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Betterment’s Smart Saver vs Traditional Bank Accounts

As detailed in my recent 2019 Review, Betterment is now promoting their Smart Saver Account as an alternative to traditional banking products.

On many levels, this is understandable. Betterment offers personalized, long-term investment portfolios comprised of widely diversified stock and bond ETFs. They have helped thousands of clients build wealth and participate in financial markets.

However, Betterment has struggled to provide a true cash management solution for existing clients who are either extremely risk-averse or who require a cash reserve for short-term goals and needs.

Enter the Smart Saver Account.

What is Betterment’s Smart Saver Account?

The Smart Saver Account is technically a taxable brokerage account comprised of the following short-term bond ETFs:

  • 80% – U.S. Short-Term Treasury Bonds (SHV)
  • 20% – U.S. Short-Term Investment Grade Corporate Bonds (NEAR)

The Smart Saver Account is created separately from any existing Betterment accounts, and transfers between accounts are allowed at any time.

Smart Saver Benefits

Reduced State Income Tax – All bonds issued by the U.S. Treasury are exempt from local and state income taxes (but fully taxable at the federal level), which is captured in the 80% SHV allocation. The 20% allocation to corporate bonds (NEAR) is fully taxable at local, state, and federal levels.

In contrast, interest paid by FDIC-insured bank accounts is almost always fully taxable at local, state, and federal levels.

Automatic Rate Increases – The Smart Saver Account is comprised entirely of short-term bonds, therefore, the interest paid by those bonds is largely determined by short-term interest rates set by the Federal Reserve. In recent years, as interest rates have risen, so have the yields on bonds (and savings accounts). This means any future interest rate increases will result in a higher yield on Betterment’s Smart Saver Account.

However, interest rate changes are inversely related to bond prices, which means future interest rate increases could reduce the value of the bond funds held in the Smart Saver Account. All bonds are subject to price fluctuations, and the 20% corporate bond allocation is especially vulnerable to future rate increases. Conversely, savings accounts are never subject to price fluctuations.

No Withdrawal Limits – Federal regulations limit all money market and savings accounts to six withdrawals per statement cycle (deposits are unlimited) before excess withdrawal fees are assessed. Betterment’s Smart Saver Account has no such limitations.

However, the limit is six withdrawals per account, which means you can easily avoid all fees by opening more than one savings account. That is exactly the process I recommend in my tutorial on maximizing interest income using several different high-yield accounts.

Smart Saver Limitations

Savings Accounts Provide More Interest – I’ve previously shared our personal banking strategy, which provides a wide range of benefits and interconnectivity. Most importantly, the FDIC-insured accounts that I recommend pay up to 5% APY interest with no downside risk.

Lack of FDIC Insurance – All traditional banking products are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per insured bank, for each account ownership category. Since the FDIC was established in 1933, no depositor has lost a penny of FDIC-insured funds.

Betterment’s Smart Saver Account is not insured by the FDIC, but is covered by SIPC insurance, which is not the same. SIPC coverage protects against fraud or Betterment bankruptcy, but does not protect against any losses incurred through participation in financial markets (remember, the account is comprised of bonds, which can lose value).

Limited Accessibility – Betterment has stated that transfers from the Smart Saver Account to outside bank accounts will take 4-5 business days to clear. That’s significantly longer than the 1-2 business day transfers made possible by Discover Bank.

Furthermore, you can’t write checks against your Smart Saver Account, use a debit card to make purchases, or withdraw cash at the local ATM. To summarize, the Smart Saver Account is NOT a substitute for a quality checking/savings account combo.

The Cash Cow Conclusion

I like the creativity Betterment has demonstrated in creating the Smart Saver Account. It’s a low-risk, savings-like account that helps fill a gap in their existing product offering for those clients who would prefer holding all of their financial accounts at Betterment.

However, as I’ve outlined in the content above, the Smart Saver Account is NOT a substitute for a traditional checking/savings combo.

It lacks liquidity, FDIC insurance, and offers less interest than the no-fee, high-yield savings accounts that I recommend to all members of the Cash Cow Community.

Let me know if I missed anything, and as always, thanks for reading.

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