Investing Options for Roth IRAs From Betterment

Betterment is a financial technology (fintech) company that offers a robo-advisory platform to simplify investment, retirement, and portfolio management decisions for its users. The platform’s automated technology constructs a portfolio of low-cost, diversified exchange-traded funds (ETFs) based on users’ individual financial goals.

Betterment was founded in 2008 and launched its platform in 2010. It has more than 730,000 customers and $33 billion in assets under management (AUM).

Betterment provides a limited amount of investment management services at a discounted price. Its platform provides recommended portfolios to meet the financial goals of its users. The platform’s algorithm constructs globally diversified portfolios tailored to its users’ specific risk profiles and investment time horizons. These portfolios are composed entirely of low-cost stock and bond ETFs across 14 different asset classes.

Investors who want more flexibility and control have the option to make adjustments to the specific allocation of different asset classes within their portfolios. For example, if an investor has a very conservative portfolio with a 10% allocation to stocks and a 90% allocation to bonds, they can adjust the allocation to be more heavily weighted toward stocks if they want a more aggressive portfolio. Investors can also make more specific asset allocation adjustments, such as giving greater weight to large caps as opposed to small caps.

Investors in the United States have access to several tax-advantaged saving plans, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. This means that contributions to Roth IRAs are not tax deductible, where they are with traditional IRAs. But unlike a traditional IRA, where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax free.

Betterment Core Portfolio 70/30 Asset Allocation 

• 23.4%—Vanguard Total Stock Market ETF (VTI): Total Stock Market ETF
• 19.3%—Vanguard FTSE Developed Markets ETF (VEA): All-Cap Developed Market Stock ETF
• 11.6%—Vanguard FTSE Emerging Markets ETF (VWO): All-Cap Emerging Market Stock ETF
• 6.2%—Vanguard Value ETF (VTV): Large Cap Value Stock ETF
• 5.1%—Vanguard Mid-Cap Value ETF (VOE): Midcap Value Stock ETF
• 4.3%—Vanguard Small-Cap Value ETF (VBR): Small Cap Value Stock ETF
• 10.9%—Vanguard Total International Bond ETF (BNDX): Global Aggregate Bond ETF
• 9.8%—iShares Core U.S. Aggregate Bond ETF (AGG): U.S. Aggregate Bond ETF
• 5.5%—iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB): USD Emerging Market Bond ETF
• 3.8%—Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP): Inflation-Protected Short-Term Bond ETF

(The portfolio data above were provided by Betterment. They are accurate as of March 31, 2022.)

Betterment’s Core portfolio, with a 70/30 stock-to-bond asset allocation, is a good default starting point for most investors. The 70/30 portfolio has become somewhat of a standard for asset allocation strategies, striking a balance between growth and risk. However, other allocation rules are used in the industry.

Some financial advisors recommend following the “100 minus your age” rule. For example, if an investor is 30 years old, their portfolio would be composed of 70% stocks and 30% bonds. By the time they turn 40, they might have a 60/40 portfolio.

However, these guidelines are just general rules of thumb. They should be used only as starting points. The important thing is that investors choose an asset mix that reflects their risk tolerance as well as their investment time horizon and associated need for growth.

Betterment charges a base 0.25% annual management fee, on top of the fees charged by the ETFs in the portfolio. The fees cover portfolio rebalancing to maintain the target asset allocation. Because the Betterment fees are more than triple the base expenses of holding this portfolio of ETFs, investors can save significantly on investing costs by constructing the same or similar portfolio themselves. All of these ETFs are available from most brokers, many of which offer accounts with no management fees.

Investors can open an account at one of these firms, then select the ETFs and specific weighting of each ETF in their portfolio, to replicate one of Betterment’s recommended portfolios. However, investors will have to take on the responsibility of periodically rebalancing their own portfolio to maintain the target asset allocation.

The Bottom Line

A Roth IRA offers investors certain tax advantages. Roth IRAs are unique in that they are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. In short, funds invested in a Roth IRA can grow tax free.

After opening a Roth IRA, the types of investments chosen will depend on the individual investor’s risk tolerance and how much time and energy they have to research various investments. Betterment offers a platform that helps to simplify the process of choosing which assets to include in a Roth IRA portfolio. The platform’s algorithm will recommend a portfolio based on individual users’ risk profiles and when the user plans to retire.