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Ultimate Guide to Maximizing Your 401(k)

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You’re probably familiar with the basics of a 401(k).

You know that it’s a retirement account and that it’s offered by your employer. You know that you can contribute a percentage of your salary and that you get tax breaks on those contributions. And you know that your employer may offer some type of matching contribution.

But beyond the basics, you may have some confusion about exactly how your 401(k) works and what you should be doing to maximize its benefits.

That’s what this guide is going to show you. We’ll tell you everything you need to know in order to maximize your 401(k) contributions.

The 4 Types of 401(k) Contributions You Need to Understand

When it comes to maximizing your 401(k), nothing you do will be more important than maximizing your contributions.

Because while most investment advice focuses on how to build the perfect portfolio, the truth is that your savings rate is much more important than the investments you choose. Especially when you’re just starting out, the simple act of saving more money is far and away the most effective way to accelerate your path toward financial independence.

There are four different ways to contribute to your 401(k), and understanding how each one works will allow you to combine them in the most efficient way possible, adding more money to your 401(k) and getting you that much closer to retirement.

1. Employee Contributions

Employee contributions are the only type of 401(k) contribution that you have full control over and are likely to be the biggest source of your 401(k) funds.

Employee contributions are the contributions that you personally make to your 401(k). They’re typically set up as a percentage of your salary and are deducted directly from your paycheck.

For example, let’s say that you are paid $3,000 every two weeks. If you decide to contribute 5% of your salary to your 401(k), then $150 will be taken out of each paycheck and deposited directly into your 401(k).

There are two different types of employee contributions you can make to your 401(k), each with a different set of tax benefits:

  1. Traditional contributions – Traditional contributions are tax-deductible in the year you make the contribution, grow tax-free while inside the 401(k), and are taxed as ordinary income when you withdraw the money in retirement. This is just like a traditional IRA. All 401(k)s allow you to make traditional contributions, and in most cases your contributions will default to traditional unless you choose otherwise.
  2. Roth contributions – Roth contributions are NOT tax-deductible in the year you make the contribution, but they grow tax-free while inside the 401(k) and the money is tax-free when you withdraw it in retirement. This is just like a Roth IRA. Not all 401(k)s allow you to make Roth contributions.

For more on whether you should make traditional or Roth contributions, you can refer to the following guide that’s specific to IRAs but largely applies to 401(k)s as well: Guide to Choosing the Right IRA: Traditional or Roth?

Maximum personal contributions

The IRS sets limits on how much money you can personally contribute to your 401(k) in a given year. For 2017, employee contributions are capped at $18,000, or $24,000 if you’re age 50 or older. In subsequent sections we’ll talk about how much you should be contributing in order to maximize these contributions.

2. Employer Matching Contributions

Many employers match your contributions up to a certain point, meaning that they contribute additional money to your 401(k) each time you make a contribution.

Employer matching contributions are only somewhat in your control. You can’t control whether your employer offers a match or the type of match they offer, but you can control how effectively you take advantage of the match they do offer.

Taking full advantage of your employer match is one of the most important parts of maximizing your 401(k). Skip ahead to this section to learn more on how to maximize your employer match.

3. Employer Non-Matching Contributions

Non-matching 401(k) contributions are contributions your employer makes to your 401(k) regardless of how much you contribute. Some companies offer this type of contribution in addition to, or in lieu of, regular matching contributions.

For example, your employer might contribute 5% of your salary to your 401(k) no matter what. Or they might make a variable contribution based on the company’s annual profits.

It’s important to note that these contributions are not within your control. Your employer either makes them or not, no matter what you do.

However, they can certainly affect how much you need to save for retirement, since more money from your employer may mean that you don’t personally have to save as much. Or they could be viewed as additional free savings that help you reach financial independence even sooner.

4. Non-Roth After-Tax Contributions

This last type of 401(k) contribution is rare. Many 401(k) plans don’t even allow this type of contribution, and even when they do, these contributions are rarely utilized.

The big catch is again that most 401(k) plans don’t allow these contributions. You can refer to your 401(k)’s summary plan description to see if it does.

And even if they are allowed, it typically only makes sense to take advantage of them if you’re already maxing out all of the other retirement accounts available to you.

But if you are maxing out those other accounts, you want to save more, and your 401(k) allows these contributions, they can be a powerful way to get even more out of your 401(k).

Here’s how they work:

Non-Roth after-tax 401(k) contributions are sort of a hybrid between Roth and traditional contributions. They are not tax-deductible, like Roth contributions, which means they are taxed first and then the remaining money is what is contributed to your account. The money grows tax-free while inside the 401(k), but the earnings are taxed as ordinary income when they are withdrawn. The contributions themselves are not taxed again.

A quick example to illustrate how the taxation works:

  • You make $10,000 of non-Roth after-tax contributions to your 401(k). You are not allowed to deduct these contributions for tax purposes.
  • Over the years, that $10,000 grows to $15,000 due to investment performance.
  • When you withdraw this money, the $10,000 that is due to contributions is not taxed. But the $5,000 that is due to investment returns — your earnings — is taxed as ordinary income.

This hybrid taxation means that on their own non-Roth after-tax 401(k) contributions are typically not as effective as either pure traditional or Roth contributions.

But they can be uniquely valuable in two big ways:

  1. You can make non-Roth after-tax contributions IN ADDITION to the $18,000 annual limit on regular employee contributions, giving you the opportunity to save even more money. They are only subject to the $54,000 annual limit that combines all employee and employer contributions made to a 401(k)..
  2. These contributions can be rolled over into a Roth IRA, when you leave your company or even while you’re still working there. And once the money is in a Roth IRA, the entire balance, including the earnings, grows completely tax-free. This contribution rollover process has been coined the Mega Backdoor Roth IRA, and it can be an effective way for high-income earners to stash a significant amount of tax-free money for retirement.

How to Maximize Your 401(k) Employer Match

With an understanding of the types of 401(k) contributions available to you, it’s time to start maximizing them. And the very first step is making sure you’re taking full advantage of your employer match.

Simply put, your 401(k) employer match is almost always the best investment return available to you. Because with every dollar you contribute up to the full match, you typically get an immediate 25%-100% return.

You won’t find that kind of deal almost anywhere else.

Here’s everything you need to know about understanding how your employer match works and how to take full advantage of it.

How a 401(k) Employer Match Works

While every 401(k) matching program is different, and you’ll learn how to find the details of your program below, a fairly typical employer match looks like this:

  • Your employer matches 100% of your contribution up to 3% of your salary.
  • Your employer also matches 50% of your contribution above 3% of your salary, up to 5% of your salary.
  • Your employer does not match contributions above 5% of your salary.

To see how this works with real numbers, let’s say that you make $3,000 per paycheck and that you contribute 10% of your salary to your 401(k). That means that $300 of your own money is deposited into your 401(k) as an employee contribution every time you receive a paycheck, and your employer matching contribution breaks down like this:

  1. The first 3% of your contribution, or $90 per paycheck, is matched at 100%, meaning that your employer contributes an additional $90 on top of your contribution.
  2. The next 2% of your contribution, or $60 per paycheck, is matched at 50%, meaning that your employer contributes an additional $30 on top of your contribution.
  3. The next 5% of your contribution is not matched.

All told, in this example, your employer contributes an extra 4% of your salary to your 401(k) as long as you contribute at least 5% of your salary. That’s an immediate 80% return on investment.

That’s why it’s so important to take full advantage of your 401(k). There’s really no other investment that provides such an easy, immediate, and high return.

How to Find Your 401(k) Employer Matching Program

On a personal level, taking full advantage of your 401(k) employer match is simply a matter of contributing at least the maximum percent of salary that your employer is willing to match. In the example above that would be 5%, but the actual amount varies from plan to plan.

So your job is to find out exactly how your 401(k) employer matching program works, and the good news is that it shouldn’t be too hard.

There are two main pieces of information you’re looking for:

  1. The maximum contribution percentage your employer will match – This is the amount of money you’d need to contribute in order to get the full match. For example, your employer might match your contribution up to 5% of your salary as in the example above, or it could be 3%, 12%, or any other percentage. Whatever this maximum percentage is, you’ll want to do what you can to contribute at least that amount so that you get the full match.
  2. The matching percentage – Your employer might match 100% of your contribution, or they may only match 50%, or 25%, or some combination of all of the above, and this has a big effect on the amount of money you actually receive. For example, two companies might both match up to 5% of your salary, but one might match 100% of that contribution, and one might only match 25% of it. Both are good deals, but one is four times as valuable.

With those two pieces of information in hand, you’ll know how much you need to contribute in order to get the full match and how much extra money you’ll be getting each time you make that contribution.

As for where to find this information, the best and most definitive source is your 401(k)’s summary plan description, which is a long document that details all the ins and outs of your plan. This is a great resource for all sorts of information about your 401(k), but you can specifically look for the word “match” to find the details on your employer matching program.

And if you have any trouble either finding the information or understanding it, you can reach out to your human resources representative for help. You should be able to find their contact information in the summary plan description.

Two Big Pitfalls to Avoid When Maximizing Your 401(k) Employer Match

Your 401(k) employer match is almost always a good deal, but there are two pitfalls to watch out for: vesting and front-loading contributions. Both of these could either diminish the value of your employer match or cause you to miss out on getting the full match.

Pitfall #1: Vesting

Clock time deadline

Employer contributions to your 401(k) plan, including matching contributions, may be subject to something called a vesting schedule.

A vesting schedule means that those employer contributions are not 100% yours right away. Instead, they become yours over time as you accumulate years of service with the company. If you leave before your employer contributions are fully vested, you will only get to take some of that money with you.

For example, a common vesting schedule gives you an additional 20% ownership over your 401(k) employer contributions for each year you stay with the company. If you leave before one year, you will not get to keep any of those employer contributions. If you leave after one year, you will get to keep 20% of the employer contributions and the earnings they’ve accumulated. After two years it will be 40%, and so on until you’ve earned the right to keep 100% of that money after five years with the company.

Three things to know about vesting:

  1. Employee contributions are never subject to a vesting schedule. Every dollar you contribute and every dollar that money earns is always 100% yours, no matter how long you stay with your company. Only employer contributions are subject to vesting schedules.
  2. Not all companies have a vesting schedule. In some cases you might be immediately 100% vested in all employer contributions.
  3. There is a single vesting clock for all employer contributions. In the example above, all employer contributions will be 100% vested once you’ve been with the company for five years, even those that were made just weeks earlier. You are not subject to a new vesting period with each individual employer contribution.

A vesting schedule can decrease the value of your employer match. A 100% match is great, but a 100% match that takes five years to get the full benefit of is not quite as great.

Still, in most cases it makes sense to take full advantage of your employer match, even if it’s subject to a vesting schedule. And the reasoning is simply that the worst-case scenario is that you leave your job before any of those employer contributions vest, in which case your 401(k) would have acted just like any other retirement account available to you, none of which offer any opportunity to get a matching contribution.

However, there are situations in which a vesting schedule might make it better to prioritize other retirement accounts before your 401(k). In some cases, your 401(k) employer contributions might be 0% vested until you’ve been with the company for three years, at which point they will become 100% vested. If you anticipate leaving your current employer within the next couple of years, and if your 401(k) is burdened with high costs, you may be better off prioritizing an IRA or other retirement account first.

You may also want to consider your vesting schedule before quitting or changing jobs. It certainly shouldn’t be the primary factor you consider, but if you’re close to having a significant portion of your 401(k) vest, it may be worth waiting just a little bit longer to make your move.

You can find all the details on your 401(k) vesting schedule in your summary plan description. And again you can reach out to your human resources representative if you have any questions.

Pitfall #2: Front-Loading Contributions

In most cases, it makes sense to put as much money into your savings and investments as soon as possible. The sooner it’s contributed, the more time it has to compound its returns and earn you even more money.

But the rules are different if you’re trying to max out your 401(k) employer match.

The reason is that most employers apply their maximum match on a per-paycheck basis. That is, if your employer only matches up to 5% of your salary, what they’re really saying is that they will only match up to 5% of each paycheck.

For a simple example, let’s say that you’re paid $18,000 twice per month. So over the course of an entire year, you make $432,000.

In theory, you could max out your annual allowed 401(k) contribution with your very first paycheck of the year. Simply contribute 100% of your salary for that one paycheck, and you’re done.

The problem is that you would only get the match on that one single paycheck. If your employer matches up to 5% of your salary, then they would match 5% of that $18,000 paycheck, or $900. The next 23 paychecks of the year wouldn’t get any match because you weren’t contributing anything. And since you were eligible to get a 5%, $900 matching contribution with each paycheck, that means you’d be missing out on $20,700.

Now, most people aren’t earning $18,000 per paycheck, so the stakes aren’t quite that high. But the principle remains the same.

In order to get the full benefit of your employer match, you need to set up your 401(k) contributions so that you’re contributing at least the full matching percentage every single paycheck. You may be able to front-load your contributions to a certain extent, but you want to make sure that you stay far enough below the annual $18,000 limit to get the full match with every paycheck.

Now, some companies will actually make an extra contribution at the end of the year to make up the difference if you contributed enough to get the full match but accidentally missed out on a few paychecks. You can find out if your company offers that benefit in your 401(k)’s summary plan description.

But in most cases you’ll need to spread your contributions out over the entire year in order to get the full benefit of your employer match.

When to Contribute More Than Is Needed for Your Employer Match

Maxing out your 401(k) employer match is a great start, but there’s almost always room to contribute more.

Using the example from above, the person with the $3,000 per-paycheck salary would max out his or her employer match with a 5% contribution. That’s $150 per paycheck. Assuming 26 paychecks per year, that individual would personally contribute $3,900 to his or her 401(k) over the course of a year with that 5% contribution.

And given that the maximum annual contribution for 2017 is $18,000 ($24,000 if you’re 50+), he or she would still be eligible to contribute an additional $14,100 per year. In fact, this individual would have to set his or her 401(k) contribution to just over 23% in order to make that full $18,000 annual contribution.

3 big questions to answer:

  1. Do you need to contribute more in order to reach your personal goals?
  2. Can you afford to contribute more right now?
  3. If the answer is yes to both #1 and #2, should you be making additional contributions to your 401(k) beyond the employer match, or should you be prioritizing other retirement accounts?

Questions #1 and #2 are beyond the scope of this guide, but you can get a sense of your required retirement savings here and here.

Question #3 is what we’ll address here. If you’ve already maxed out your employer match and you want to save more money for retirement, should you prioritize your 401(k) or other retirement accounts?

Let’s dive in.

What Other Retirement Accounts Are Available to You?

Your 401(k) is almost never the only retirement account available to you. Here are the other major options you might have.

IRA

An IRA is a retirement account that you set up on your own, outside of work. You can contribute up to $5,500 per year ($6,500 if you’re 50+), and just like with the 401(k) there are two different types:

  1. Traditional IRA – You get a tax deduction on your contributions, your money grows tax-free inside the account, and your withdrawals are taxed as ordinary income in retirement.
  2. Roth IRA – You do not get a tax deduction on your contributions, but your money grows tax-free and can be withdrawn tax-free in retirement.

You can read more about making the decision between using a Roth IRA or a traditional IRA here: Guide to Choosing the Right IRA: Traditional or Roth?

The big benefit of IRAs is that you have full control over the investment company you use, and therefore the investments you choose and the fees you pay. While some 401(k)s force you to choose between a small number of high-cost investments, IRAs give you a lot more freedom to choose better investments.

The only catch is that there are income limits that may prevent you from being allowed to contribute to an IRA or to deduct your contributions for tax purposes. If you earn more than those limits, an IRA may not be an option for you.

Health Savings Account

Health savings accounts, or HSAs, were designed to be used for medical expenses, but they can also function as a high-powered retirement account.

In fact, health savings accounts are the only investment accounts that offer a triple tax break:

  1. Your contributions are deductible.
  2. Your money grows tax-free inside the account.
  3. You can withdraw the money tax-free for qualified medical expenses.

On top of that, many HSAs allow you to invest the money, your balance rolls over year to year, and as long as you keep good records, you can actually reimburse yourself down the line for medical expenses that occurred years ago.

Put all that together with the fact that you will almost certainly have medical expenses in retirement, and HSAs are one of the most powerful retirement tools available to you.

The catch is that you have to be participating in a qualifying high-deductible health plan, which generally means a minimum annual deductible of $1,300 for individual coverage and $2,600 for family coverage.

If you’re eligible though, you can contribute up to $3,400 if you are the only individual covered by such a plan, or up to $6,750 if you have family coverage.

Backdoor Roth IRA

If you’re not eligible to contribute to an IRA directly, you might want to consider something called a Backdoor Roth IRA.

The Backdoor Roth IRA takes advantage of two rules that, when combined, can allow you to contribute to a Roth IRA even if you make too much for a regular contribution:

  1. You are always allowed to make non-deductible traditional IRA contributions, up to the annual $5,500 limit, no matter how much you make.
  2. You are also allowed to convert money from a traditional IRA to a Roth IRA at any time, no matter how much you make.

When you put those together, high-earners could make non-deductible contributions to a traditional IRA, and shortly after convert that money to a Roth IRA. From that point forward the money will grow completely tax-free.

There are some potential pitfalls, and you can review all the details here. But if you are otherwise ineligible to make IRA contributions, this is a good option to have in your back pocket.

Taxable Investment Account

While dedicated retirement accounts offer the biggest tax breaks, there are plenty of tax-efficient ways to invest within a regular taxable investment account as well.

These accounts can be especially helpful for nearer term goals, since your money isn’t locked away until retirement age, or for money you’d like to invest after maxing out your dedicated retirement accounts.

How to Decide Between Additional 401(K) Contributions and Other Retirement Accounts

With those options in hand, how do you decide whether to make additional 401(k) contributions, beyond the amount needed to max out the employer match, or to contribute that money to other accounts?

There are a few big factors to consider:

  • Eligibility – If you’re not eligible to contribute to an IRA or HSA, a 401(k) might be your best option by default.
  • Costs – Cost is the single best predictor of future investment returns, with lower cost investments leading to higher returns. You’ll want to prioritize accounts that allow you to minimize the fees you pay.
  • Investment options – You should prioritize accounts that allow you to implement your preferred asset allocation, again with good, low-cost funds.
  • Convenience – All else being equal, having fewer accounts spread across fewer companies will make your life easier.

With those factors in mind, here’s a reasonable guide for making the decision:

  1. Max out your employer match before contributing to other accounts.
  2. If your 401(k) offers low fees and investments that fit your desired portfolio, you can keep things simple by prioritizing additional contributions there first. This allows you to work with one account, at least for a little while, instead of several.
  3. If your 401(k) is high-cost, or if you’ve already maxed out your 401(k), a health savings account may be the next best place to look. If you can pay for your medical expenses with other money, allowing this account to stay invested and grow for the long term, that triple tax break is hard to beat.
  4. An IRA is likely your next best option. You can review this guide for a full breakdown of the traditional versus Roth debate.
  5. If you’re not eligible for a direct IRA contribution, you should consider a Backdoor Roth IRA.
  6. If you maxed out your other retirement accounts because your 401(k) is high-cost, now is probably the time to go back. While there are some circumstances in which incredibly high fees might make a taxable investment account a better deal, in most cases the tax breaks offered by a 401(k) will outweigh any difference in cost.
  7. Once those retirement accounts are maxed out, you can invest additional money in a regular taxable investment account.

The Bottom Line: Maximize Your 401(k)

A 401(k) is a powerful tool if you know how to use it. The tax breaks make it easier to save more and earn more than in a regular investment account, and the potential for an employer match is unlike any opportunity offered by any other retirement account.

The key is in understanding your 401(k)’s specific opportunities and how to take maximum advantage of them. If you can do that, you may find yourself a lot closer to financial independence than you thought.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Investing

Betterment Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Robo-advisor Betterment uses exchange-traded funds (ETFs) and a high degree of automation to manage your portfolio. In addition, it’s possible to speak with financial professionals to receive more tailored advice on retirement and other financial goals.

Investors most likely to benefit from Betterment include beginning investors hoping for a low barrier to entry, as well as intermediate investors who are interested in keeping a portion of their portfolio in set-it-and-forget-it accounts. Investors interested in trading individual stocks or taking a more hands-on approach aren’t likely to benefit as much from Betterment.

Betterment
Visit BettermentSecuredon Betterment’s secure site
The bottom line: Betterment is great for investors looking to get started with minimum fuss — and who aren’t interested in active trading.

  • Easy to get started
  • Set up different investing goals
  • Benefit from tax optimization

Who should consider Betterment

Betterment is for investors who would like an automated approach to investing. Anyone can benefit from Betterment, but it’s especially helpful for beginner investors hoping to start growing their wealth.

Because of the low barrier to entry — there are no account minimums and you can get started with a minimum deposit of $10 — it’s possible for almost anyone to begin investing.

It’s also a great resource for intermediate investors looking to accomplish different goals with “buckets” of money. With Betterment, it’s possible to set varying levels of risk for different goals, with different asset allocations based on when you’re likely to need the money.

Finally, intermediate and advanced traders can use Betterment to build a long-term retirement portfolio, although there is no active trading. Betterment offers a place for assets to grow over longer periods at a pace that is likely to track the market as a whole.

Consider your goals and what you hope to accomplish with your investment portfolio. While Betterment can potentially be a good choice for anyone who keeps a portion of their portfolio in long-term assets, it’s not ideal for those who prefer to actively manage their portfolios or engage in active trading.

Betterment fees and features

Amount minimum to open account
  • $0
Management fees
  • 0.25% for Digital offering (no minimum account balance)
  • 0.40% for Premium offering ($100,000 minimum account balance)
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Current promotions

Three months free for new customers who are referred by an existing Betterment account holder

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
  • Trust
Portfolio
  • 12 asset classes represented in ETF portfolio
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android
Customer supportPhone, Email

Management fees

Betterment’s pricing starts with a 0.25% management fee for the basic Digital account. This pricing is in line with other robo-advisors like Wealthfront, which also charges 0.25%.

Balances above $100,000 earn Betterment’s Premium account status, featuring unlimited access to personalized advice for a management fee of 0.40%. This isn’t out of line with other robo-advisors: Wealthsimple charges 0.40% for account balances above $100,000. Wealthfront, however, maintains the 0.25% management fee, no matter the size of your account. Once your balance reaches $2 million, your fee drops to 0.15%.

In addition to regular management fees, it’s also important to note that you’ll pay expense ratios on the ETFs Betterment selects on your behalf. Betterment’s recommended portfolios feature expense ratios of 0.07% to 0.15%. According to Betterment, this is much lower than the industry average.

Finally, there are additional fees if you want access to specialized financial planning. If you have $100,000 or more invested with Betterment, you get access to these services as part of your annual management fee. However, if your balance is lower, you pay a flat fee for financial advice ranging between $199 and $299 per advisory session.

Portfolio options and portfolio management

Betterment chooses an investment portfolio for you based on your goals and time horizon. The core portfolio includes stock and bond ETFs allocated in a way that helps you reach your goals. It’s also possible to tweak your asset allocation in your account.

In addition, Betterment offers different portfolio options based on specific goals and targets. Here are some of the additional choices available with Betterment:

  • Socially Responsible Investing (SRI): This portfolio focuses on reducing exposure to companies that have a negative social impact. The expense ratio is a little higher with these portfolios, around 0.14% to 0.22%, depending on the allocation within the portfolio.
  • BlackRock Target Income Portfolio: Aimed at retirees, this portfolio is designed to provide a regular income stream. The portfolio focuses on bond investments that offer dividends that can be used for income rather than focusing on principal and capital appreciation.
  • Goldman Sachs Smart Beta Portfolio: Rather than using basic asset allocation principles, this portfolio focuses on assets that possess four characteristics considered to drive performance — strong momentum, good value, low volatility and high quality. It’s possible to adjust this portfolio in 101 different ways.

With all portfolios, Betterment handles automatic rebalancing when your assets experience a certain amount of drift. For example, if market performance is resulting in an asset allocation that is too far outside the target for your portfolio, Betterment will sell and buy different assets to bring your portfolio back to its target.

Another way Betterment automatically manages your portfolio is by using tax optimization strategies. Different assets are assigned to your accounts based on their overall tax efficiency. Additionally, when certain assets lose value, Betterment will sell them automatically in an effort to offset capital gains in other areas. With the help of the Tax Loss Harvesting+ feature, rebalancing can occur daily.

Financial planning features

If you want a big-picture view of your finances, Betterment’s account sync feature can be helpful. With this feature, you connect some or all of your outside accounts to Betterment, which lets you view all of your financial information in one place. The app then offers personalized recommendations for managing your money.

You have the option to speak with Betterment financial professionals about planning for specific goals and life milestones. Account holders above the $100,000 balance requirement get unlimited access to personalized advice and help by phone and email as part of the management fee.

If you don’t meet this threshold, you can pay for advice packages tailored to the goals you’re working on. Here are some of the Betterment advice packages available for a flat fee:

  • Getting Started: A 45-minute phone call with a certified financial planner (CFP) who can provide step-by-step help setting up a Betterment account that helps you maximize a variety of goals. Price: $199.
  • Financial Checkup: Get a review of your investment portfolio and how it fits into your financial situation in a 60-minute call with a Certified Financial Planner. Price: $299.
  • College Planning: Aimed at families who want help getting set up for college costs and using higher education plans. It consists of a 60-minute phone call that can help you review your choices and decide what’s best for you. Price: $299.
  • Marriage Planning: Planning to tie the knot soon? Get help as you navigate goals, priorities and merging finances in a 60-minute phone call. Price: $299.
  • Retirement Planning: Set up a 60-minute holistic review of your portfolio, current situation and more that can help you make better decisions for your retirement. Price: $299.

The Betterment Advisor Network can also help you get your own dedicated financial advisor who can help you with almost any financial need. Betterment will help match you with a professional who is likely to fit your goals and priorities.

Everyday Savings Account

Betterment offers Federal Deposit Insurance Corporation (FDIC)-insured banking options. While the checking account isn’t universally available yet, it is possible to use Everyday Savings to earn up to 2.04% APY. Additionally, there are no limits on withdrawals and no minimum balance. You also don’t have to worry about paying fees on your balance. The money in your Everyday Savings account is actually held at partner banks — it’s possible to opt out of a specific partner bank, if you wish.

In addition to providing a high-yield savings option, you can also decide to use the Two-Way Sweep feature. With this feature, Betterment automatically analyzes a connected account each day and will move excess cash from your connected account and into your savings account. If you need the money back in your main account, Betterment will sweep it from your Everyday Savings without the need to take further action on your part.

Strengths of Betterment

Betterment is always adding new goals and features. Here are some of the most helpful features it currently offers:

  • Tax optimization: Betterment uses tax loss harvesting to help offset taxes on your gains. The company also uses its Tax-Coordinated Portfolio to give you the maximum tax benefit. Certain assets are assigned to your IRA, while others are kept in your taxable accounts.
  • Betterment Everyday: Betterment now offers FDIC-insured checking and savings accounts. While the checking product is still in the roll-out stages, it’s possible to earn up to 2.04% APY with Everyday Savings.
  • Set up different goals: One of Betterment’s most useful features is the ability to set up different goals. It’s possible to have a traditional IRA and a rollover IRA, as well as open a Roth IRA. It’s also possible to open taxable accounts for a variety of other goals. Set different asset mixes for each type of account and adjust what you add simply and easily.
  • Chance to talk to a human: Betterment offers customer service by phone in addition to email. However, you can also speak with a financial professional with packages starting at $199, depending on what you’re looking for. It’s also possible to be matched with an advisor if you meet the requirements for access to the Betterment Advisor Network.
  • Portfolio projection tools: Set goals with the help of Betterment’s projection tools and track your progress toward reaching your objectives. Betterment offers insight into whether you’re on track with your goals as well as graphs to help you visualize the potential of your portfolio.

Drawbacks of Betterment

While Betterment is a great choice for many investors, it’s not for everyone. There are some drawbacks, and no Betterment review would be complete without mentioning them.

  • No active trading: If you’re interested in choosing your own investments and actively trading, you won’t be able to do that with Betterment. While you can do a little more self-directed investing with a Premium account, the reality is that you’re mostly limited to choosing your prefered asset mix rather than picking individual investments.
  • Lack of 529 and education savings accounts (ESAs): There are no custodial accounts with Betterment, and you can’t set up a 529 or ESA to save for your child’s education. A similar robo-investing company that does offer a 529 is Wealthfront.

Is Betterment safe?

Anytime you invest, there is a chance you could lose money. Poor market conditions can always lead to a loss. However, Betterment’s use of modern portfolio theory in its asset allocation helps reduce your exposure to risk. Additionally, Betterment carries Securities Investor Protection Corporation (SIPC) insurance, protecting each of your Betterment accounts up to $500,000 in the event of a failure by the company. (Note that market losses aren’t covered by SIPC insurance.)

In addition to making sure an investment company is SIPC-insured, you also can use the Financial Industry Regulatory Authority’s BrokerCheck to find out about disclosures and actions, and search the Consumer Financial Protection Bureau’s Consumer Complaint Database. The Better Business Bureau is also a good source of information.

Final thoughts

Betterment is a great choice for beginner investors looking to get their feet wet and for long-term investors hoping to grow a retirement portfolio. For investors with more than $100,000, it can also be a decent place to keep your money if you’re looking for basic advice.

However, for active traders and those who want a little more control over their assets, Betterment might not be the best choice. Instead, it could make more sense to use platforms like E-Trade or Robinhood if you want to get involved with active trading. Stockpile is also a good choice for investors who want to buy individual stocks using fractional shares.

Overall, though, Betterment is a great choice for building wealth for the long term, including setting accounts for specific goals and using tools that help you see if you’re on track to meet your objectives.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Investing

Ally Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Not having enough cash to open an online brokerage account can be seen as a barrier to starting your investing journey. If that’s a concern check out Ally Invest, which doesn’t have a minimum balance requirement.

Ally Invest is a good choice even if you don’t already have another account with Ally Bank. This online broker offers a wide range of account features, as well as a robo-advisor option. Take advantage of Ally Invest’s online platform and mobile app to track your investments whenever and wherever you wish.

Ally Invest
Visit AllySecuredon Ally Invest’s secure site
The Bottom Line: Ally Invest is an affordable broker with a wide range of investments to choose from.

  • Zero commissions on buying or selling ETFs, U.S. exchange-traded stock and options.
  • There’s no minimum deposit required for a self-directed trading account and no minimum account balance requirement.
  • Ally Invest offers tons of investment options, including stocks, bonds, mutual funds, options, futures and forex.
  • Managed portfolios don’t have advisory fees, annual charges or rebalancing fees.

Who should consider Ally Invest

If you’re new to investing, Ally Invest is a great option. It doesn’t have an account minimum to start, which lets you start investing even if you only have a few extra dollars. The managed portfolio — Ally’s take on a robo-advisor — requires $100 minimum to get started. The managed portfolio include a variety of individual retirement accounts (IRAs):

  • Individual
  • Joint
  • Traditional
  • Roth
  • Rollover
  • Custodial

Ally Invest is also a solid choice if you’re trying to minimize the impact fees have on your overall investments. Ally doesn’t charge trading commissions on exchange traded funds (ETFs), options or U.S. exchange-traded stocks.

Once you’ve opened your account, Ally Invest’s online trading platform and research tools are easy to use. While you won’t find earnings transcripts, SEC filings, earnings press releases or audio calls, you can still dig into technical data using free screeners and other tools powered by Recognia.

Ally Invest fees and features

Current promotions

New Ally Invest accounts accounts receive 90 days of commission-free trades, up to $500 in value, regardless of deposit amount. Cash bonuses are available for new accounts starting at $50 for if you deposit or transfer at least $10,000.

Stock trading fees
  • $0.00 per trade
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Ease of use
Mobile appiOS, Android , Windows phone
Customer supportPhone, 24/7 live support, Chat, Email

Commissions and fees

Online brokers, including Ally Invest, have reduced trading commissions to zero on a wide range of assets. As mentioned above, Ally Invest offers commission-free trading of ETFs, U.S. exchange-traded stock and options. However, the online broker still charges some fees:

  • Bonds: $1.00 per trade
  • Mutual funds: $9.95 per trade
  • Margin accounts: Varies
  • IRA transfer fee: $50
  • IRA closure fee: $25
  • Returned checks, ACH or wires: $30
  • Paper statements: $4
  • Restricted accounts and broker-assisted trades: $20 plus commission
  • Short stock: daily charge at cost
  • ATM withdrawals: $1

Additionally, Ally Invest will reimburse you up to $150 in transfer fees you might accrue from your current brokerage firm.

Fees mentioned in the article are accurate as of the date of publishing.

Tradable asset categories

Ally Invest allows you to trade a variety of asset classes, including:

  • Stocks
  • ETFs
  • Options (equity and index)
  • Mutual funds
  • Bonds
  • Margin account
  • Forex

If you’d rather take a hands-off approach, you can look into managed portfolios, which is Ally’s version of a robo-advisor. There are four different portfolio types:

  • Core: A variety of diversified choices, including international, domestic and fixed-income assets. You can choose your risk tolerance, from conservative to aggressive.
  • Income: If you’re in retirement or close to it, this option allows you to take a conservative risk tolerance with higher dividend returns.
  • Tax optimized: If you earn a lot of money, you can make after-tax contributions to your investment account, which can lower your tax bill and maximize investments.
  • Socially responsible: This account is filled with ethical companies that practice sustainability, energy efficiency or other initiatives that are good for the environment.

While these portfolios are managed and rebalanced algorithmically by computers like other robo-advisors, Ally Invest says that live financial analysts design its portfolios.

Trading technology and experience

Ally Invest allows you to set up an investing platform with customizable features that work best for you. You can create custom watchlists to observe market data that’s relevant to your investments. This also helps you monitor particular stocks or other investments — if they drop to a favorable amount, you can jump in to buy. Other technology highlights include:

  • Profit/loss graph: If you’re interested in a particular investment, the profit/loss graph gives you the chance to see the potential of it before buying. This is helpful if you’re considering an investment but want to determine whether it’ll earn you money without actually putting money towards it.
  • Market data: When you’re looking to learn more about a company, your investment platform lets you check company quotes, charts, high and low prices, dividend dates, peer performance comparisons and other news about the company.
  • Probability calculator: Unsure about an investment’s potential performance? This lets you check the volatility of it and see if it will help you hit your investment goals.

Ally Invest has mobile apps for iOS and Android users, or you can log in to your account through your mobile browser to use the Ally Invest LIVE platform. From there, you can check your watchlist and stream quotes.

You can also check quotes, charts, earnings, company news and more when you log in to your account and click “Research.”

Strengths of Ally Invest

Ally Invest has plenty of strengths to help it stand out from the competition, including the following:

  • No minimum deposit required: Ally Invest doesn’t have a minimum initial deposit requirement, which makes it simple to get started with only a little cash. You can also earn a cash bonus for opening an Ally Invest account if you deposit or transfer just $10,000, compared with a $25,000 minimum to earn a cash bonus with E*Trade or $20,000 with Merrill Edge.
  • Powerful tools and intuitive trading platform: Ally Invest’s online site offers you powerful tools to screen investments. Its trading platform is intuitive and provides the features necessary to be an informed investor. This includes a dashboard you can customize to your preferred view, as well as real-time streaming quotes and up-to-date data.
  • Responsive online and phone customer service: Ally Invest can be contacted via phone 24/7. There’s also an online chat feature, where you can get answers within seconds from helpful customer service agents. Email support is available, as well.
  • Hundreds of ETFs. Ally Invest offers 500+ ETFs from Vanguard, GlobalX, iShares and others.

Drawbacks of Ally Invest

Ally Invest also has some downsides to consider:

  • Mutual fund transaction fees: Ally Invest charges a $9.95 transaction fee per trade for no-load mutual funds. But many competitors offer options without any transaction fees, including E*Trade, which offers more than 4,400 fee-free funds.
  • A mobile app with minimal features: While you can do the basics with Ally Invest’s mobile app, it offers far fewer features and investment tools than competitor apps such as TD Ameritrade Mobile.
  • No physical branches: Ally Invest is an online-only company. There are no physical branches, unlike competitors such as Merrill Edge or E-Trade, which has more than 30 branches spread across the country.

Is Ally Invest safe?

Ally Invest is a trusted online brokerage with more than $4.7 billion in assets under management. It’s a member of the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC), so you can rest assured that the cash in your accounts is safe. And since the company has passed its Financial Industry Regulatory Authority (FINRA) broker check, you can count on the fact that it’s in full compliance with regulations.

Since Ally Invest is online-only, it’s also important to review Ally’s data protection policies. The good news is Ally Invest promises that they use “multiple levels of security” to keep your info safe. This includes 128-bit SSL encryption for any exchange of data from your browser and Ally’s servers if your personal information is being transmitted. The downside, however, is that Ally’s privacy policy does permit Ally Invest to share your information with third parties. While common, it’s important to keep in mind.

Of course, once you invest your money, there’s always a risk of losses. Investing means you can potentially lose money. Research what you’re investing in carefully, and diversify your portfolio to minimize the risks you’re taking.

Bottom line

Thanks to the fact it has no minimum deposit requirement for its self-directed brokerage accounts, Ally Invest is a great choice if you’re looking to get started investing and you don’t have a ton of money. Commission-free investments give you a diverse offering of low-cost or no-cost options.

But the high mutual fund transaction fees are a turnoff. Along with that, not being able to meet with an advisor face-to-face could deter you from signing up. Since Ally doesn’t have physical branches, you may feel like you’re missing out without the in-person interaction.

Overall, it’s a great option for beginning and intermediate investors. The offerings might not be as detailed for expert investors, but if you’re looking to get started or enhance your experience, Ally Invest might work for you.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here