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• Backdoor Roths and beyond: The four camps who can benefit from a Roth IRA conversion
  Backdoor Roths and beyond: The four camps who can benefit from a Roth IRA conversion A Roth conversion isn't for everyone, but it can unlock tax savings if you're a high earner, facing RMDs, retiring early, or in a low-income year. Key takeaways A Roth conversion means moving money from a traditional retirement account into a Roth IRA, where you pay taxes now in exchange for tax-free qualified withdrawals. It can be a smart move in several scenarios: your income exceeds the eligibility limits for IRAs, you want lower required minimum distributions in retirement, you're planning an early retirement, or you're temporarily in a low tax bracket. Done right, a conversion can lead to savings over time, but timing and tax planning matter enormously. We recommend working with a financial and/or tax specialist before converting. Households with over $100k at Betterment can kick the tires on a Roth conversion with the help of a professional. Roth IRAs and their tax-exempt perks are pretty great—so great that in some scenarios, it can make sense to convert pre-tax dollars from traditional IRAs and 401(k)s into post-tax dollars in a Roth IRA. This is what’s known as a Roth IRA conversion. You’re taking those pre-tax funds and telling Uncle Sam you’d rather pay taxes on them now in exchange for the benefit of tax-free qualified withdrawals down the road. So what scenarios are Roth conversions ideal for? Four in particular: High earners and the “backdoor” Roth conversion – The IRS blocks direct Roth IRA contributions above certain income limits, but there's a workaround. Recent retirees and unwelcome RMDs – Converting traditional retirement account funds now shrinks the mandatory withdrawals that can inflate your tax bill in retirement. Early retirees and the Roth conversion “ladder” – A little advance planning can unlock your retirement savings years before the IRS’s minimum age of 59 ½ for penalty-free withdrawals after a 5-year holding period for each conversion. People experiencing temporary income dips – Take advantage of low (or no) income tax years. High earners and the “backdoor” Roth conversion Did you know the IRS restricts access to Roth IRAs based on income? Shut the front door! Yes, if your income exceeds these limits, you can’t contribute directly to a Roth IRA. But as the saying goes, when one door closes, another door opens. A “backdoor,” more specifically. A “backdoor” Roth entails contributing after-tax dollars first to a traditional IRA, then converting those funds to a Roth IRA. It’s fairly straightforward in two scenarios: You’ve never contributed to a traditional IRA before. Betterment makes it easy to not only open both a traditional and Roth IRA, but to convert those traditional funds with only a few clicks. You’ve made only pre-tax contributions to a traditional, SEP, and/or SIMPLE IRA(s). Thanks to the IRS’s pro rata rule, you’ll need to first move those pre-tax dollars out of their respective accounts and into a traditional 401(k) or 403(b) before you can use the IRA for a backdoor. Now, things can get tricky if you have a mix of both pre- and post-tax funds in any traditional IRAs (Side note: the IRS treats any and all traditional IRAs you have as essentially the same bucket). So before going down the road of a backdoor Roth, or any Roth conversion really, we highly recommend seeking out both financial and tax guidance. In the case of the former, households with $100k at Betterment can get free guidance on a backdoor Roth via live chat. Already a customer and clear that mark? You're already in—just open a chat. Considering making the move? Our Licensed Concierge team is here to help. Recent retirees and unwelcome RMDs The IRS doesn’t let you keep pre-tax funds in your traditional IRAs and 401(k)s indefinitely. Those dollars are meant to be spent, after all. And Uncle Sam wants (or needs) that tax revenue at some point. So starting in your 70s (75 for those born after 1960, 73 for those born 1951-1959), annual required minimum distributions (RMDs) from these accounts kick in, and the withdrawals are taxed accordingly. RMDs aren’t inherently a bad thing, but if your expenses can already be covered from other sources, RMDs can needlessly raise your tax bill. You can get ahead of this and lower your future amount of RMDs by converting traditional funds to a Roth IRA, which is exempt from RMDs, before you reach RMD age. This can be especially beneficial when your income is low and you have extra space in a low tax bracket you can take advantage of. Another benefit is you’ll minimize taxes on Social Security benefits and Medicare premiums later on in retirement. Early retirees and the Roth conversion “ladder” If you want to retire early, even by just a few years, you might encounter a problem: Most of your retirement savings are tied up in tax-advantaged 401(k)s and IRAs, which slap you with a 10% penalty if you withdraw the funds before the age of 59 ½. A few key exceptions to this early withdrawal rule exist, however: Regular contributions to a Roth IRA (not the growth from those contributions) can be withdrawn any time without taxes or penalties. Once regular contributions are exhausted, Roth IRA conversions can be withdrawn penalty-free as well provided you let each conversion sit for at least five years. So with a little advance planning, early retirees can create a “ladder” of penalty-free Roth IRA funds. They convert funds each year, pay income taxes on them at that time (or not, if they play their cards right), wait five years, then withdraw each conversion scot-free. People experiencing temporary income dips Say you find yourself staring at a significantly smaller income for the year. Maybe you’re taking some time away from work, or you work on commission and had a down year. Whatever the reason, that dip in income means you’re currently in a lower tax bracket, and it may be wise to pay taxes on some of your pre-tax investments now at that lower rate compared to the higher rate when your income bounces back. Roth conversions can be powerful, but plan carefully If you find yourself in one of these scenarios, a Roth conversion could be a real opportunity for you. But the difference between a smart conversion and a costly one often comes down to timing, tax planning, and knowing the rules. Before you pull the trigger, it's worth reading up on the most common Roth conversion mistakes—and even better, talking it through with an advisor who can look at your full picture. Betterment Premium gives you access to a team of CERTIFIED FINANCIAL PLANNER® professionals who can help you figure out the right amount to convert, in the right year, for your situation.
• The hidden cost of holding too much cash
  The hidden cost of holding too much cash How to size up your actual cash needs, and find a high-potential home for the rest Key takeaways Cash is great for short-term needs, but inflation steadily eats away at its value over time. Size up those short-term needs like paying the bills and providing a safety net. Then consider investing your excess cash for the long run to make your money work harder. Cash feels safe, but that sense of safety comes at a cost: inflation steadily eats away at the value of your money over time. Take recent history as a harsh example. Since 2021, cash has lost roughly 20% of its purchasing power due to inflation. Parking your money in a high-yield cash account can help ease the blow, but interest rates ebb and flow. Savers may very well find themselves with lower yields in the near future and more cash than suits their needs. So let’s start there: exactly which needs is cash best suited for, and how much do you really need on hand? Cash Reserve offered by Betterment LLC and requires a Betterment Securities brokerage account. Betterment is not a bank. FDIC insurance provided by Program Banks, subject to certain conditions. Learn more. The average American’s calls for cash Inflation risks aside, cash has the advantage of being highly “liquid,” meaning it’s easy to access at a moment’s notice. This makes it ideal for short-term needs like paying the bills, providing a safety net, and purchasing big-ticket items. Let’s put some hypothetical numbers to these to help quantify the average American’s cash needs. Paying the bills — The average American household, based on the latest available numbers from 2024, spends roughly $6,500 a month. Providing a safety net — Most advisors (including us) recommend an emergency fund with at least three months' worth of expenses ($19,500 using the average monthly spend above). Your spending levels may differ, but for the average American, that calls for about $26,000 in cash, plus any more needed for major purchases. Saving for a home and/or car purchase, for example, will change your calculus. If you're more risk averse, then consider adding a little more buffer. Try a six-month emergency fund. If you’re a freelancer and your income fluctuates a lot, consider nine months. Beyond that, however, you're paying a premium for cash not earmarked for a specific purpose, and the cost is two-fold. Your money, as mentioned earlier, is very likely losing value each day. Not the big swings of the stock market, but a slow yet steady leak. You're missing out on the potential gains of the market. And the historical difference in yields between cash and stocks is stark, to say the least. Global stocks, as represented by the MSCI World Index, have generated nearly a 9% annual return since 1988. Even the highest-yield cash accounts come nowhere near that. So once you've identified your excess cash, where do you go from there? Take a big leap forward on your long-term goals And say hello to investing by way of a lump sum deposit. It can feel like a leap of faith. Like diving into the deep end instead of slowly wading in. And it feels that way for a good reason—all investing comes with risk. But when you have extra cash lying around, historical and simulated market data suggests that investing it all at once outperforms spreading it out, even when accounting for market volatility. Spreading out your deposits over time is called dollar cost averaging, and it’s generally a good fit for investing your regular cash flow, not lump sums you already have on hand. But savvy savers can employ both strategies—they dollar cost average their income as it comes in, and they invest excess dollars or cash windfalls in lump sums. Because in the end, both serve the same goal of building long-term wealth.
• The powerful potential of the tax swap
  The powerful potential of the tax swap Your top tax rate will likely ebb and flow over your lifetime. Tax-savvy investing can help you pay when the tide is low. Key takeaways Your tax rate often ebbs and flows over your lifetime, and the gap between your highest- and lowest-earning years represents an opportunity. Tax-deferred investing lets you swap taxes today for a potentially smaller bill in retirement, while keeping more capital compounding in the market. In low-income years, you can do the opposite: pay a lower rate up front, then enjoy tax-free qualified withdrawals down the road. Betterment automates much of the heavy lifting on both strategies. And for more personalized planning, our advisors can help you find the right moves at the right time. Most investors fixate on their returns. But there's a second stat that can quietly work against them: their tax bracket. And unlike market returns, your tax bracket is something you can actually influence. Investors accomplish this by way of tax arbitrage—a tax “swap” of sorts. The core insight is simple: your tax bracket isn't fixed. It changes over your lifetime, and in response to the choices you make. Sometimes the opportunity arises to swap a tax for a lower (and/or later) one, and these moves can make a meaningful difference in how much of your investing returns you actually keep in the long run. First, a quick tour of how taxes work The U.S. tax system is progressive, meaning income is taxed in layers. Each slice is taxed at a higher rate than the one below it, so while it’s common to hear about your tax bracket (as in, singular), your income often falls into multiple brackets (as in, plural). Tax swaps are all about maneuvering around your top tax bracket and its associated tax rate. As your income grows over time, your last few dollars earned will sometimes break into a higher bracket. And vice versa, when you earn less in a given year—say in retirement or in between jobs—you may slide down a bracket or two. These movements present an opportunity. Two common types of tax swaps Tax deferral: Reducing taxable income today, and buying time for compound interest to do its thing The first example is also the most straightforward: swap a tax today for one down the road. For many people in their peak earning years, that future point is retirement. Let’s say you're hypothetically in the 22% income tax bracket today, but expect to be in the 12% bracket in retirement. In this scenario, every dollar you defer is a dollar that gets taxed nearly half as much, although individual results will vary. Just as importantly, however, this frees up more capital that can potentially benefit from decades of compound growth. Traditional IRAs and 401(k)s are the workhorses here, letting you invest more than $30,000 of income before it gets taxed. In the case of traditional IRAs, it should be noted, those tax benefits phase out at certain income levels. Beyond capped retirement accounts, two strategies can help you maximize the benefits of deferring taxes: Tax-loss harvesting can sprinkle the same advantages on a portion of your taxable investing, with theoretically no limits—and as a side benefit, any leftover harvested losses can offset a higher tax on up to $3,000 of ordinary income each year. Asset location, also known as Tax Coordination at Betterment, can help shield more of your tax-heavy assets in tax-deferred accounts. Both features are fully-automated at Betterment and just a few of the ways it can pay to automate your investing. Filling up low brackets: Take advantage of low or no(!) tax rate years If deferring taxes is about pushing taxes into the future, the second type of tax swap is its polar opposite: pulling them forward into the present when your cash flow dips below its normal cruising altitude. Think early in your career, a gap year between jobs, or early retirement. Filling up low brackets strategically requires advance planning, which is why we recommend talking things through with both a financial and tax advisor. Broadly-speaking, you have a few strategies at your disposal: Roth IRA/401(k) contributions | Paying taxes on your investing now so future growth can be tapped tax-free via qualified withdrawals. Roth IRA conversions | Converting pre-tax traditional IRA/401(k) contributions to a Roth IRA and paying taxes now. Tax-gain harvesting | Strategically selling appreciated investments in a taxable account to realize gains without owing federal income tax, then reinvesting the proceeds. If you play your cards right here, you could pull off the most impressive tax swap of all: a 0% tax rate. That's thanks to the favorable treatment of long-term capital gains, the profits from selling investments held longer than a year. Unlike short-term gains, which are taxed as ordinary income, long-term gains have their own brackets, which are both lower and fewer in number: Tax year 2026 long-term capital gains tax rates Tax rate Single filers Married filing jointly 0% $0-$49,450 $0-$98,900 15% $49,451-$545,500 $98,901-$613,700 20% $545,501 or more $613,701 or more Source: IRS This means investors, assuming they have no other sources of income, can enjoy tens of thousands of dollars in qualified tax-free profits from their taxable investing accounts each year, and even more when factoring in the standard deduction. How Betterment makes it easy You could map all of this out yourself—figuring out your current bracket/s, projecting where you'll land in retirement, deciding which accounts to prioritize, and revisiting it all every time your life changes. It's doable. It's also a lot. Or you can let us do the lion’s share of the work. Tell us your household pre-tax income and tax filing status, and we’ll recommend whether it makes sense to lean into tax-deferred accounts. And for even more personalized guidance, there’s Betterment Premium. Our team of advisors can help you think through the timing of Roth conversions and other strategies that benefit from a human eye. We also recommend looping in a tax advisor, who can pressure-test the plan from a tax filing perspective. A savvy trade hiding in plain sight Tax swaps aren’t about gaming the system. They’re about using the tax code the way it was designed to be used—strategically, patiently, and with an eye on the long game. Most investors leave this opportunity on the table not because it's out of reach, but because it feels complicated. It doesn't have to be. Whether you're just starting to think about tax-smart investing or looking to get more intentional about your retirement strategy, Betterment can help you find and act on the opportunities that make sense for you.