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Capital Gains Tax Rate and Rules 2021 – Mitigating Your Tax Liability

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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As an investor, the goal is to improve the performance of your portfolio and make money through capital gains. However, when you see gains from your investments, the United States government expects to get its cut in the form of taxes, known as capital gains tax. Here’s what you need to know about the capital gains tax rate and when you’re expected to pay.

Capital gains tax rates 2021

In general, capital gains (or losses) are realized when you sell an investment. Short-term capital gains are those that come from the sale of investments that you’ve held for a year or less. These gains are considered part of your income and taxed at your marginal tax rate.

Long-term capital gains, on the other hand, are realized on investments that you’ve held for more than a year. If you bought an asset a year and a day ago, you can access a favorable capital gains tax rate. Here are the federal capital gains tax rates for 2021:

2021 Long-Term Capital Gains Tax Rates for Single Filers

Long-term capital gains rateIncome

2021 Long-Term Capital Gains Tax Rates for Those Married, Filing Jointly

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2021 Long-Term Capital Gains Tax Rates for Those Married, Filing Separately

Long-term capital gains rateIncome

2021 Long-Term Capital Gains Tax Rates for Head of Household

Long-term capital gains rateIncome

As you may have noted from looking at the above tax brackets, even at the highest capital gains tax rate, it’s likely that you’ll still pay less on your investment gains than you do on your regular earned income. That’s because capital gains tax brackets are designed to reward those who invest for the longer term.

What counts as a capital gain?

A capital gain is what’s realized on an asset that increases in value. With a stock, your capital gains are realized when you sell a share for more than you bought it for. The same is true of an asset like real estate. If you sell a piece of property for more than your purchase price, the difference is your gain.

Basically, you used your money (your capital) to buy an asset. When that asset becomes worth more, and you sell it for a higher price, you receive more capital (money). If you held that asset for more than a year, you’ll see long-term versus short-term capital gains.

How to calculate capital gains taxes

Calculating your federal capital gains tax is fairly straightforward. In essence, it consists of these three steps:

  • Figure out how long you’ve held the asset: Your first step is to figure out how long you’ve had your investment. If you bought it less than a year ago, it’s going to be a short-term capital gain, and you’ll just pay taxes on it at your regular income tax rate.
  • Use the tax table to see how much you’ll owe: If you’ve had the asset for more than a year, you can use a tax table to see how much you’ll owe, based on your income.
  • Multiply your rate by your gain: If you had a gain of $3,000 and you’re in the 15% bracket for long-term capital gains taxes, you simply multiply those together and your tax payment is $450.

In addition to these simple steps, though, there are a few other things you’ll need to consider as you figure out your tax requirement:

Keep cost basis in mind

Your gain is based on the cost basis of an investment. For example, if you buy 10 shares of stock at $100 a piece, you’re paying $1,000. However, if you pay a $7 trading commission on the transaction, that’s added in, bringing your actual cost basis to $1,007.

More than a year later, let’s say you decide to sell all of your shares for $1,500. By this time, though, your broker now offers fee-free trading, so you don’t have to pay a commission. All you have to do is subtract your cost basis, $1,007, from your total sale of $1,500. The result is a gain of $493. That’s the amount you’ll be taxed on, as your capital gains tax is only levied on what you actually made on the transaction.

Use the first in, first out rule

If you’re using a robo-advisor or broker and decide to sell some assets, you might want to make sure that you’re selling your older shares first. There’s a decent chance you won’t sell everything at once. Instead, you might be trying to liquidate a few shares to meet a specific goal. The good news is that most brokers and robo-advisors will automatically sell your oldest shares first. A financial advisor can also help strategize a way to minimize these taxes. When opening an account, you might be asked if you want to use the first in, first out method when deciding which shares to sell and this can be a good plan.

At the end of the year, when sending your tax information, your broker will provide you with your cost basis and gains — and let you know whether they’re long-term versus short-term capital gains. This can help you keep track of the situation.

Remember you can offset capital gains with losses

Realize, too, that you can offset your capital gains with capital losses. If you lose money on investments, that amount can be used to reduce your gains. For example, let’s say you had a gain of $493. However, you had a different investment that you sold at a loss of $800. You can take that $800 loss and use it to offset your $493 gain. Now, instead of owing taxes on $493, you have a loss of $307 that can be deducted from your income.

When calculating your capital gains taxes, you should start by using short-term losses to offset short-term gains, and match long-term losses with long-term gains. Then, taxes are figured on any gains you have, based on whether they’re short-term or long-term.

Be aware of common exceptions for federal capital gains tax

There are some exceptions to keep in mind, depending on the asset. Two common capital gains tax items to be aware of include:

  • Collectibles: Collectibles, art and certain coins are taxed at ordinary income rates up to 28%, regardless of how long you’ve held them.
  • Primary residence: If you have a primary residence and you meet certain conditions (like living in the property for at least two of the last five years before the sale), you can exclude up to $500,000 of your gains from taxes if you’re married and $250,000 if you’re single.

5 strategies to minimize capital gains taxes

When preparing to sell investments, it’s a good idea to know how to reduce your tax bill. Here are some strategies that investors can use to minimize the capital gains tax rate.

1. Don’t sell

You don’t actually pay taxes on your capital gains until you realize them by selling the asset. So, if you can hold off selling, you can reduce your tax bill.

Consider using a strategy that allows you to invest in assets that have long-term staying power, like a strong individual stock or an index fund that reflects broader market trends. If you can invest in a way that allows you to put off selling until you’re ready to accomplish a specific goal, you can reduce the taxes you pay. This is especially true if you can hold off until you’ll be in a lower tax bracket.

2. Invest in tax-advantaged vehicles

You can shelter some of your capital gains from taxes with the help of tax-advantaged accounts. If you have a retirement account, you can sell assets in the account and buy different assets without worrying about capital gains. Later, when you withdraw money from your traditional 401(k) or IRA, you pay taxes on the withdrawals at your regular income tax rate.

If you use a tax-advantaged vehicle like a Roth account, though, you can avoid paying capital gains taxes at all. With a Roth account, you make contributions with after-tax money, but all of your gains grow tax-free. When you withdraw during retirement, you don’t pay taxes on the money.

You can also use a similar strategy with a Health Savings Account (HSA). If you qualify, you can put money into an HSA and invest it. As long as the money is used for eligible healthcare costs, you can withdraw the money tax-free and you won’t have to pay capital gains taxes.

3. Use a tax-matching strategy

When you know you’re going to have a gain that’s taxable, you can offset it by selling a losing investment. Whether you’re rebalancing or hoping to cut losses on an asset that keeps dropping in value, you can take advantage of that loss through a process called tax loss harvesting. You sell at a loss and then use that loss to offset some of your gains.

You reduce the size of your gains with this strategy, and also reduce the capital gains taxes you pay. It’s also possible to use up to $3,000 in excess losses as a deduction against your regular income and carry forward any remaining losses to another year.

4. Donate appreciated property to charity

Rather than cashing out an investment, consider donating it to charity. The charity gets a valuable asset, and you can claim a tax deduction for the value of the asset. It’s treated like a cash donation for tax deduction purposes, and you don’t end up paying taxes on the gain. Plus, you still have the cash you would have donated.

5. Strategically balance gains and losses

Rather than planning on carrying losses into the next year, or waiting until tax time to benefit, you can balance your gains and losses by selling some securities at a loss and some at a gain, based on your needs. If you want to unload a losing stock, you can do so, and instead of waiting until tax time to claim the deduction, look for a profitable stock you planned to sell anyway. Now you have the cash available, and you won’t have to pay a capital gains tax.

By paying attention to the tax impact of your investment transactions, you can make better choices and reduce the amount you pay in federal capital gains tax.


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What Is the Best Way to Invest $100k?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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The best way to invest $100k comes down to figuring out what’s optimal for your unique financial situation. While that may seem like a daunting task, you can start by considering your current financial profile and various investing and savings options.

You might consider investing your $100k in exchange-traded funds (ETFs), mutual funds, stocks, real estate or cash. And, of course, you can always consult a financial professional if you need help. We’ll walk you through how to figure it out, what to know about your investing options and what to keep in mind throughout the process of investing $100k.

What do to with $100k: 4 steps to figure it out

Step 1: Assess your current financial situation

Before you make any decision about what to do with $100k, you first need to take a step back and look at your current financial situation. Consider if there are any pressing issues you need to take care of, like tackling high-interest debt, such as credit card debt. You may also want to think about other financial priorities, such as ensuring you have some sort of emergency fund.

You may not want to put all the money toward paying down debt or starting an emergency fund, however. Consider taking the time to really think about where the money will have the most impact on your finances.

Also, understand that if you received this money due to the death of a close relative or other significant life event, you may want to wait to make any major decisions until you have worked through the emotions of such an event. A financial advisor may be able to help you work through different scenarios and figure out how to best proceed.

Step 2: Make sure you’re already making the most of your retirement accounts

If you want to determine your best way to invest $100k, first look at your retirement accounts, if you have any. Tax-advantaged retirement accounts can be more efficient in the long run, providing you a chance to grow your money in a way that comes with a tax benefit.

Review the contribution limits of your accounts, and consider the tax deduction phaseouts. With the help of tax-deductible contributions, you can reduce the immediate tax impact of your $100k windfall. For 2020, you can contribute up to $19,500 to a 401(k) and $6,000 to a traditional or Roth IRA. People who are at least 50 years old can make a catch-up contribution of $6,500 to a 401(k) or $1,000 to an IRA. If you’re self-employed, though, you might be able to contribute even more to a SEP IRA.

With a traditional 401(k) or IRA, or a SEP IRA, you contribute with after-tax money. This allows you a tax break today, even though you pay taxes later, when you withdraw the money from the account. Or you may fund a Roth 401(k) or IRA with after-tax dollars. While you won’t see a tax break today, the money you invest grows tax-free and you won’t have to pay taxes later when you take distributions.

Don’t assume that you need to max out your tax-advantaged retirement accounts if you already have a pretty good nest egg, or if you know you’ll want access to your money without worrying about early withdrawal penalties. Consulting with a tax professional can help you figure out your best way to grow your wealth while paying attention to tax consequences.

Step 3: Determine your risk tolerance and time horizon

Your risk tolerance and time horizon can affect what you decide to do with $100k. Basically, your risk tolerance is how much potential loss you might be able to sustain in your portfolio. Your time horizon, or how long you plan to need to be able to hold an investment, is connected to your risk tolerance.

For example, if you are young, and at least a couple of decades away from retirement, you’re likely to have a higher tolerance for risk. Your portfolio will have time to recover from market downturns, so you might be able to devote more of your assets to stocks, which are generally a riskier asset than bonds or other fixed-income investments like certificates of deposit (CDs).

On the other hand, if you’re within a few years of your planned retirement, you might be wary of putting too much into stocks. Instead, you can have more of the so-called safer investments in your portfolio, and fewer risk-on assets. The older you are, the less time you will have to recover from stock market downturns, so less risky assets can create a degree of stability in your portfolio.

Step 4: Decide if you’d prefer passive or active investing

Finally, when figuring out your best way to invest $100k, you need to consider your own investment strategy preferences. Because $100k is a significant amount of money, you should carefully consider how involved you want to be in the day-to-day decisions.

If you enjoy hands-on, DIY investing, you may want to choose your own stocks or funds, and take on the job of rebalancing your portfolio. You’ll have to spend time and energy researching your choices.

On the other hand, if you prefer to let others do most of the heavy lifting, you can automate with a robo-advisor, or hire a human investment advisor to manage your portfolio. That way, you can provide a general direction and goals, while either an algorithm or a human professional largely manages your investments.

Where to invest $100k

ETFs and mutual funds

Mutual funds, which represent a collection of investments that are similar, can give you a degree of instant diversity. Rather than owning one stock or bond, you could own pieces of hundreds of securities, all in one fund. You might, for example, consider an index fund that tracks a stock market benchmark like the S&P 500. This can potentially protect you to some degree when a single stock drops, as it doesn’t have as big an impact on your portfolio. At the same time, if the broad stock market drops, your index fund will drop along with it. Through mutual funds, you can invest in stocks, bonds (both domestic and international) and a variety of specific sectors, such as energy, health care and industrials.

Exchange-traded funds (ETFs) are similar, in that they can give you exposure to a wide variety of investments in a single fund. A key difference is that an ETF trades like a stock on the exchange, meaning you can trade it throughout the day, like an individual stock. Mutual funds can only be traded once a day.

Mutual funds and ETFs may be considered less risky than choosing just a few individual investments, because of their diversity and wide market exposure. They also represent different degrees of risk. For example, a stock ETF may have more risk than a bond ETF, because bonds in general are often considered less risky than stocks.

ETFs can be a good choice for those who want a somewhat hands-off approach to investing. You can focus more on asset allocation than on picking individual securities. You can invest in stocks, bonds, currencies and commodities, and different sectors. You can rebalance your allocations according to your risk tolerance and time frame as you approach retirement or other financial milestones.

Individual stocks

Individual stocks are often considered riskier than mutual funds and ETFs. When investing in individual stocks, you encounter single-stock risk. This means you could lose all of your initial capital if bad news bankrupts a company, or there is some other problem that sends the stock reeling. However, for those who like to choose their own investments or trade frequently, individual stocks can provide a potentially rewarding way to invest a portion of $100K. And you can choose several stocks in order to diversify, instead of focusing on only a few.

It’s important to note that average annual returns depend on various companies, and trying to pinpoint exactly what individual stocks will return can be difficult. You may have one small-cap stock that is extremely volatile and loses 50% in a week on bad news, while you have another that returns 300% in a year, and yet another that is less volatile and returns only a small percentage in a year. You can do your research and see how the company has performed in the past, but you must understand that when it comes to stocks or funds, past performance is no guarantee of future returns.

There are different ways to trade stocks, including buying and holding for long periods of time and day trading. Day trading is often considered far riskier than buy and hold, and many experts advise against it for everyday investors.

Additionally, you can look for dividend-paying stocks, which pay shareholders a portion of a company’s earnings, often on a quarterly basis. Some funds offer dividend payments as well. Dividend aristocrats, for example, are companies that have raised dividends consistently for decades. While nothing is a sure thing, a company that can keep increasing its dividends may be a solid choice for the long term, even if the annual returns aren’t dramatic.

Real estate

Real estate investment trusts (REITs) can provide a way to add real estate exposure to your portfolio without the need to buy properties. REITs can also provide some income, as these entities are required to pay out 90% of their taxable income annually to shareholders. Income investors disappointed with dividend yields from some stocks, or with income from bonds, can consider adding REITs to their portfolio to provide access to potential dividend income.

However, there are tax complications associated with some REITs, so you need to understand these. This may be something you choose to discuss with a financial advisor or tax professional. Additionally, there are some higher-risk REITs that could potentially offer bigger returns — but also increase your chance of loss. It’s important to carefully consider the types of REITs you choose and make sure you understand them before you invest.

For those who are interested in having a more hands-on experience with real estate, putting some money toward investment properties with tenants can offer a source of income.


There are a number of different savings products available, including savings and money market accounts and CDs. Depending on the type of account and the current interest-rate environment, you might see yields as low as 0.01% on traditional savings accounts to 2% or more on high-yield savings accounts or CDs.

CDs often require you to lock your money away for longer periods of time, and there can be penalties for withdrawing before that period is up. While they can offer higher returns than even a high-yield savings account, it’s important to note that in a low-rate environment, you might have a hard time finding yields of even 1%.

In general, savings can be good for those using a bucket strategy when they need to access cash. For example, you might keep what you need to cover expenses in the next six months to a year or more in a cash account you can access easily. That way, if you need cash quickly, you don’t need to sell investments at a loss, or pay capital gains tax on a gain in order to access it.

Savings also can be a good choice for those who need to shore up an emergency fund, or are putting aside money for a short-term goal, such as a down payment on a home. Remember that, in a low-rate environment, your cash may not earn enough interest to even keep up with inflation. However, the main goal with cash savings is not to get great returns but to have it on hand if needed. It might make sense to put the entire $100k in a high-yield savings account for six months or more while you consider your options.

 What to keep in mind before investing $100,000

  • You don’t need to invest $100k all at once: Rather than trying to pinpoint your best way to invest $100k all at once, you can consider dollar-cost averaging. With this strategy, you put your money into the stock market in increments, allowing for consistent investing that can provide you with a way to take advantage of market drops through buying shares at lower prices.However, there is research that indicates you might benefit by putting all your money into the stock market at once. Carefully consider your own risk tolerance and needs, as some people prefer to spread out the risk of a volatile market.
  • Make sure you diversify: When trying to figure out how to invest $100k, you shouldn’t put it all in one place. Consider a portfolio allocation that is likely to help you reach your goals while providing you with some stability. A mix of assets including stocks, bonds and short-term reserves, such as cash, can prevent you from being too exposed to one particular asset class.Eventually, through a careful balance of risk and protection in your portfolio, you may be able to turn that $100K into $1 million or more. But remember that you can never fully predict the performance of your portfolio, as there are many unexpected events that may shake it up at a difficult time, such as when you are close to retirement.
  • Don’t forget about fees: Pay attention to fees. Higher fees can erode your real returns. For example, if you use individual stocks and trade frequently, commissions may reduce how much you actually end up with (not to mention that you might have to pay short-term capital gains). However, you can reduce this risk by choosing one of the many platforms that offer commission-free trading. Also keep in mind that actively managed mutual funds and ETFs can charge higher fees than passive funds that simply track an index, and a human financial advisor might charge more than a robo-advisor. Consider your needs and then look for your best way to meet them in a cost-efficient manner.
  • Regularly check in on your asset allocation: You’ll want to review your asset allocation to make sure it’s on track. If you have one asset class that has gained, you can sell the excess shares and use the profits to buy into other asset classes at lower prices. Depending on your situation, you might want to rebalance your portfolio at least once a year, or when your asset allocation strays by 4% to 5%.
  • Give your money time to grow: Realize that no matter what you decide to do with $100k, you need to give your money time to grow. Any investment strategy requires a degree of patience and discipline. Don’t be swayed by short-term volatility, and instead put together a long-term strategy that can help you grow your wealth consistently.

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What Is a Robo-Advisor?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A robo-advisor is a digital investment advisor that creates a portfolio on your behalf, usually with the help of algorithms. Many robo-advisors have basic guidelines and use the principles of Modern Portfolio Theory (MPT), which asserts that asset allocation matters more than the individual investments in a portfolio when deciding how to assemble your account.

If you’re looking for help choosing the investments to build your portfolio, a robo-advisor can be a great option. We’ll take a look at robo-investing so you can decide if it’s right for you.

What is a robo-advisor and how does it work?

When signing up with a robo-advisor, you typically respond to a questionnaire that’s used to establish a general idea of your risk tolerance, investing time frame and financial goals. Once you’ve completed the questionnaire, a portfolio is constructed for you, usually from a selection of exchange-traded funds (ETFs) and similar investments. The idea is to create an asset allocation that matches the general principles of investing for those who have similar characteristics to you.

While some robo-advisors might offer some financial planning help and a small degree of customization, you probably won’t get fully tailored investment solutions. Instead, many investors are drawn to robo-advisors for their ease of use, low cost and low barrier to entry.

Many robo-advisors follow similar rules to other investment advisory firms and are registered with the U.S. Securities and Exchange Commission (SEC). They also carry SIPC insurance, protecting investors against failure by the firm.

Robo-advisor features

While not every robo-advisor offers the exact same features, here’s a sampling of what you might find.

  • Investment recommendations and portfolio management: You might receive suggestions for what percentage of your portfolio should be invested in certain asset classes. Some robo-advisors also offer performance projections so you can see how different adjustments can impact your potential returns.
  • Portfolio rebalancing: If your portfolio strays outside a desired asset allocation range, a robo-advisor might sell some shares and use the proceeds to buy others. With portfolio rebalancing, the goal is to help keep your asset allocation close to your desired makeup.
  • Tax loss harvesting: Depending on the robo-advisor, you might receive tax loss harvesting services, in which some of the holdings in your portfolio are sold in order to reduce your tax liability.
  • Financial planning tools: You might be able to access different financial planning tools, such as help planning for college or even assistance in creating a basic financial plan. However, some of these services might cost extra.
  • Impact investing: Some robo-advisors offer socially responsible investment choices or values-based. Those choices might come with higher expense ratios, but they allow you to use your money to make a positive social impact.
  • Access to a human advisor: In some cases, you can get access to a human financial advisor, whether through message, over the phone or by appointment. The amount of access you get can vary widely though, and such services usually cost extra or come with a higher annual management fee.

How much do robo-advisors cost?

Depending on the robo-advisor, you might pay an annual fee based on your account balance, or you might pay a flat monthly fee. For example, the average fee charged by robo-advisors, based on an account balance of $50,000, was 0.36% per year, or about $180. If you sign up for some robo-advisors, though, you might just pay a flat fee of $1 per month. Depending on your account size, that might be a better deal.

It’s important to note, however, that these management fees charged by robo financial advisors don’t always include the expense ratios from the ETFs they use. So that could add another layer of cost. However, ETFs, in general, have low expense ratios.

The cost of a robo-advisor vs. a traditional advisor or DIY investing

In general, one of the reasons that people consider a robo investment advisor has to do with the relatively low cost. With automated investing, there isn’t as much required of humans to manage your portfolio, so the idea is that costs are lower. On top of that, with robo investing, many of the portfolios are constructed using ETFs, which generally have low expense ratios. This also contributes to the relatively low cost.

On the other hand, a human investment advisor might charge more for their services. Many charge a percentage of your assets under management. According to a study by RIA in a Box, the total average fee for a traditional advisor is 1.17% of assets under management. This is over three times the cost of a robo-advisor.

You might be tempted to just manage your own investments to save money on management fees altogether. Some brokers have gotten rid of transaction fees for stocks and ETFs, making it possible for you to trade without paying these fees. However, you still have to pay expense ratios and other possible costs. Additionally, you might have to pay a transaction fee (in addition to fund fees) to trade mutual funds with some brokers. Most robo-advisors don’t charge transaction fees, as those are baked into the annual management fee.

Pros and cons of robo-advisors

When trying to decide if robo-advisors are worth it, you should compare the pros and cons. Here’s what you need to know.


  • Typically lower fees than with human advisors: With a robo investing, you can usually invest for a lower cost than you’d see with a human investment advisor.
  • Instant portfolio diversification: Because many robo-advisors focus on broad-based ETFs, you end up with exposure to a wide variety of investments at once. Plus, using the MPT approach gives you asset diversification based on your risk tolerance.
  • Start investing with a small amount of money: Many robo-advisors will let you open an account with no minimum balance requirement. Additionally, you might be able to invest a small amount of money, including using robo-advisors that allow you to invest pocket change. Traditional financial advisors, on the other hand, can have minimum investment requirements ranging into the hundreds of thousands of dollars.
  • Accessibility: Because you access robo-advisors online or through an app, you can manage your account at any time.


  • Harder to customize for specific needs: While it’s possible to get some customization, you might have a harder time tailoring a portfolio for specific needs. You won’t get the nuanced advice you’d get from a human investment advisor.
  • May not have access to as many services: When you work with a human advisor, you could get access to a wider variety of services, including wealth management, private banking, tax planning and other specific planning help. With a robo-advisor, the menu of services is generally much smaller.
  • Limited ability to trade individual stocks: Because robo-advisors generally construct your portfolio for you using ETFs, you aren’t usually able to trade individual stocks. If you want to day trade or buy specific shares of a company, you likely won’t have that flexibility with a robo-advisor. There are some hybrid brokers that offer robo-advising and access to individual stocks, but the stock choices are usually limited.
  • Limited human interaction: While some robo-advisors allow you to buy premium services that include human interaction, you’re largely limited when it comes to a personal touch. Many robo-advisors don’t have offices, and you might not be able to sit down face-to-face with someone. If that’s important to you, a robo-advisor might not meet your needs.

How to choose a robo-advisor

When choosing a robo-advisor, it’s important to consider your needs and financial goals Here are a few things to keep in mind.

Consider fees

In general, robo-advisor fees are based on your account size and charged as a percentage of your assets under management. There are some robo-advisors, however, that charge a flat monthly fee. If there are other services, like financial planning, you might pay an additional one-time fee for the session.

While there are some free robo-advisors, the average fee for a balance of $50,000 is 0.36%. This is much lower than the average fee of 1.17% seen with human investment advisors. Still, you’ll want to compare costs between robo-advisors to make sure you’re selecting the best option for your financial situation.

Make sure you meet the minimum investment requirement

Many robo-advisors don’t require a minimum investment. Often, you can open an account with $0 and then invest when it’s convenient. There are some robo-advisors that do have minimum balance requirements of $5,000 or more though, so it’s a good idea to check. Look for a robo-advisor whose minimum you can meet.

Also, be aware that some robo-advisors allow you to “unlock” certain premium services once your account balance reaches a certain amount. For example, with Betterment, once you have $100,000 in your account, you get access to a financial planner (although the management fee is higher). If you’re hoping to get more advanced and personalized help later, check to see if a growing balance allows you to gain access to these additional services.

Look at available account options

Depending on your situation, you might want different types of accounts. While most managed investment accounts offer individual and joint taxable accounts, you might also be looking for other types of accounts, like trusts. Alternatively, you might also want a robo-advisor Roth IRA or a SEP IRA. Some robo-advisors offer help with college savings and allow you to set up custodial accounts for your kids, too.

However, not all robo-advisors offer all possible account options. Before opening an account, review the types of accounts to make sure you’re getting what you want.

Review the investment selection and strategy

Many robo-advisors use their own investment algorithm based on the principles of MPT, which favors asset allocation over individual stock picks and holds that risk and reward are correlated. Additionally, many use different ETFs to construct portfolios. A robo ETF selection usually includes stocks, bonds and real estate investments.

Check the robo-advisor returns to see how different model portfolios perform. You can also get an idea of robo-advisor performance by looking at a prospectus from the different funds used. This will give you an idea of what to expect, even though past robo investing returns can’t predict future results.

Robo-advisor alternatives

Robo-advisor vs. index funds

An index fund allows you to own a small piece of each investment in the fund. To buy an index fund, you normally need to go through a brokerage. Depending on the brokerage, there might be a selection of index funds that don’t come with transaction fees. If you want to build your own portfolio, this can be one way to go about it. However, you still have to be aware of potential transaction fees and expense ratios.

With a robo-advisor, your portfolio is constructed for you, from a selection of ETFs the advisor favors. It’s important to note that, with ETFs, you don’t own the underlying assets. If you don’t mind a hands-off approach and don’t care if you pick your own funds, this can be a good choice.

When choosing your own index funds and managing your own investment account, you’re responsible for rebalancing and managing any tax strategy. With a robo-advisor, depending on the offered features, that can all be taken care of on your behalf.

Robo-advisor vs. financial advisor

With a robo-advisor, you can choose the general direction of your portfolio, in that it’s possible for you to adjust your asset allocation. However, you won’t be able to do a lot of serious customization, and you might not get personal attention. Portfolio decisions are largely handled by algorithms, whether it has to do with tax minimization or portfolio rebalancing.

On the other hand, a financial advisor can provide you with more tailored advice. They can look at your situation and provide guidance based on your unique circumstances. Plus, depending on the services they provide, you might get access to a wider variety of asset classes and investment choices. If you want more involvement from a financial advisor, going this route — instead of choosing a robo-advisor — may make more sense.

In the end, a robo-advisor can be a smart choice, especially for beginning investors. It can provide you with a low-cost way to start investing without the need for a lot of specialized knowledge. If you decide later that you need more help with financial planning, or if you learn enough to branch out into managing your own portfolio, you can always move your money and invest in a way that makes more sense to your changing situation.


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