NerdWallet's Smart Money Podcast - Retirement Rollover Ready? Rules, Risks, and Rewards of 401k and IRA Transfers

Episode Date: November 4, 2024

Learn the pros, cons, and methods of rolling over retirement accounts to simplify your finances so you can avoid costly mistakes. How can you budget smarter for the holidays? Does it make sense to combine retirement accounts from previous jobs into one? What are the benefits and drawbacks of different rollover options? Hosts Elizabeth Ayoola and Sara Rathner begin the episode with a discussion of holiday budgeting, offering tips and tricks on avoiding impulsive spending, setting clear financial priorities, and the importance of delayed gratification. Then, hosts Sean Pyles and Sara Rathner discuss retirement account rollovers and key considerations to help you streamline your retirement savings and avoid penalties. They begin with a discussion of rollover basics, with tips on direct vs. indirect rollovers, how to avoid unexpected costs, and how to choose between an IRA and a Roth IRA. Credit Card Nerd Jae Bratton joins Sean and Sara to discuss her own experiences with retirement rollovers. They discuss the pros of consolidating accounts, the financial security it can offer, and how to choose the right investment options to suit your retirement goals. Interested in consolidating your old retirement accounts? Our investing writers broke down the best IRA accounts for hands-on or hands-off investors: https://www.nerdwallet.com/best/investing/ira-accounts And the best Roth IRA accounts categorized by online brokers or robo-advisors: https://www.nerdwallet.com/best/investing/roth-ira-accounts  In their conversation, the Nerds discuss: holiday budgeting, retirement rollovers, financial management, impulsive online shopping, retirement account rollovers, direct rollovers, indirect rollover, IRS penalties, Roth 401k, Roth IRA, 403b, traditional IRA, tax compatibility, retirement savings, financial priorities, budgeting tips, holiday spending mistakes, investment flexibility, IRA options, consolidating accounts, retirement planning, contribution limits, managing finances, budgeting strategies, simplifying retirement accounts, retirement account consolidation, and financial goals. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Who hit fast forward on 2024? Like, how are we in November already? Sarah, am I alone in feeling like this year was on turbo speed? You're not. I still think 1975 was 20 years ago. I like the end of the year for two reasons. Now, one, I'm a self-reflective journaling chick, and I enjoy doing my year in review exercises.

And for two, I'm a December baby. Shout out to all my Sagittariuses. But anyway, we're going to be delving more into the former today. Welcome to NerdWallet's Smart Money Podcast. I'm Elizabeth Ayola. And I'm Sarah Rathner. And for the record, I do not journal. We got to talk about that more later.

I know. All right. This episode, we answer a listener's question about combining retirement accounts from different jobs. But first, Sarah and I are going to talk about the worst budgeting or financial mistake that we have made this year. Now, if we want to add a splash of festivity to the topic, we can focus on holiday spending mistakes. It's your call, Sarah. And yes, that means you're going first. Yeah, no pressure. Well, we could apply this to holiday spending, but we could also apply it to spending year round. And for me, it's just so easy, like way too easy to try to solve problems

by buying stuff online. And I can't count the number of times I thought I had the problem to solve and I threw money at some small thing. And I thought it would be the solution to my problem. And then the package arrived a few days later and I'm like, why did I buy this? It's like this death by a thousand Amazon purchases. I'm certain that so many people feel seen right now, Sarah, because you shared that. And you know what? I hate to say that I can relate, but I must say that I'm proud of a new habit that I've developed. So I have started returning things to Amazon that I do not need. Yes, before I was too lazy to return them so they would just sit around my house.

Now, I think the option to drop items at Whole Foods, shout out to Amazon for that, has been a source of motivation. Nothing beats saving money by returning things I don't need and picking up a few healthy food items in the process. And if you wanna think about your overall environmental impact, it's always better not to buy the item in the first place than it is to buy it and return it. But none of us are perfect and returning it is also a great idea if it's

something you do not actually need. So Elizabeth, I've shared my own personal shame. One of many shames, but we're only picking one today. So we don't have to list all of them. What has been your big budgeting fail of the year? Oh my gosh, listeners, please just stick with me, okay? I'm going to have a little vent now. I'm going to go with general biggest budgeting mistake this year because it's going to affect my holiday spending too. So as some listeners may be aware, because I spoke about it earlier this year, I have moved to a different state and it's my first time moving state since I moved back to the US from London. Now, while I did budget a lump sum that I needed to move, which included rent, damn

that first insecurity deposit, new furniture because my old furniture sucked, a $2,000 U-Haul, first quarter private school fees for my son and so much more. But anyways, what was the mistake? I should have set a harder limit for how much I would spend and prioritize in terms of what could wait. But in the spirit of wanting my house to feel like a home, I purchased things that honestly could have waited even until next year. What I don't regret is buying quality furniture this time around. And I'm hoping that it's going to last for years to come. And yes, that includes the white sofa that I bought with a six-year-old boy in the house. I know, you guys are screaming. Overextending my budget means I'm now on a tight budget for the rest of the year,

and most people will be getting hugs for Christmas. I'm currently avoiding large purchases, and I'm just focusing on what I need versus what I want. But I do have one highlight, though. All of that spending got me lots of air miles on my travel credit card. Well, maybe next holiday season you could go somewhere for free. And I will say as somebody with three pets and a toddler, I'm amazed anyone buys white sofas. I know, I know. But honestly, I am not an interior decor girl, but it just really went with my walls because my walls are gray. So anyway, I'm enjoying living on the edge. So for anyone planning on making a big move in 2025, please be as specific as you can about your budget. Moving can be extremely expensive and

settling into a new city or environment can be hard enough as it is. So you don't want to add financial stress to the mix. And also a lesson in delayed gratification here. Some things honestly can wait. And it can be worth the wait when you have financial peace as a result. Yeah, I think it's really common to underestimate how much it costs to move. I mean, you've got the packing materials and the professional movers. And once you're in your new space, you want to make it feel like home. And yes, I said professional movers, because when you're 22, you could pay your friends

and pizza to move your stuff. When you're 32 and you have like real furniture and your friends are busy, they don't want to help you move your stuff for the cost of pizza. So just hire some professionals and save your friendships. Say it again. And I did exactly that. Actually, Sarah, I did exactly that. You hired professional movers or you paid your friends in pizza? No. What friends? Nobody was helping me move all that stuff out that U-Haul. I paid a professional, okay? Listen, if you have white couch money, you can hire a professional.

That's it. That's my financial rule. Oh my gosh. And I have a little confession. My son has finally put a little stain on the white couch. So here goes like the cost, right? Because now I'm going to pay for a professional cleaner to clean the sofa. And I was just thinking I didn't think of the ongoing maintenance costs. But anyway, with that said, let's give listeners a couple of budgeting tips for the last two months of the year. Now, I know it can be easy to ignore

your budget because you're busy having fun, spending time with loved ones, and also unwinding from what has been a long, chaotic year. Now, all those happy hormones can also trick you into living in the moment and blowing up your budget. So what's one tip that you have for listeners, Sarah, to hopefully avoid doing this? Well, this is the time of year where everyone's going out and spending a lot of money in the spirit of festivity. But talk to your loved ones and suggest alternate plans if the plans they are recommending cost a lot of money and are going to blow your budget. So let's say your friends want to go out for an expensive dinner, or your family insists on

buying everybody a mountain of presents. It's okay to say, listen, that's just not my budget right now. Like you mentioned, giving people hugs for the holidays is their gift because you just spent so much money on moving. Don't just complain. Offer up an alternative. Maybe you skip the dinner with your friends, but you meet up with them later on for a cheaper outing. Or maybe you talk with your family about doing a gift exchange where everybody draws one name out of a hat and you only buy one gift and you set a hard budget for that gift. You know, your loved ones aren't going to know that you're struggling unless you speak up. And honestly, oftentimes once you speak up, you realize that you're not the only one in your circle who's struggling. So other people want an excuse to take a break too. I love that so much. And I think it takes a lot of vulnerability to be open and tell

people that you just ain't got it. And I do know that some people feel embarrassed to say that, but I think feeling embarrassed might be a little bit better than not having enough money, especially going into the new year. Yes. Your embarrassment is not worth not being able to make your rent payment in January. Think of it that way. It could be that serious for you. Exactly. I would rather tell somebody who cares about me

about what's going on with me than have to talk with my landlord about the fact that I have to pay a late payment because I can't afford rent on time. Absolutely. And this is a little bit off topic, but I've been seeing things going around social media. Like, you know,

if you don't show up to your friend's birthday dinner, I'm sure there are a lot of December babies having some birthday things that you might have to pay for. Like, are you a bad friend? And just putting that out there. If anybody gets upset with you because you can't attend because it's not in your budget, then you might want to reassess that relationship as well. Okay. Elizabeth, you've got more tips for us. My more formal tip now is to start thinking about what you want your finances to look like in 2025. Now, doing this can help you stay focused, and it can also give you the discipline that you need to ensure you start 2025 off strong financially.

For example, with interest rates trickling down, you may be hoping to finally buy a home next year. Housing market is another story, but it's going to be hard to do that if you blow your savings or hurt your credit score by maxing out your credit cards during the holidays. I like that. I think it's helpful to list a few things that you want to accomplish over the next few months. So you're not just thinking about the holidays now, but rather how the holidays might affect what you want to do next year. Exactly. And as someone who sometimes can fall prey to impulse spending, I know this task

especially helps me. One of my goals for 2025 is to finally start my traveling on points journey, or rather take it to the next level by getting more travel credit cards. And that requires me maintaining good credit and not overspending. Well, luckily, you're surrounded by co workers who can help you with that, including yours truly. Oh, shout out to my co-workers. Love that. All right, listeners, we want to hear from you. What are your strategies for getting through the holiday season financially unscathed and, I don't know, still on speaking terms with your relatives? So text us or leave a voicemail on the Nerd Hotline. I'm serious at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com.

Oh my gosh, just a sidebar. I think some people might end up in a group chat about how cheap they're being this holiday because they say no. But we don't care. We're saving money. I'm here for all of your group chats where you talk about how cheap you have to be. You can invite me to that group chat and I'll just silently sit there and applaud you. Exactly.

All right, now let's turn to this episode's money question segment where we get deep into retirement benefits. That's coming up in a moment. Stay with us. We're back and answering your real world money questions to help you make smarter financial decisions. This episode's question comes from a listener's text message. They wrote, does it make sense to amalgamate all of my retirement accounts from different jobs into

one place or does it not matter? First of all, bonus points to this listener for typing the word amalgamate into a text message. Yes. I don't know what your bonus points are worth in real life, but you should know that you have them. To answer this question on this episode of the podcast, we are joined by NerdWallet credit card writer, Jay Bratton. Welcome to Smart Money, Jay. Thanks for having me. Now, Jay typically writes about credit cards, but has experience managing retirement account

rollovers. So we're going to talk with her about that. But let's start by talking about what our listener describes as, quote, amalgamating, unquote, their retirement accounts, which is known conversationally as rolling retirement accounts over. Before we dive in, we just want to reiterate that we are not investment advisors. So Sean, do you want to give us a quick explanation of what retirement account rollover looks like? Sure. So rolling over a retirement account is when you take the retirement account from maybe an old employer, and you guessed it, roll it into the retirement account of your new employer or another retirement account you have like an IRA. And there are two main ways that you can do a rollover.

One is a direct rollover where your former retirement account administrator connects to your new administrator and transfers the funds from your old account to your new account. Or in the case of an IRA, the institution that manages your account transfers it to another IRA or retirement plan like a 401k.

The second way to do a rollover is called an indirect rollover or a 60-day rollover, where you get a check with the entire balance of your retirement account, and then you move it into the new account yourself. This second option can give you a little more flexibility with how you manage the rollover, but it does have some drawbacks too. Yeah, let's talk about those drawbacks. And a big one is the cost. When you do an indirect rollover, the IRS automatically withholds 10% or 20% of your account balance depending on the type of account you have. And here's the thing, you have to contribute the entire amount of your original cash balance to the new account, or you face penalties. And that could put people

in a pretty serious cash crunch. And also you are given a check with your retirement account balance again, which can be a little scary to see and hold in your hand. Yeah, it's kind of your life savings. So right. I want to give a quick example of what an indirect rollover looks like and this cash withholding from the IRS because it can get a little confusing. For example, say I want to rollover a 401k balance of $10,000. The IRS withholds 20% or $2,000. So I only get a check for $8,000. Then I need to come up with an additional $2,000 so I can deposit that original balance of $10,000 to the new retirement account. And if I don't do that, I can't find that $2,000,

I will face penalties from the IRS, which is not ideal. And we should say that you will get that withheld money back from the IRS, but not in time to replace it within the 60 day period. So that sucks. No, I mean, there's no other way I could say that. That's really rough. And you're taking something that is already really administratively complicated, and then making it expensive, which is no fun. Jay, that being said, let's get to your story. What was your rollover adventure like? The year is 2022. I had just been hired by NerdWallet and I decided that it was time to get all of my retirement accounts from my former employers into one.

I had two old ones from, like I said, two previous employers, and I wanted to move them into one financial institution, the one that was already holding my husband's and my Roth IRAs. I used a service which facilitates the rollover process for free. And even though I didn't need this particular feature, it also helps you find old 401ks that you may have forgotten about. That's handy. So you were doing an indirect rollover, but you had a company helping you out as sort of an intermediary. Right. Okay. And you did two rollovers. So walk us through the first one. The first rollover, I would say was a little bit more straightforward.

I moved about $21,000 from a Roth 401k from a former employer into that Roth IRA that I said I had already had at that particular financial institution. I was able to roll that $21,000 in my old Roth 401k into my current Roth IRA because both investment accounts are after tax. And that just means I had already paid tax on the contributions. And the big benefit of that is I get to make withdrawals and retirement tax-free. Now, when you do rollovers, it is possible to roll over a traditional 401k into a Roth IRA, but you will have to pay taxes. Accounts have to be tax compatible if you want to avoid paying penalties. One thing that's nice about rolling into a Roth IRA like you did is that you could ignore the contribution limits on these types of accounts. So for the 2024 tax year a Roth IRA like you did is that you could ignore the contribution limits

on these types of accounts. So for the 2024 tax year, Roth IRA contributions are limited to $7,000 a year or $8,000 a year for those who are 50 or older. But rollovers don't count toward those contribution limits. And Jay, that's why you were able to roll $21,000 from that Roth 401k into the Roth IRA in one go, right? Exactly. I was able to grow the balance in my Roth IRA while still playing by the rules that govern annual contribution limits. And the contribution limit for Roth IRAs is pretty low comparatively, especially like when you compare it to a 401k. That was just a nice perk. That's pretty handy. So let's talk about your second rollover. What was the deal with that one? For the second rollover, again, from another former employer,

this time I was moving about $25,000 from a 403b into a traditional IRA. And for those wondering, a 403b is generally what employees of public schools and nonprofits get instead of a 401k, but they're pretty similar. So Jay, was rolling the 403b into your IRA as easy as rolling over the 401k? Yeah, actually, the process was just as simple. Again, that service that I used facilitated the rolling over process and made it pretty seamless. The only difference is that in this particular rollover, my 403b was traditional, not a Roth, meaning I hadn't paid tax on those contributions yet. So I rolled over the money from the 403b into a traditional IRA, not a Roth IRA. And whenever I go to withdraw those funds in retirement, I will have to pay taxes on that money then.

Was the second rollover, was that direct or indirect? It was direct. And that means that I did not have to pay any financial penalty on this particular rollover. Did you find that to be easier than the indirect or not? I don't have experience doing an indirect rollover, so I can't really compare, but I would just say overall, the experience was fairly easy just because I had the assistance of this particular service to walk me through it. Why was it important to you to do these rollovers? To get to our listeners' question, why did it make financial or personal sense to you? As I mentioned earlier, I initiated this rollover process in 2022.

Right when I had been hired at NerdWallet, I knew that I was going to have a retirement account with NerdWallet 401k. And I knew I had these two other retirement accounts just hanging out in the ether. I didn't want just three retirement accounts in separate financial institutions. So in 2022, I just decided now is the time to streamline everything. Come our retirement, I didn't want to be hunting down retirement accounts at X number of financial institutions. I want that time to be for leisure. There is a financial component behind the motivation to rollover. I wanted to move that money from those old accounts and invest them into mutual funds of my choice. Sarah, I know that you have done rollovers or at least one in the past. Was your motivation similar? Yeah, I've done two rollovers in the past

from former employers. I had traditional 401ks with both and I rolled them into one traditional IRA at the same financial institution where I also have a Roth IRA and I also have taxable brokerage account. So really for me, it was about simplifying my finances and having more of my finances in one place. Even

if there are several different accounts, they're still under one roof too. And that to me is just administratively easier. The more complicated your life gets financially, the more you want to simplify some stuff that, you know, and have it be a little bit more under your control. And Sarah, was your rollover process as easy as it seems Jay's was? I mean, to be honest, I blacked out a lot of it because it was so annoying. Really? So that's a no? Yeah, it just, I think I started by calling customer service from both the financial

institution that had my old account and then the financial institution I was going to transfer it into. I will say all the banks and institutions I dealt with had incredible customer service. So if you have any questions, start by just calling them. They will walk you through the process. That was probably the best part was just talking to people on the phone, which is usually not the best part. Usually, that's the worst part. But really, they were incredibly helpful. And then they kind of directed me to forms I had to fill out and I had to get them notarized, send them in. It was just a series of tasks that were just annoying. It wasn't just fill out an online form and hit submit, and then you get your money transferred. It's not that simple.

How long did the process take you, if you remember? It kind of depends. I didn't really realize this at the time, but I think one of the transfers was indirect. And so one day, my doorbell rang, and it was like FedEx with an overnight envelope that contained a six-figure check from an employer I had been at for almost a decade. So you can imagine how much money I had set aside over the years. And they were just like, there you go. Have fun. And then I had to like mail it to the next institution. So you're terrified because your money is just floating out there into ether at the behest of various shipping companies. And yeah, I didn't love that. Yeah, that's scary. There's got to be a better way, you know?

Yeah, one process was all electronic. I never saw a check with the money. The other one, for whatever reason, was not. You just don't know what you're going to get. That's what I don't like about it. Let's talk a little bit more broadly about some of the pros and cons of rollovers. Our listener got to one pro with their question, and it seems like this relates to Jay and Sarah, your experiences too. Having all of your retirement funds in just one or two places makes it easier to manage. So Jay, can you speak to any other upsides that made this process appealing to you, even if it isn't maybe the most straightforward sometimes?

Definitely. But before I do that, I want to go back to something that Sarah was saying. Sarah was talking about how her process of rolling over some of her old retirement accounts was not as easy as maybe my experience. And I want to say that mine was maybe a little bit easier than hers and maybe other people listening because I only was rolling over two accounts. I mentioned this before, but I used a service to help walk me through that process. And also, like Sarah, I had a baseline knowledge of a retirement account. So I say all that to say, I don't want to put out this impression that

rolling over retirement accounts is easy. It's not. It is a complicated process made easier by some services. So I don't want the listeners to think this is something that I can do in 15 minutes. And it's not. The task of rolling over retirement accounts, I mean, we don't have to do it, but there are benefits, which I will talk about. This is just another example of how the onus is on us to make sure that we are making all the right decisions to safeguard our future in retirement. It might sound kind of counterintuitive, but weirdly, I'm okay with a retirement account rollover not being the easiest thing to do. It maybe shouldn't be a 15-minute exchange to put all of your retirement savings from

one account to the next. It's a pretty significant amount of money oftentimes, and it's a very serious allocation of funds for a very important goal, funding your retirement. Yeah, but that being said, I could move tens of thousands of dollars into a brokerage account in like two business days. Maybe that also isn't great. I mean, yeah, but at the same time, you know, you have to think about how democratized personal finance has become because of this technology.

And you no longer have to be 100% knowledgeable, 100% connected, have, you know, you have a guy behind a mahogany desk who can you put in a phone call and he does stuff for you. You don't have to live that life. You can be your average person who switched jobs a couple of times and just wants to keep their finances as organized as possible. On the one hand, putting a little friction into some financial processes definitely prevents people from making mistakes or from spending money unnecessarily. At the same time, some processes, you know, we could utilize technology to make things less onerous than they used to be. Totally agree. I think the certified mail route that you described having to go through

is pretty outdated. Yeah, what if I wasn't home to answer the door? Were you just going to leave that check like in my mailbox? You know? It's scary, but we want to make sure that people understand the gravity of what they're dealing with at the same time. So Jay, I want to go back to any other upsides around rollovers that did make this sort of intimidating process appealing. The first one I've already mentioned before, but it's worth repeating again, because this is probably the main motivation for many people doing rollovers. And that is just simply simplicity. For people who have held multiple jobs

like myself, that's reason enough. Many of us are going to have many jobs in our lifetime before we get to retirement. And without rolling over those accounts, you'll have to pull money in retirement from multiple pots. And I just wanted mine in one big one. The second draw for rolling over retirement accounts is financial security. Many of us have had multiple jobs, and the more jobs we have, we're increasing the likelihood that we'll forget about that 401k that we've had with an employer we had 20 years ago and definitely don't want to forget about that money. And lastly, I would say that your 401k with an employer usually has limited investment options that

are pre-selected by that employer. If you're not satisfied with those investment options or the fees attached to those funds, one way to get around that is to roll over your retirement funds into an IRA where you have much more freedom to select the investments that you want. We should also note that funds in a 401k sometimes have lower expense ratios, which basically means they cost less to invest in. And if you like the funds you're invested in, but you're considering consolidating your various retirement accounts, you may want to compare the expense ratios of the funds you're invested in with your current retirement account and the funds you'd invest in through the IRA. I want to turn now to a couple cons. Sarah and Jay, I think you described some just through your

experiences. But really, one that stands out to me is that doing a rollover requires you to take action and be really on top of your finances. If you are in your prime working years, you're maybe a little bit lazy, but decently organized. And you don't want to have to wrangle your old accounts. Jay going through what you described or Sarah, what you described, it might not be appealing. And I think that's totally fair. As long as people are making sure that the money in these accounts is actually invested, maybe check on it a few times a year, then it can be fine to leave old accounts where they are. Again, just do not forget about them. Though, as we've sort of been talking about, people might want to think about consolidating accounts as they

get closer to retirement, so they have fewer accounts to manage. Because in general, as we get older, it can be a good idea to consolidate accounts so your finances are just easier to account for. Yeah. and I'll also say, if you're in your prime working years and you're decently organized, it might not even be laziness, you're just busy. You're busy.

Yeah. You're tired. You got so much other stuff to deal with. This is just another thing. That's fair. So it's always something. All right, listeners, if you are interested in rolling over your own funds,

we've got a handy resource for you. I recommend you check out NerdWallet's roundups of the best IRA accounts and best Roth IRA accounts. Our investing writers broke down the best IRA accounts for hands-on or hands-off investors and the best Roth IRA accounts categorized by online brokers or robo-advisors. And we'll link to those roundups in today's show notes. You can also just search for NerdWallet, Best IRA, or Roth IRA accounts. Jay, any final thoughts about rollovers for our listeners who might be looking to amalgamate their accounts?

I would just say, if you're considering a rollover, speak with your particular retirement plan custodian and ask them to help you roll over the money in a way that won't incur any financial penalties. Yeah. Find some way to make this easier for you, whether you work with your custodian or you find a service like you used previously, Jay. That's right. Well, Jay, thank you so much for coming on and sharing your story with us. Thank you for having me. And that's all we have for this episode. Remember, listener, to send us your money questions, you can call or text us at 901-730-6373. That's 901-730-NERD. You can also email us your questions or leave us a voice memo at podcast at nerdwallet.com.

Also visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.