How I got stuck using Betterment.com for 8 months
TLDR; If you use a 60 day rollover to fund an IRA at Betterment, your funds are stuck there for a year and you will have to continue to make deposits to avoid higher fees.
I really liked Betterment.com. The site is well done and the concept is sound. A year ago I created a Roth IRA account at Betterment only to find out that they only accept inbound IRA transfers using a 60-day rollover through your personal checking account. After a few months, I decided that I would prefer to just stick with Vanguard since the fees are lower and I don’t need Betterment to “actively” manage my funds for a fee. The problem I encountered was that, due to the method Betterment uses for IRA funds transfer, my money was stuck. And worse still, I had to continue contributing to the account to prevent the fees from going up to a much higher amount.
For those unfamiliar, there are a couple of ways to move IRA funds between two different custodians:
The best way is to do a custodian-to-custodian transfer. In this case you authorize the destination custodian to initiate a transfer from the original custodian directly. You can do this type of transfer as many times as you want.
The second way allows you to withdraw the IRA funds into your personal checking account via EFT and then transfer them into the account at the destination custodian via EFT. There are three major caveats with this method. First, you have to transfer those exact funds from that same account, you can’t transfer the funds into one account and then transfer an equal amount out of a different checking account. Second, you have 60 days to complete the rollover or the funds are considered a distribution and all of the implications that follow. Third, and this is the kicker, you aren’t allowed to do another 60 day rollover involving those two IRA accounts for at least one full calendar year.
Betterment does not allow custodian-to-custodian transfers for inbound OR outbound transfer. So if you decide to fund your Betterment IRA using a 60 day rollover, your funds cannot be rolled back out for at least one calendar year. This is unfortunate, but to add insult to injury, their fee plan requires you to contribute at least $100 a month (if you have a balance lower than $10k) in order to get the 0.35% fee level, otherwise they take a flat $3 fee out monthly. So even if you decide you don’t want to use Betterment anymore and are okay waiting the remainder of the 1-year waiting period, you are still better of continuing to contribute.
In their FAQ they explain these details regarding an inbound transfer and even offer an exception to do a direct custodian-to-custodian transfer if you have already done a 60 day rollover in the past 12 months (because, of course, they really want your money). What they don’t tell you here is that the same does not apply for an outbound transfer.
When I contacted them via email I received the following response
Unfortunately the electronic indirect transfer method is the only method offered at this time.
I don’t believe they make any of this very clear from the get-go which bothers me. If you understand how all of this works before seeing the FAQ, you may conclude what I found out the hard way. Unfortunately this FAQ post didn’t exist when I first funded my account, and even if it had, I wasn’t yet familiar with the ins and outs of the 60 day rollover.
The only place I have found that they mention anything about your money being “stuck” is in this blog post. I didn’t see their footnote at first and went ahead and commented voicing my concern. They replied to me directly via email pointing me to the footnote below and then subsequently deleted my post.
Note that if you choose to do an indirect rollover into a Betterment IRA, but later want to withdraw that money, you would have to wait a year to avoid penalties. At the moment, Betterment supports only indirect rollovers out of its accounts, and a premature second indirect rollover would violate the IRS’s 12-month rule.