Smart Money Podcast: Renters Are Struggling, and What to Do With an Old 401(k)

Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.

Liz Weston: And I'm Liz Weston. As always, be sure to send us your money questions. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected]. We're here to help you, so please keep those questions coming.

Sean: Also, if you want more Nerdy goodness delivered to your device every Monday, hit that subscribe button. And if you like what you hear, leave us a review. On this episode, Liz and I are talking with investing Nerd Tiffany Lam-Balfour about how to handle retirement accounts from old jobs. But first, in our This Week In Your Money segment, we're joined by another Liz, Liz Renter, a Nerd who does a lot of data journalism at NerdWallet. She's here to talk with us about a new report she published about how renters have been impacted by the pandemic.

Liz W.: Hey, Liz. Thanks for joining us.

Liz Renter: Hey, Sean. Hey, Liz. I'm excited to be here.

Sean: We are really happy to have you because we know that this report is really timely. A lot of renters are having a hard time right now. So, just to start it off, can you tell us what were some of the key findings of your report?

Liz R.: Sure. So I think the main finding is that renters are more likely to be hit hard by a financial crisis, and that's the current financial crisis that we're living in and really any financial crisis. So, as an example, we did a survey in May where we found half of renters had used their government stimulus check for necessities, like groceries or rent. And that's compared to just 32% of homeowners. Really, people who rent are more likely to be struggling right now.

Sean: And we know that a lot of renters haven't been making their full rental payments on time. Month after month, it seems like the numbers are going up. And I recently read a report from the Aspen Institute that was analyzing some U.S. Census data that found that 30 to 40 million people are at risk of eviction in the next several months. And if conditions don't change, somewhere between 29% and 43% of renter households could be at risk of eviction by the end of the year. So it's clear that renters need support and that they're a pretty economically fragile group overall.

Liz R.: I think it really boils down to their income versus their housing costs. So renters earn less and spend a greater portion of their income on their housing. So when their income is impacted through something like unemployment, or even when something as seemingly minor as grocery prices or gas prices go up, they just have less wiggle room than homeowners.

Liz W.: To add onto what Sean was saying, it seems like there's an eviction apocalypse coming. And it's coming pretty fast. Does your report corroborate that?

Liz R.: Possibly. So, one of the things that I looked at was Google search traffic and internet searches for mortgage relief options. So, things like "mortgage relief" or "mortgage assistance," those peaked in March and then they started to go down. Whereas rent relief searches — so searches for "rent relief or "rent assistance" — they're still up. They peaked in March, but they peaked again in July and they're still high. So this suggests that the impact to renters may be lasting longer than that to mortgage borrowers. And when you sort of layer that in with the dwindling number of safeguards that are left protecting renters from eviction, it's entirely possible that we will see an influx of evictions coming.

Liz W.: Those search results make a lot of sense because mortgage borrowers had access to forbearance. Typically, they can ask for three months. Because of the CARES Act, they could ask for six right off the bat and they can get another six. So basically, they can get a year without payments, if they need to. Nothing like that was offered to renters. Is that right?

Liz R.: Sure. And I think even in normal times, people with a mortgage have more built-in protections than renters do, but what we saw with renters is sort of a patchwork system of eviction protections. And so there were some things done at the local level, at the state level. And then, of course, the federal moratorium that expired at the end of last month. They didn't all protect all renters. So a lot of renters were kind of left wondering, "Am I protected? And how do I know? And what do I do about it?"

Liz W.: Yeah. The federal moratorium was super confusing because it all pivoted on who the mortgage lender was for the landlord. Right?

Liz R.: Right. Exactly. So if the landlord had a federally backed mortgage or if the housing was federally subsidized, so like, HUD housing, for example, then people would be protected. But how many renters know what their landlord's mortgage looks like? Not too many.

Sean: Right.

Sean: So it seems like just by the structure of how the CARES Act support system worked, people with mortgages could maybe have a forbearance set for a number of months. And then they have that taken care of, at least for the medium term. While it's on renters, every single month, to figure out what they're going to do with their landlord. And so that's probably why the search activity for rental assistance has continued to be high and spikes around the first of the month because people are continuing to have this crisis, month after month.

Liz R.: That's absolutely a great point, Sean. And one other thing that I found is that several of the populations that are more likely to be renters are also being disproportionately impacted by unemployment. So there could be some overlap there, where people that are more likely to rent are also more likely to be continuing to experience financial hardship.

Sean: Right. That's one thing I wanted to make sure we touched on as well, is the role that inequity plays in this rental crisis and potentially coming eviction apocalypse, as we've heard it described. We know that communities of color are disproportionately low income and are twice as likely to be renters. And on top of that, that Aspen Institute report that I mentioned, highlighted that black and Latinx people constitute about 80% of people facing eviction. So as we think about this rental crisis and how it's affecting people across the country, we also need to think about the role that systemic racism plays in this as well. And how people who are the most vulnerable are going to be facing the worst repercussions of this crisis.

Liz W.: Yeah. There are repercussions to getting evicted. Obviously, it's no fun. But there's long-lasting issues as well. Right, Liz?

Liz R.: If you get evicted now and you start looking for a new place, you're going to have a hard time getting into a place that is both affordable and safe. So it's why we recommend if you can do anything to avoid eviction, do it. And that seems like, "Yeah, no kidding. That's a no-brainer." Because like you said, Liz, getting evicted is not a walk in the park. It's very stressful and it's expensive. But in some ways, those are short-term effects of eviction. A longer-term effect of eviction is it can really jeopardize your housing going forward.

Sean: Right. So as we're recording this, it's around the end of August and a lot of people have rent due for September coming up really fast. So, Liz, I'm wondering if you can talk us through a few different things that renters can do, with the big caveat that it would be great if they had maybe a greater social support system or a societal safety net that would be able to provide them some money. But short of that being an option right now, what can people do?

Liz R.: They can seek out emergency assistance. So visiting 211.org, you can locate local charities and resources that may be able to assist with your housing costs. You can also visit the website of the National Low Income Housing Coalition that can point you towards local and state emergency rent assistance programs. A lot of those local and state emergency rent assistance programs did receive some additional funding through the CARES Act. And so they're able to provide assistance to people who are either on the verge of eviction or are having problems making their rent. And then, in addition to all of that, I would say, talk to your landlord or property management company. That's a difficult conversation to have and no one wants to do it. But bottom line, landlords, property management companies, these people know that their tenants are having difficulty. If they don't know because of your late rent payment, they know because they're reading the news, right?

So talk to them and explain the situation. Maybe there's a way for you to set up an installment agreement for you to pay throughout the month, rather than in one lump sum. And when worse comes to worst, maybe they can help you by negotiating a graceful exit from your lease. Evictions are expensive for landlords too. Obviously, the burden is really on the tenants, but they don't want to file an eviction if they don't have to. So they may be willing to work with you to get you out of the lease. So you can avoid eviction and just get out of your apartment.

Liz W.: One of the things that people need to know when they're making these arrangements and trying to negotiate, is basically what their rights are. So how do they find that out, given that they're such a patchwork of protections?

Liz R.: If renters are interested in "what local and state protections are in place for me now?" it's hard to give a blanket statement on, "Visit this website at your state and local government." But I did find that nolo.com and legalfaq.org are both maintaining good databases on local and state eviction protection. So you could start by visiting there.

Liz W.: OK. And I want to put in a pitch for if you are not in a situation where you're facing eviction and don't really know a lot about it. I really recommend the book, Evicted, because it spells out very clearly what the issues are, why there's a problem. I don't necessarily agree with all the conclusions that the author made, but it's a really revealing look at what people's lives are like, once they get kicked out of an apartment.

Sean: Well, Liz, thank you so much for joining us. I really appreciate you taking the time.

Liz R.: Absolutely. Thanks for having me. This was great.

Liz W.: Let's get to this episode's money question, which comes from Kelly. Kelly says, "I changed jobs 18 months ago and never rolled my old 401(k) over to my new company's account. I was preparing to do so, and then the stock market crashed due to COVID and my balance went down. Would you recommend waiting until the balance recovers a bit or rolling my old account over regardless, so both accounts can compound together?"

Sean: That is a really interesting and truly Nerdy question that you have there, Kelly. I had not thought about whether the recent economic turmoil would affect 401(k) rollovers and the timing of that. My first thought is that it actually might be a good opportunity to optimize your retirement accounts, maybe opening an IRA. But, to help us answer this question, on this episode of the podcast, we're talking with investing Nerd Tiffany Lam-Balfour. So let's get to it.

Liz W.: All right. Hi, Tiffany. Thanks for coming on the show.

Tiffany: Hey Liz, thanks for having me.

Sean: Hey, we're really happy to have you here. So let me set you up, Tiffany. Our listener, Kelly, has a 401(k) from an old job that she has not rolled over to her new company's account. She was about to and then COVID hit and everything got pretty topsy-turvy in the economy. And she's not sure if she should wait to roll it over, or if now would be a good time to do so, or maybe it doesn't matter at all. What do you think?

Tiffany: Obviously, we have been dealing with market volatility for a couple months and as we navigate COVID, it's likely to continue. We also have an election coming up. So I think that when Kelly is making this decision — if she's already completely invested with her old 401(k) and her plan is to roll over and get immediately reinvested in the new client's 401(k) — actually, the volatility of the market is not a big concern. This is because rolling over is actually a fairly expedient process. So even if her current balance is not as high as it was pre-COVID, if she rolls it over and invests right now, she'll likely buy in at a similar point, which is a little off the highs of the markets, which means that she'll buy in at a lower price point.

Sean: One thing I was thinking about here as well, is that because retirement is such a long-term investment that the current ups and downs in the market will probably be evened out by the time she's going to retire, right?

Tiffany: That's correct. Kelly doesn't indicate how old she is and how much time she has to retirement. But generally, we touch our retirement accounts last. So she has a long time horizon and she's also dollar-cost-averaging in her 401(k). She's putting in money [and] she's designated a contribution rate. So every single paycheck, she puts money into the markets. So when you dollar-cost-average this way, you smooth out the entry level when you get into the market. So with a long time horizon and that dollar-cost-averaging, the volatility really isn't a big concern.

Liz W.: Can you give us an example of how that works?

Tiffany: Sure. When the market is high, Kelly will buy fewer shares and when the market is low, she buys more shares. So it's like when the market is down, stocks are on sale. So you end up buying more shares and benefiting from the upside when their price goes up.

Liz W.: OK. That makes sense. Tiffany, she has basically three options: She can leave her money where it is, she can roll it into an IRA or she can roll it over into her new employer's plan. We're assuming that last is an option. How do you make the decision about which of those three options is best?

Tiffany: Well, there are different considerations to think about. So you're right — this is assuming that her new employer will accept the rollover from the old plan, which she probably has already checked. But the other thing is to look at the fees that are baked into the 401(k) plans and also the investment choices that she has access to in each plan. So, it seems like she may have already made up her mind, so she may have already done the due diligence, but I would usually check and see which plan cost most and also which investment choices she has and the performance of those investment choices. So if the new plan is cheaper and gives her more choice, it definitely makes sense for her to roll the two plans together. It's also a little bit more convenient because she can keep track of the combined account. However, if she finds out that the old 401(k) plan has more choice and is cheaper, she could always leave it there as well.

Sean: Now, I know there's a lot of debate about whether people should roll their old 401(k)s is over to an IRA, and it seems like this would be a good opportunity for Kelly to do so. What are your thoughts on that?

Tiffany: In terms of convenience, she would still have two accounts to take care of: her IRA and her new 401(k). But she would have a lot more investment options available to her in an IRA, versus a 401(k) plan. Another thing is with an IRA, she could hire an advisor to help her manage it, which would be more costly than the 401(k) plan. However, usually with a professional, hopefully she would get better returns, so that should hopefully take care of paying a little bit more.

Liz W.: I think a lot of people have the idea, once they hear about IRA rollovers, that those are always the better option, that they are always cheaper. And that's not always the case. Right, Tiffany?

Tiffany: That's true. It depends on the type of IRA, if there's management, if it's a discount brokerage versus a full-service firm. So you do have to check into fees to make sure you're not paying too much.

Liz W.: Yeah. I actually liked our 401(k) here at NerdWallet so much that I took some of my old IRAs, as well as a previous 401(k) and rolled it all over because it was so much cheaper and, with a lot of larger companies, they have access to institutional funds, which are dirt cheap. So that's what attracted me to NerdWallet's plan. That, and the fact that 401(k)s have more creditor protection. Not that I expect to get sued, but it's always nice to have money safely tucked away from any bad guys that might want to come after it.

Tiffany: Right.

Sean: Beyond fees, I'm wondering about tax implications of a rollover, either to a 401(k) or an IRA. What do you think Kelly should be thinking about here?

Tiffany: So the options we've been talking about — which is either keeping her old 401(k), rolling into her new employer's 401(k), or rolling into a traditional IRA — these options would avoid any sort of tax implication, as long as she does it within 60 days. There are some other options, like if she wanted to convert part of her old 401(k) into a Roth IRA, that would trigger paying taxes, but she didn't indicate she wanted to do that.

Sean: Now, I'm also wondering about the actual process of rolling over, because I've heard that sometimes you get mailed a check for the balance of your retirement account, which can be very scary to have this very important piece of paper with all the money from your retirement account. And then you have to roll it over to your new account and that can be a little time consuming, I've heard. So what should Kelly be aware of with this process?

Tiffany: So technically, the process should be fairly straightforward. Once she makes the decision of where to roll the old 401(k) into, as long as she knows the account number and the address of the administrator, all she has to do is call the old plan administrator and specify that she would like to roll her balance over.

However, it could be helpful for her to request a direct rollover, which means that the plan administrator would liquidate her current investments and write the check and send it directly to the institution where the funds should be deposited. That takes her out of the process, but not all administrators will allow that. Some different plan administrators will cut her a check and she has 60 days to redeposit that into a tax-deferred account. So she has to make sure to do that within that time frame.

Liz W.: Now, how can she avoid the 20% withholding? Because normally if you get a check from your 401(k), that's exactly what they do, they withhold 20%. And then you've got to come up with the 20% out of your own pocket to avoid getting taxed on that. So how do you avoid that inadvertent tax bill?

Tiffany: I think the easiest way is the direct rollover, so that they would just send it over to the other firm directly and deposit it in there and so it wouldn't trigger that 20%.

Liz W.: I think back in the day, the last time I did one of these where the company actually wrote me a check, I think I had them make it out to the new company, just so it didn't come to me. Now, unfortunately, when that happened, we were moving and the check got misdirected. So it actually wound up with some guy in Newport Beach — this was a six-figure check from a discount brokerage. I was not pleased, but fortunately, he was honest. He sent it on and we got it taken care of. But to Tiffany's point, if you can do the direct rollover, definitely that's the way to go.

Tiffany: And to your point, Liz, just keeping track of where it is that every step of the way. Asking the old administrator how long it should take and making sure that [the] new administrator receives it, that's really important. And it's also important because she's trying to avoid the market volatility and wants to get it invested as soon as possible.

Liz W.: I actually lucked out that way when the account was liquidated, the stock market was doing great. There was this big drop while my check was in transit, and then I got to basically buy in at a lower rate and then it went up. So it worked out pretty nicely.

Tiffany: Wow.

Sean: Yeah. Despite all of the scariness around that, you ended up ahead. So that's interesting.

Liz W.: Well, I would never want to time the market otherwise, but that was accidental and it worked out.

Sean: Yeah.

Liz W.: Tiffany, one of the things that Kelly seemed to be concerned about was whether the accounts would compound more? Whether she would get more if they were together, in other words, versus compounding separately. But that doesn't really make a difference, does it?

Tiffany: No, it doesn't really matter if they're separate or together, in terms of the growth in compounding.

Sean: That seems a little counterintuitive to me because I can see where Kelly's coming from, where you would want a bigger amount in one single account to compound together, versus two smaller amounts in two separate accounts compounding on their own. But, just mathematically, it doesn't really make much of a difference, is what you're saying.

Liz W.: Yeah.

Sean: OK. That's why I'm a writer and a podcaster and not a mathematician.

Tiffany: It's not like her IRA just grows at a compounded rate. It depends on the investments and their growth of those particular investments. For example, if she had five shares of Amazon in one account and five shares in another, she would still receive the same return as having 10 shares in another account. So this is really where the investment selection and the fees come in. If one account has better choices that perform better, that account is going to grow more and in essence have a higher return than the other account. So she should put everything into that account with the better investment options so that she can pick the ones that grow the fastest, or grow the most.

Sean: So it also matters which account has fewer fees, right? Because you want the money to be compounding there because it will grow more.

Tiffany: That's correct. So that's why we were saying to pick the account that had the cheapest fees and also had the most investment options and check out what the performance has been of those investment options. So that she can consolidate into the account that is cheaper and grows the fastest.

Sean: OK. Well, Tiffany, do you have any final tips or words of wisdom for Kelly?

Tiffany: No. I'm just happy that she is saving for retirement and being so diligent about it. We could be in retirement for 30 or 40 years. So it's important to make sure that we're saving up that nest egg.

Sean: Well, thank you so much for joining us.

Tiffany: Thanks for having me.

Liz W.: All right. And with that, let's get to our takeaway tips.

First, know your options. When you're rolling over retirement accounts from previous jobs, you can roll the balance into the new employer's 401(k) in most cases, or you can roll it over into an IRA. You also have the option of keeping it in your old 401(k), converting all or part of it into a Roth, or withdrawing the money. We don't recommend that.

Sean: Yeah. Next step, as Liz just alluded to, weigh your options because you have a number of them. Think about what makes the most sense for your situation and your personal financial goals.

Liz W.: Finally, don't worry about timing the market when rolling over an old retirement account. Just do it.

Sean: All right. And that is all we have for this episode.

Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. And visit nerdwallet.com/podcast for more info on this episode and remember to subscribe, rate and review us wherever you're getting this podcast.

Liz W.: And tell your friends. OK. Here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but 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.