial advisory, providing you with financial planning tools. They can help you plan for retirement or saving for the down payment on a house or a college education for one or more of your children. The apps run what-if scenarios, that can make projections based on various savings levels for each of your specific goals.
Though it doesn’t offer live financial advice, the service is free to use.
Wealthfront Cash
You can open an interest-bearing cash account with Wealthfront Cash Account with just $1. There’s no market risk, no fees, unlimited free transfers, and your account is FDIC insured for up to $5 million. The account currently pays 4.30% APY and provides a safe, cash investment to go with your stock portfolios.
And now, Wealthfront Cash allows you to get your paycheck up to two days early when you set up a direct deposit. They’ve also implemented the ability for you to invest directly into the market within minutes, straight from your Wealthfront Cash account. That means you can get paid early and immediately invest – giving you about extra days of investing each year.
Read more: Wealthfront Cash Account review
Wealthfront Portfolio Line of Credit
Much like a home equity line of credit, the Wealthfront Portfolio Line of Credit is secured by your investment account. You can borrow up to 30% of the value of your account for any purpose. There’s no prequalification since the line of credit is completely secured by your investment account.
The line of credit is automatic if you have a non-retirement account balance of at least $25,000. You can request funds against the line on your smartphone and receive them in as little as one business day.
Current interest rates paid on the line range between 2.45% and 3.70% APR, depending on the size of your account.
Retirement Planning Betterment vs. Wealthfront
One of the most common uses of robo advisors is the management of retirement accounts. Both Betterment and Wealthfront can manage all types of IRA accounts, similar to the way they do with taxable accounts. But each also offers some level of retirement planning.
Read More: Best Robo Advisors Find out which one matches your investment needs.
Betterment Retirement Planning
Betterment is strong in this category because in addition to their regular portfolios, they also offer income-specific investment options, like their BlackRock Target Income and Everyday Cash Reserve. The Target Income option in particular focuses on maximizing interest income, which is exactly what most people are looking for in retirement.
One of the advantages Betterment offers is that you can connect your 401(k) with your investment account. Betterment cant manage the 401(k) (unless chosen to do so by your employer through their 401(k) management plan), but they can coordinate your Betterment retirement account(s) with the activity in your employer plan.
And of course, if you have at least $100,000 in your Betterment account, you can enroll in the Premium plan and have access to live financial advisors.
But Betterment also offers its Retirement Savings Calculator to help you know if you’re on track for your retirement. By answering just four questions, they’ll be able to determine if your current retirement plan will provide the income you’ll need in retirement, taking your projected Social Security income into consideration. If it isn’t, it’ll let you know how much more you need to invest on a regular basis.
Wealthfront Retirement Planning
You can take advantage of Wealthfront Path to help you with retirement planning. You’ll start by linking your financial accounts so the program can get a better understanding of your finances. Recommendations to help you reach your goals are made based on the amount of regular contributions you’re making and the income you will need in retirement.
Path will analyze your spending patterns, your average annual savings rate, the interest you’re earning on those savings, as well as your investment and retirement contributions. It will also analyze the fees you’re paying on your investment and retirement accounts. Loan accounts are analyzed as well.
The information is assembled, and future projections are made. You’ll be given advice on any needed increases in savings for retirement contributions, as well as asset allocations. And perhaps best of all, since all your financial accounts are linked to the service, it will provide continuous updates on your progress toward your retirement goals.
Betterment Pros & Cons
No minimum initial investment or account balance requirement.
Reduced fee structure on larger account balances.
Use of value stocks seeks to outperform the general market.
Unlimited access to certified financial planners on account balances over $100,000.
Comprehensive retirement planning package.
Limited investment diversification, excluding alternative asset classes, like real estate and natural resources.
The annual management fee rises from 0.25% to 0.40% if you select the Premium plan.
The reduced fee structure on large account balances doesn’t kick in until you reach a minimum of $2 million.
Wealthfront Pros & Cons
Your account includes alternative investments, like real estate and natural resources. This offers greater diversification than a portfolio invested only in stocks and bonds.
The minimum initial investment is just $500. That’s not zero, but it’s an amount most small investors can comfortably start with.
Flat-rate fee of 0.25% on all account balances.
Larger accounts get the benefit of more efficient tax-loss harvesting strategies through Wealthfront Risk Parity.
The Wealthfront Portfolio Line of Credit lets you borrow up to 30% of the value of your non-retirement accounts at very low interest and with no credit check.
There’s no reduced management fee for larger account balances.
The retirement planning tool (Path) is an automated system and does not provide advice from live financial advisors.
Poor rating from the Better Business Bureau.
Bottom Line
We’ve covered a lot of territory and details in this side-by-side comparison of Betterment vs Wealthfront. The summary table below should help you to be able to compare the various services each offers with a quick glance.
Category
Betterment
Wealthfront
Minimum initial investment
Digital: $0 Premium: $100,000
$500
Promotions
Up To 1 Year Free
First $5,000 Managed Free
Management fees
Digital: 0.25% up to $2 million, then 0.15% above Premium: 0.40% to $2 million, then 0.30%
0.25%
Available accounts
Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and nonprofit accounts
Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 accounts
Rebalancing
Yes
Yes
Dividend reinvestment
Yes
Yes
Tax-loss harvesting – on taxable accounts only
Yes
Yes
Socially-responsible investing
Yes
Available through Smart Beta ($500,000 minimum) and Stock-level Tax-Loss Harvesting ($100,000 minimum)
Smart Beta investing
Yes
Yes, minimum $500,000
Interest bearing cash account
Yes
Yes
Line of credit
No
Yes
Financial advice
Yes, on Premium Plan only
Automated only
Mobile app
Yes
Yes
Customer service
Phone and email, Monday through Friday, 9:00 am to 6:00 pm Eastern time
Phone and email, Monday through Friday, 10:00 am to 8:00 pm Eastern time
You’ve probably already guessed were not declaring a winner between these two popular roboadvisors. Both are first rate and you can’t go wrong with either. More than anything, your decision will likely come down to specific details–what features and benefits one offers that better suits your own personal preferences and investment style.
But one advantage that’s undeniable with both Betterment and Wealthfront is that not only is each a first-rate service, but they provide enough investment options and related services that they can accommodate your growing financial capabilities and needs well into the future.
For example, while you may start out with a basic managed portfolio, you’ll eventually want to get into higher risk/higher reward options as your wealth grows. As well, you’ll like the flexibility of having high-interest cash investment options, as well as low-cost or free financial or retirement advice.
We like both these services and are certain you can’t go wrong with whichever one you choose.
Betterment Cash Reserve Disclosure – Betterment Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.
Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.
DoughRoller receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. DoughRoller is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.
Robo-advisors have barely been around for 10 years, but in the past couple of years several have been steadily expanding their investment menus, and even offering valuable add-on services. One of the leaders in this regard is Wealthfront. The robo-advisor has been growing its investment capability in every direction but is now even offering financial planning. The platform now bills itself as offering High-Interest Cash, Financial Planning & Robo-Investing for Millennials. If you’re looking for more than just investing, Wealthfront has it. And as has become their trademark, it’s all available at a low cost.
What is Wealthfront?
Based in Palo Alto, California, and founded in 2011, Wealthfront has about $25 billion in assets under management. It’s the second-largest independent robo-advisor, after Betterment. And while dozens of robo-advisors have arrived in recent years, Wealthfront stands out as one of the very best. There isn’t any one thing Wealthfront does especially well, but many. And they’re adding to their menu of services all the time.
Their primary business of course is automated online investing. You can open an account with as little as $500, and the platform will design a portfolio for you, then manage it continuously. Your money will be invested in a globally diversified portfolio of ETFs–just like most other robo-advisors. But Wealthfront takes it a step further, and also adds real estate and natural resources.
Like other robo-advisors, Wealthfront uses Modern Portfolio Theory (MPT) in the creation of portfolios. They first determine your investment goals, time horizon, and risk tolerance, then build a portfolio designed to work within those parameters. MPT emphasizes proper asset allocation to both maximize returns, and minimize losses.
But in a major departure from other robo-advisors, Wealthfront now offers the ability to customize your portfolio and get access to a variety of investment methodologies and portfolios, including Smart Beta, Risk Parity and Stock-Level Tax-Loss Harvesting. And more recently, they’ve also stepped into the financial planning arena. They now offer several financial planning packages, customized to very specific needs, including retirement planning and college planning.
If you haven’t checked out Wealthfront in the past year or so, you definitely need to give it a second look. This is a robo-advisor platform where things are happening–fast!
How Wealthfront Works
When you sign up with Wealthfront, they first have you complete a questionnaire. Your answers will determine your investment goals, time horizon, and risk tolerance. A portfolio invested in multiple asset classes will be constructed, with an exchange-traded fund (ETF) representing each.
The advantage of ETFs is that they are low-cost, and enable the platform to expose your portfolio to literally hundreds of different companies in each asset class. With your portfolio invested in multiple asset classes, it will literally contain the stocks and bonds of thousands of companies and institutions, both here in the U.S. and abroad.
Wealthfront offers tax-loss harvesting on all portfolio levels. But they’ve also added portfolio options for larger investors, that include stocks as well as ETFs. The inclusion of stocks gives Wealthfront the ability to be more precise and aggressive with tax-loss harvesting.
Each portfolio also comes with periodic rebalancing, to maintain target asset allocations, as well as automatic dividend reinvestment. As is typical with robo-advisors, all you need to do is fund your account–Wealthfront handles 100% of the investment management for you.
More recently, Wealthfront has also added external account support. The platform can now incorporate investment accounts that are not directly managed by the robo-advisor. This will provide a high-altitude view of your entire financial situation, helping you explore what’s possible and providing guidance to optimize your finances.
And much like many large investment brokers, Wealthfront now offers a portfolio line of credit. It’s available only to investors with $25,000 or more in a taxable account, but if you qualify you can borrow money against your investment account and set your own repayment terms in the process
Wealthfront Features and Benefits
Minimum initial investment: $500
Account types offered: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 college accounts
Account access: Available in web and mobile apps. Compatible with Android devices (5.0 and up), and available for download at Google Play. Also compatible with iOS (11.0 and later) devices at The App Store. Compatible with iPhone, iPad and iPod touch devices.
Account custodian: Account funds are held in a brokerage account in your name through Wealthfront Brokerage Corporation, which has partnered with RBC Correspondent Services for clearing functions, such as trade settlement. IRA accounts are held with Forge Trust.
Customer service: Available by phone and email, Monday through Friday, from 7:00 AM to 5:00 PM, Pacific time.
Wealthfront security: Your funds invested with Wealthfront are covered by SIPC, which insures your account against broker failure for up to $500,000 in cash and securities, including up to $250,000 in cash.
Wealthfront uses third-party providers to maintain secure, read-only links to your account. The providers specialize in tracking financial data, as well as employ robust, bank-grade security, and in general, they follow data protection best practices. In addition, Wealthfront does not store your account password.
Wealthfront Investment Methodology
For regular investment accounts, Wealthfront constructs portfolios from a combination of 10 different specific asset classes. This includes four stock funds, four bond funds, a real estate fund, and a natural resources fund.
Each portfolio will contain various allocations of each asset class, based on your investor profile as determined by your answers to the questionnaire. The one exception is municipal bonds. That allocation will appear only in taxable accounts. IRAs don’t include them since the accounts are already tax-sheltered.
Notice in the table below that most asset classes have two ETFs listed. This is part of Wealthfront’s tax-loss harvesting strategy. In each case, the two ETFs are very similar. To facilitate tax-loss harvesting, one fund position will be sold, then the second will be purchased at least 30 days later, to restore the asset class. (We’ll cover tax-loss harvesting in a bit more detail a little further down.)
The ETFs used for each asset class are as follows, as of December 29, 2018:
Specific Asset ClassGeneral Asset ClassPrimary ETFSecondary ETF
US Stocks
Stocks
Vanguard CRSP US Total Market Index (VTI)
Schwab DJ Broad US Market (SCHB)
Foreign Stocks
Stocks
Vanguard FTSE Developed All Cap ex-US Index (VEA)
Schwab FTSE Dev ex-US (SCHF)
Emerging Markets
Stocks
Vanguard FTSE Emerging Markets All Cap China A Inclusion Index (VWO)
iShares MSCI EM (IEMG)
Real Estate
Real Estate
Vanguard MSCI US REIT (VNQ)
Schwab DJ REIT (SCHH)
Natural Resources
Natural Resources
State Street S&P Energy Select Sector Index (XLE)
Vanguard MSCI Energy (VDE)
US Government Bonds
Bonds
Vanguard Barclays Aggregate Bonds (BND)
Vanguard Barclays 5-10 Gov/Credit (BIV)
TIPS
Bonds
Schwab Barclays Capital US TIPS (SCHP)
Vanguard Barclays Capital US TIPS 0-5 Years (VTIP)
Municipal Bonds (taxable accounts only)
Bonds
Vanguard S&P National Municipal (VTEB)
State Street Barclays Capital Municipal (TFI)
Dividend Stocks
Bonds
Vanguard Dividend Achievers Select (VIG)
Schwab Dow Jones US Dividend 100 (SCHD)
Wealthfront’s historical returns are as follows (through 1/31/2019). But keep in mind these numbers are general. Since the portfolios designed for each investor are unique, your returns will vary.
Specialized Wealthfront Portfolios
As mentioned in the introduction, Wealthfront has rolled out several different investment options, in addition to its regular robo-advisor portfolios. Each represents a specific, and generally more specialized investment strategy, and is typically available to those with larger investment accounts.
Smart Beta: You’ll need at least $500,000 to be eligible for this portfolio. Smart beta departs from traditional index-based investing, which relies on market capitalization. For example, since Apple is one of the most highly capitalized S&P 500 stocks, it has a disproportionate weight in strict S&P 500 index funds. In a smart beta portfolio, the position in Apple will be reduced based on other factors.
In general, under smart beta, the weighing of stocks in the fund uses a variety of factors that are less dependent on market capitalization. There’s some evidence this investment methodology produces higher returns. This portfolio is available at no additional fee.
Wealthfront Risk Parity Fund: This is actually a mutual fund–the first offered by Wealthfront. It involves the use of leverage with some positions within the portfolio. It attempts to achieve higher long-term returns by equalizing the risk contributions of each asset class. It’s based on the Bridgewater Hedge Fund, and requires a minimum of $100,000, with an additional annual fee of 0.25% (0.50% total). This is the only Wealthfront portfolio that charges a fee over and above the regular advisory fee.
Socially responsible investing (SRI): Wealthfront just recently began to offer a specific SRI portfolio option. Once you sign up, you’ll be able to customize your portfolio and add socially responsible ETFs.
Sector-specific ETFs: If you want to invest in a particular portion of the market, such as technology or healthcare, Wealthfront gives you the option to build a portfolio that focuses on certain industries to portions of the stock market.
Customized Wealthfront Portfolios:
Wealthfront also lets investors build their own portfolios, which is somewhat uncommon among robo-advisors.
Most robo-advisors will build your portfolio automatically based on your risk tolerance and goals. If you like that service, Wealthfront can do it. However, more hands-on investors are free to make tweaks to the automatically designed portfolio by adding or removing ETFs.
You can also build a portfolio entirely from scratch if you’d rather. You can choose which ETFs to invest in and how much you want to invest in them. You can then let Wealthfront handle things like rebalancing and tax-loss harvesting while maintaining the portfolio you desire.
Wealthfront Tax-loss Harvesting
If there’s one investment category where Wealthfront stands above other robo-advisors, it’s tax-loss harvesting. Not only do they offer it on all regular taxable accounts (but not IRAs, since they’re already tax-sheltered), but they also offer specialized portfolios that take it to an even higher degree.
Wealthfront starts with a tax location strategy. That involves holding interest and dividend-earning asset classes in IRA accounts, where the predictable returns will be sheltered from income tax. Capital appreciation assets, like stocks, are held in taxable accounts, where they can get the benefit of lower long-term capital gains tax rates.
But for larger portfolios, Wealthfront offers Stock-level Tax-Loss Harvesting. Three specialized portfolios are available, using a mix of both ETFs and individual stocks. The purpose of the stocks is to provide more specific tax-loss harvesting opportunities. For example, it may be more advantageous to sell a handful of stocks to generate tax losses, than to close out an entire ETF.
Given that Wealthfront puts such heavy emphasis on tax-loss harvesting, it’s not surprising they’ve published one of the most respected white papers on the subject on the internet. If you want to know more about this topic, it’s well worth a read. The paper concludes that tax-loss harvesting can significantly increase the return on investment of a typical portfolio.
US Direct Indexing
US Direct Indexing is an enhanced level of tax-loss harvesting that Wealthfront offers to people with account balances exceeding $100,000.
Instead of building a portfolio of ETFs, Wealthfront will use your money to directly purchase shares in 100, 500, or 1,000 US companies. By buying shares in so many companies, Wealthfront can emulate an index fund in your portfolio while owning individual shares in the businesses.
Owning individual shares in hundreds of companies makes tax-loss harvesting easier as it lets Wealthfront’s algorithm trade based on movements in individual stocks rather than in funds. This can increase the number of tax losses that Wealthfront harvests each year, reducing your income tax bill.
Other Wealthfront Features
Wealthfront Cash Account
Wealthfront offers acash account where you can safely and securely store your money for anything–emergencies, a down payment for a home, or to later invest. By working with what they call Program Banks, Wealthfront has quadrupled the normal FDIC insurance on this account, so you’re protected for up to $5 million.
There’s also no market risk since it’s not an investment account and the money isn’t being invested anywhere. You can make as many transfers in and out of the account as you’d like, and it only takes $1 to start.
So what’s the catch?
There really isn’t one. Wealthfront will skim a little off the top to make some money before giving you an industry-leading 4.30% APY, but other than that, you’re just giving them more financial data. Since we’re doing this all the time with technology anyway, it shouldn’t make that big of a difference.
I see no downside, especially if you’re already a client of Wealthfront.
They’re really making a play to be your all-in-one financial services provider, too.
A new feature, just launched, is the ability to use your cash account as a checking account. This includes the ability to access your paycheck up to two days early when you set up a direct deposit. Additionally, you can invest in the market within minutes using your Wealthfront Cash account. Put the two together and you give yourself the ability to invest more than 100 days more in the market. The account also allows you to auto-pay bills and use apps like Venmo and PayPal to send money to friends or family. Account-holders also get a debit card to make purchases and get cash from ATMs. And you can use the account to organize your cash into savings buckets – like an emergency fund, down payment on a house, or other large purchase – and use Wealthfront’s Self-Driving Money offering to automate your savings into those buckets.
If you have cash that’s getting rusty in a traditional bank account and you want to earn more, the Wealthfront Cash Accountis a great place to keep it.
Read more about the cash account in our Wealthfront Cash Account full review.
Wealthfront Portfolio Line of Credit
This feature is available if you have at least $25,000 in your Wealthfront account. It allows you to borrow up to 30% of your account value, and currently charges interest rates between 3.15% and 4.40% APR depending on account size. You can make repayments on your own timetable, since you’re essentially borrowing from yourself. And since the credit line is secured by your account, you don’t need to credit qualify to access it.
Wealthfront Free Financial Planning
This is Wealthfront’s entry into financial planning. But like everything else with Wealthfront, this is an automated service. There are no in-person meetings or phone calls with a certified financial planner. Instead, technology is used to help you explore your financial goals, and to provide guidance to help you reach them. And since the service is technology-based, there is no fee for using it.
The service can be used to help you plan for homeownership, college, early retirement, or even to help you plan to take some time off to travel, like an entire year!
Simply choose your financial objective, enter your financial information, and Wealthfront will direct you on how to plan and prepare.
Self-Driving Money
One of the biggest and largely unrecognized obstacles for most investors is something known as cash drag. That’s when you have too much of your portfolio sitting in cash, which may earn interest, but it doesn’t provide the investment returns you can get in a diversified investment portfolio.
Wealthfront has addressed the cash drag dilemma with their newly released Self-Driving Money features. It’s a free service offered by the robo-advisor that essentially automates your savings strategy. It does this by automatically moving excess cash to help meet your goals, including into investment accounts where it will earn higher returns. And in the process, it eliminates the need to make manual cash transfers, and the judgment needed to decide exactly when to make that happen.
Our vision of Self-Driving Money is going to be a complete game-changer for people’s finances, said Chris Hutchins, Head of Financial Automation at Wealthfront. We want to completely remove the burden of managing your money so you can focus on your career, your family or whatever is most important to you.
You can take advantage of Self-Driving Money from the Wealthfront Cash Account. You’ll set a maximum balance for the connected account, which should be an amount that’s more than you expect to spend or withdraw on a monthly basis.
How It Works
When Wealthfront determines you’re over your maximum balance by at least $100 it will schedule an automatic transfer of the excess cash based on your goals. For example, you can tell Wealthfront you want to save $10,000 in an emergency fund, then max out your Roth IRA, then put the rest toward saving for a down payment on a house. Once you set the strategy, Wealthfront will automate the rest.
And before it happens, you’ll receive an email alert, then always have 24 hours to cancel the transfer if you need to cover unexpected expenses. You’ll also be able to turn on and off your Self-Driving Money plan at any time.
It’s usually possible to set up automated transfers from external accounts into most investment accounts. But what sets Wealthfront apart is the fact that it will make those transfers automatically. They will make sure you always have enough cash to pay your bills, then automatically transfer any excess into your savings buckets or investment accounts to improve the return on your money.
The strategy is designed to optimize your money across spending, savings, and investments, and to make it all flow with no effort on your part. You can simply have your paycheck direct deposited into your external checking account or Wealthfront Cash Account, cover your expected monthly spending, then have excess funds automatically transferred into the Wealthfront account of your choice.
By delivering on its Self-Driving Money vision, Wealthfront is taking the robo-advisor concept to a whole new level. Not only do you not need to concern yourself with managing your investments, but now even funding those investments will happen automatically. The result will be near complete freedom from the financial stresses that plague so many individuals.
Wealthfront Fees
Wealthfront has a single fee structure of just 0.25% per year for their advisory fee. That means you can have a $100,000 portfolio managed for just $250, or only a little bit more than $20 per month.
The one exception is the Wealthfront Risk Parity Fund, which has a total fee of 0.50% per year.
How to Sign Up with Wealthfront
To open an account with Wealthfront, you’ll need to be at least 18 years old, and a U.S. citizen.
You’ll need to provide the following information:
Your name
Address
Email address
Social Security number
Date of birth
Citizenship/residency status
Employment status
As is the case with all investment accounts, you’ll also be required to supply documentation verifying your identity. This is usually accomplished by supplying a driver’s license or other state-issued identification.
As mentioned earlier, you complete a questionnaire that will be used to determine your investment goals, time horizon, and risk tolerance. Your portfolio will be based on your answers to that questionnaire, and will be presented to you upon completion of the questionnaire.
For funding, you can use ACH transfers from a linked bank account. You will also have the option to schedule recurring deposits, on a weekly, biweekly, or monthly basis. The platform can even enable you to set up dollar-cost averaging deposits.
If you already have a brokerage account with another company, Wealthfront makes it easy to transfer your funds to your new account. If you’re invested in ETFs that Wealthfront supports, Wealthfront will assist with an in-kind transfer.
That means that you won’t have to sell your shares before transferring funds, which lets you avoid capital gains taxes that would be triggered by a sale.
Wealthfront Alternatives
Wealthfront’s closest competitor, and the robo-advisor that offers the most comparable services, is Betterment. They also have an annual advisory fee of 0.25%, but require no minimum initial investment. That could make it the perfect robo-advisor for someone with no money, who plans to fund their account with monthly deposits. Read the full Betterment review here.
Related: Wealthfront vs. Betterment
Another alternative is M1. Also a robo-advisor, M1 enables you to invest your money in what they call “pies”. These are miniature investment portfolios comprised of both stocks and ETFs. You can invest in existing pies, or create and populate pies of your own design. Once you invest in one or more pies, the platform will automatically manage it going forward. What’s more, M1 is free to use. Read more about M1 here.
Related: Wealthfront vs. Vanguard
Read More: The Best Robo Advisors – Find out which one matches your investment needs.
Wealthfront Pros and Cons
Investment options: Wealthfront offers more investment options than just about any other robo-advisor, particularly for investors with at least $100,000.
Reasonably priced: The annual fee of 0.25% is extremely reasonable, especially when you consider the degree of sophistication offered by Wealthfront’s investment methodology.
Tax-loss harvesting: This is available on all accounts, and Wealthfront is probably better at this investment strategy than any other robo-advisor.
Portfolio credit line: Gives you the ability to borrow against your portfolio with ease, and represents a form of margin investing.
Financial planning feature: The financial planning service is free to use and is available to all investors.
Limited access for smaller investors: Some of the more advanced investment portfolios and services are available only to investors with $100,000 or more to invest.
$500 minimum initial investment: It’s a minor issue, though some competitors require no funds to open an account.
FAQs
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Should You Sign Up for Wealthfront?
In a word, absolutely! Wealthfront is one of the very top robo-advisors, and you can’t go wrong with this one. Not only do they offer far more services than most other robo-advisors, but they also allow you to grow along the way. For example, as your account increases in value, you can take advantage of more sophisticated investment strategies, including advanced tax-loss harvesting.
That Wealthfront offers its portfolio line of credit and free financial planning services only makes the platform a bit more attractive, But the real benefit is the actual investment service. Wealthfront’s investment service comes extremely close to that of traditional human investment advisors, but at only a fraction of the annual cost.
A 401(k) is a retirement savings plan sponsored by your employer. It allows for pre-and post-tax dollars to be removed directly from your paycheck and deposited into investment accounts. These accounts are typically managed through a third-party investment firm, such as Vanguard or Fidelity.
These types of accounts are common methods for saving for retirement. Get seven tips below for maximizing your 401(k) savings to help cover your future lifestyle.
Does Having a 401(k) Help Your Credit Score?
Before we dive into the nitty-gritty, let’s answer a quick question: does having a 401(k) help your credit score? Quick answer: no. Because your 401(k) isn’t being reported to any of the credit bureaus and isn’t on your credit report, it won’t negatively or positively impact your credit score.
Know How Much You Can Put into Your 401(k) in 2021
One of the best ways to maximize your 401(k) savings is by maxing out your annual deductions if you can. You can invest up to $19,500 in your 401(k) in 2021, plus an additional “catch-up” contribution of up to $6,500 if you’re age 50 or older. If you wish to invest more than this amount, you’ll have to consider other savings and post-tax options such as an IRA, mutual funds, CDs or other investment vehicles.
You’ll also want to understand what you can afford to put into your 401(k). Don’t invest in retirement at the expense of missing payments on your bills today, for example. That can hurt your credit and make it difficult to access financial tools in the future.
Maximize Employer Match
Many employers offer to match funds to encourage their employees to save for retirement. These employers offer up to a certain percentage of your salary as a match.
For example, you might put 10% of your paycheck into your 401(k) and your employer might offer matching funds up to 3%. That means you’ll receive the full 3% from your employer as an investment into your 401(k). However, if you’re only contributing 2% of your salary, your employer will match only that 2%. That’s why it’s important to know what your employer’s matching amount is so you can take full advantage of these additional retirement funds.
Know When You’re Vested
Vested means you own the plan or contributions to it. You’re immediately 100% vested in the contributions you make yourself. But it can take up to six years to become 100% vested in the contributions your employer makes.
When you become vested depends on the type of vesting your employer uses. With Graded Vesting, for example, you’re 20% more vested for each year of service you complete after the first. If you leave the company after three years, you’re only 40% vested. That means you only get to keep 40% of the employer’s contributions to your 401(k).
Knowing when you become fully vested can help you plan career moves to protect your retirement. If you only have one year to go, for example, you might wait to make a move depending on how much employer contribution you stand to gain.
Understand the Tax Advantages
The money you contribute to your 401(k) up to the IRS allowed amount each year is pre-tax. That means it’s taken out of your paycheck before taxes are calculated and withheld. Since taxes are only calculated on the lower amount, you pay fewer taxes than you would if you weren’t contributing to your 401(k).
Yes, you’ll eventually pay taxes on the money in your 401(k) when you withdraw it as income during retirement. But with the tax savings today, you can work toward even greater financial stability in the future by paying off debt or making other positive financial decisions with the money you might otherwise have paid in taxes.
Don’t Borrow or Withdraw the Money Early
It’s easy to see a 401(k) savings as a savings account. But that’s far from the truth. When you withdraw from your 401(k) early, you may pay a 10% penalty tax on top of any other taxes owed on the withdrawal.
In some cases, you can borrow from the plan via a loan that you pay back with interest. However, that means the money isn’t in your 401(k) investment account earning interest—usually at a higher rate than you’re paying back. So, even borrowing the money can negatively impact your future retirement savings.
Instead of relying on your 401(k) as an emergency savings account, consider budgeting to build an emergency savings instead. That way, you don’t have to dip into your retirement account if something comes up.
Plan Rollovers Carefully
Since 401(k) accounts are employer-sponsored, you can’t typically keep them as-is when you change employers. But you can plan a rollover that allows you to maintain your retirement funds and tax-deferred savings status.
If you’re moving to a new employment opportunity immediately, you might consider rolling an old 401(k) into one offered by your new employer. If not, you may be able to roll your savings into an IRA. Talk to both HR departments involved or a financial analyst about your options.
Have a 401(k) Investment Strategy
Don’t just set and forget your 401(k). Educate yourself about the markets so you can choose a strategy that’s right for you or work with a retirement planning analyst. It’s a good idea to know when you should switch from risky investments to more stable ones, for example. Risky investments when you’re younger may be okay because you have time to recover funds, but as you approach retirement, you may want to play it safe with what you have.
Having a strategy can help you weather issues and market forces, too. For example, the COVID-19 pandemic caused a lot of upheaval in markets. That did impact people’s 401(k) investments, and some people panicked with actions such as early withdrawals. Having a 401(k) strategy can help you hang on through market upheaval by understanding the big picture of your investment goals.
It’s Never Too Early to Start
There’s never a bad time to start learning more about and saving for retirement. In fact, if you have kids, you may want to start teaching them about retirement investing so they can get a head start on the process.
Whether you’re starting early or not, understanding what you need for retirement and how to maximize your savings now is a great place to begin.
The series on Roth Individual Retirement Arrangements (Roth IRAs) has covered a number of topics — what they are, how (and where) to open one, and which investments are best. Now, in the final part, we turn to some of your questions. Remember: I am not a financial adviser. I’m just a regular guy trying to gather information to help you. If you need more specific answers, please consult a CPA or an investment professional.
All of the questions below were submitted by Get Rich Slowly readers via comment or email. If your question isn’t here, please drop us a line so we can research an answer and add it to the list. If you are new to Roth IRAs, this article is not the place to begin. Start here, instead.
Types of Accounts and How Much You Can Contribute
Which is better: Investing in a Roth IRA with after-tax dollars or investing in a 401(k) with pre-tax dollars?
Also, does it make a difference if there is an employer match?
And if I already have a 401(k) through work, then why would I want to add to a Roth IRA?
There are a lot of variables here, so the answer for your situation may be different. But the traditional answer to this question is to…
Invest in the Following Order:
If your job offers a 401(k), contribute to that each year until you’ve reached the limit of the employer match. Never turn down free money!
If you still have money to invest, contribute to your Roth IRA.
If you still have money to invest, then max out your 401(k).
Once you’ve contributed all you can to these investments, then invest however you see fit in regular, taxable accounts.
Some people like to have all their accounts in one place. If you’re this sort of person, you may benefit from simply putting all your money into a 401(k) and not worrying about a Roth IRA.
However, there is another wrinkle to consider: When debating whether to invest in a 401(k) versus a Roth IRA, why not check with your employer to see if they offer a Roth 401(k) which allows you to invest with after-tax dollars (and withdraw tax-free in retirement)?
Also note that you can actually invest in both a 401(k) and a Roth IRA as long as you meet the requirements for both programs.
Is It Possible to Roll a 401(k) Into a Roth IRA?
It is possible, but you have to be careful. It is not a one-step process. Also, it’s difficult to do with an active 401(k) account. A mistake along the way could cost you a lot of money, so it’s a good idea to consult a financial adviser for help.
Here’s a discussion of the subject in the forum.
Can I have more than one Roth IRA? For example, can I have one at USAA and another at Vanguard?
To understand the answer, let’s step back and look at what an IRA is exactly: The “A” in IRA does not stand for “account.” If you look on the IRS website, you will see that the official definition of “IRA” is “Individual Retirement Arrangement.”
Every taxpayer can have only one Roth arrangement, but you can have multiple accounts as part of that arrangement. You can have as many Roth IRA accounts as you’d like.
Contribution Limits for Roth IRAs (and Traditional IRAs)
Contribution limits for 2015 and 2016:
Under 50 years of age: $5,500
Age 50 and over: $6,500
Note that your contribution limit applies to all of your IRA accounts (Roth and traditional) collectively; they don’t each get a $5,500 limit. In other words, you can contribute $100 each to 40 different Roth IRA accounts, but not $1,000 to each of them.
Who Can Invest and are There Limitations?
Can legal U.S. residents who are not citizens open an IRA?
Is it a good idea?
What if I don’t plan to be in the U.S. at retirement age?
Anyone with earned income in the U.S. can contribute to a Roth IRA — citizenship is not required. However, for greater flexibility, you may want to consider a traditional IRA or other investment accounts, depending on your goals.
Be sure to check with a tax professional to see which solution best fits your exact situation.
How does the IRS know that you contributed to a Roth IRA?
How does it know if you contributed more than you were allowed?
At the end of the year, the investment company submits Form 5498 to the IRS, which reports the amount that you invested. For example, it might show that, in 2015, you invested $5,000 in a Roth IRA. The IRS computers then match this form electronically to your tax return to check for discrepancies. If you are over the income limit, your return will be flagged.
What happens if I contribute too much to a Roth IRA?
If you contribute more than allowed, you are subject to a 6 percent excess-contribution penalty. However, you have until the annual contribution deadline (generally April 15th) to withdraw any overage from the account before the penalty is assessed.
What options are there if I earn too much to contribute to a Roth IRA?
Your Contribution May Be Affected by Your Modified AGI
These tables show whether your contribution to a Roth IRA is affected by the amount of your modified AGI as computed for Roth IRA purposes. They show how to determine the amount of Roth IRA contributions that you can make for …
If you make too much to contribute to a Roth IRA, be sure you’re maxing out your 401(k), if you have one. You can also contribute to a traditional IRA.
Both of these are excellent options. But note that, if you have a 401(k) at work, your contributions to a traditional IRA may not be tax deductible. Another option for high-income individuals to consider is to contribute to an annuity.
Here are two more forum discussions about Backdoor Roth and 401(k) rollover strategies and What to do when Roth IRA isn’t an option.
My wife is a stay-at-home mom and doesn’t have any earned income. Does this mean she cannot have a Roth IRA?
To every rule, there is an exception. If you are married and filing a joint return, then both spouses can max out IRAs from a single income (so long as the other Roth IRA requirements are met).
I’m self-employed and I make more than the maximum allowable for a Roth IRA. Does a SEP-IRA make sense?
A SEP-IRA may make sense, but that will depend on your individual circumstances. Basically, self-employed people can contribute roughly 20 percent of their first $200,000 of pre-tax earnings to a SEP-IRA. However, they must contribute the same percentage for all employees. If you are the only employee, or if you don’t mind giving all employees the same retirement benefits, then this may be a good choice. This is another case in which you should consult a financial adviser.
Types of Roth IRA Investments
I want to open a Roth IRA, but I’m confused by the mutual funds offered by different companies.
For example, ING Direct (now Capital One 360) offers six funds, and another bank offers only five. What’s the difference?
Which should I choose?
Only you can answer that question. Here’s how I would approach this problem: I would first locate the investment I want to purchase. Is it an individual stock? Is it real estate? Or is it, as I encourage, an index fund?
Once you’ve decided on an investment, then find a company that will let you buy the investment from within a Roth IRA at the lowest cost. This shouldn’t take too much effort. If, like me, you decide you like Vanguard’s mutual funds, then open an account directly with Vanguard.
Can I really use my Roth IRA to buy a house?
Sort of. There’s an animal called a self-directed IRA which allows you to invest in real estate. However, you cannot invest in anything directly related to you, like your company or your primary residence. This is definitely a topic you should take up with a tax professional if you have a strong interest in doing something like this.
In many cases, complex Roth IRA questions are best answered by a qualified financial professional. Each person’s situation is different. It is difficult to give one-size-fits-all advice in the context of this blog. Use the National Association of Personal Financial Advisors to find an independent, fee-only adviser.
I opened a Roth IRA at a local bank, but I noticed that I’m only getting a 1.98% return. This seems unusually low. Should I withdraw my money and move it to Vanguard, Fidelity, or T. Rowe Price?
Your money is probably in a savings account or certificate of deposit. Your bank may offer additional financial services — check with them to see where else you can put the money. Barring that, yes, absolutely move the money to a different location. You may have to pay a transfer fee, but it’s worth it.
As Mandy writes in the forums, “Traditionally, banks are one of the worst places to invest because they typically offer high-load/high-fee or very conservative investments and charge higher service fees than most other brokerages. Banks are for banking, not investing.”
(See Which investments are best for a Roth IRA? for ideas on where to put the money.)
Withdrawing From a Roth IRA
Can I really withdraw money from my Roth IRA without penalty?
That depends on what you would consider a penalty. Here is a direct quote from the IRS website:
“You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you’re under age 59 1/2. The additional tax is 25% if you take a distribution from your SIMPLE-IRA in the first 2 years you participate in the SIMPLE IRA plan. There is no exception to the 10% additional tax specifically for hardships. See chart of exceptions to the 10% additional tax.”