Most investors focus on visible performance metrics—portfolio allocation, returns, and fees. But often, it’s the invisible wins that make a bigger long-term impact. Tax efficiency is one of those quiet forces working behind the scenes to preserve more of your gains.
At Betterment, tax optimization isn’t an annual event—it’s a daily mission. While you think about taxes once a year, we think about them every day. Here are four sophisticated and automated strategies we use to help reduce your tax burden.
1. Smart Asset Location with Tax Coordination
Every investment account has a different tax structure:
- Tax-deferred (e.g., traditional IRAs, 401(k)s): taxes paid later
- Tax-exempt (e.g., Roth IRAs): taxes paid upfront, not on withdrawal
- Taxable: taxes paid both now and later
Instead of dividing assets equally across these accounts, our Tax Coordination feature allocates them strategically. For example, high-yield bonds are placed in tax-advantaged accounts, while more tax-efficient stocks go into taxable ones.
This smart asset location strategy ensures more of your gains are shielded—especially in Roth accounts where future withdrawals are tax-free.
2. Rebalancing That Minimizes Capital Gains
Rebalancing is essential for maintaining your risk profile. But doing it wrong can trigger avoidable capital gains taxes.
Betterment’s approach uses cash flows like deposits or dividends to rebalance your portfolio first. Only when needed, we sell overweight assets—but even then, we do it in a way that reduces your tax exposure. The result? A more efficient portfolio with less tax drag.
3. TaxMin and TaxMax: Choosing Shares Wisely
When you sell or donate shares, which ones should you part with?
Most brokers default to “first in, first out” (FIFO), but that’s not always the most tax-efficient route. Betterment’s TaxMin algorithm selects the specific lots that help you avoid short-term capital gains and harvest potential losses.
When donating, we flip the script with TaxMax, choosing the shares with the highest gains—maximizing the charitable deduction while resetting your tax basis if you repurchase similar assets later.
4. Automated Tax-Loss Harvesting
When markets dip, we don’t panic—we harvest.
Tax-loss harvesting means selling an investment at a loss and replacing it with a similar asset to stay invested. The harvested loss can offset capital gains or income on your tax return, lowering your current liability.
Traditionally a strategy reserved for high-net-worth individuals, Betterment’s technology makes tax-loss harvesting accessible and automatic for all eligible clients.
In Summary: We’re Obsessed with Tax Efficiency
We can’t control the markets, but we can navigate tax rules wisely—and we do so daily. That’s why every Betterment client benefits from a deeply embedded tax strategy focused on long-term growth and minimized liabilities.
So next time you check your portfolio, ask yourself: How much of this growth will I actually keep after taxes?
If you’re with Betterment, the answer is: more than you think—because we’re working behind the scenes, every day, to keep your tax bill in check.