MARK RIEPE: I'm recording this episode in early December, and yesterday it was reported that the U.S. economy created 199,000 jobs in November. And by the time most of you hear this episode, we'll be getting close to the holiday season where many people look back and take stock of their personal and professional lives. And it's a good time for it.
January is the start of a new year, and for many, a fresh start. Now that can mean many things. It can mean making resolutions or setting personal development goals for the new year. And for others, it may mean starting a new job.
I'm Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
One of my suggestions to individuals is to pay attention to changes. By that I mean changes to the economic environment, changes to your financial situation, or changes to your personal situation. When those changes happen, it's important to make sure your financial life reflects the current realities.
A job change is a big change, and it's one of those changes that is happening to people with greater frequency.
According to The Small Business Blog,[1] as of July 2023, the average American worker has 12 jobs over the course of a lifetime. In contrast, in 1950, the average number of jobs a person had was four.
And while it is true that the number of times a person changes jobs is correlated to age, every age group can be affected.
Millennials, on average, report changing jobs every three years. Meanwhile, GenX and Baby Boomers stay with one employer for an average of 10 years.
There are many reasons people change jobs. 33% of employees changed jobs for a pay increase, which is most popular reason. The second most popular reason, at 21%, was wanting to pursue a new career. And third place goes to the 20% who were seeking more opportunities for upward mobility.
For many of these job seekers and switchers, employers offer some kind of retirement savings plan. If you're changing jobs, what should you do with that plan? Do you leave your 401(k) where it is? Roll it over to a new one? Open a new account and put the money in there? What are your other options? The right choice for your situation isn't always clear.
My guest, Sarah Buchardt, will help us navigate these questions. Sarah is a corporate financial consultant and CERTIFIED FINANCIAL PLANNER™ here at Schwab and works out of Menlo Park, California. Over the years she has helped many clients sift through their options when they change jobs.
Sarah, welcome to the show.
SARAH BUCHARDT: Thank you, Mark. It's good to be here.
MARK: So we're going to be talking about rollovers of retirement accounts. But before we get into that, how did you get into this business? Were you one of those people who were just always interested in finances and investments, or is it something that you came to later in life?
SARAH: You know, I did get really lucky. I had an early introduction into the investing world. When I got my first job in high school, my dad took me to open a Roth IRA. But he made me a deal. He said, "Whatever you make this year, I will match it with a contribution into your Roth IRA." And I thought that was a pretty good deal. I got that first W-2. It was so small. I think I made a couple hundred dollars my first … my first working year. But sure enough he matched that contribution, and I just really enjoyed the entire process. I thought it was fascinating to learn about the different rules and the different accounts and all the different investments you could use. I really liked the puzzle of it all—sort of being given a set of parameters and just trying to find the optimal solution.
MARK: That's fantastic. And I'm glad that you figured out the power of the match right away. It's amazing that one of the easiest ways to improve your financial situation is just taking advantage of that employer match if it's available in a 401(k) plan.
And that's a nice lead into my next question here, which is—at a high level, what are the options that are available to you when you're moving from one employer to the next and you've got a retirement account, let's say a 401(k), at your previous employer?
SARAH: So there are four main options for folks. You can cash it, you can leave it, and you can roll it. And I know that only sounds like three, but for that last option, roll it, there are kind of two different ways you can do it.
There's pros and cons to each of those options. So it's really about evaluating what makes the most sense for your situation. There's no one right or wrong answer.
High level—if you're going to cash it out, this is typically for folks who have a need for that liquidity that they can't cover with other dollars. But there are often taxes and penalties associated with doing that.
Leaving it is the path of least resistance initially, but it's really important that you are still keeping track of that account and you're still involved with it.
Rolling it into your own retirement account is always an option. This is typically done with an individual retirement account, or an IRA.
And then the fourth option—rolling it into a new company-sponsored plan. If that plan allows for it, sometimes that's an option as well.
So those last two options are really great for folks that are trying to maybe consolidate accounts, maybe reduce the number of institutions that they're working with. Great for sort of general organization.
MARK: Love the brevity of that. That's actually fantastic. Unfortunately, to a certain extent, there's some bureaucracy and some paperwork and some administrative tasks whenever making one of these decisions. So once an investor, once an employee has decided which of the four options they're going to move forward with, what sort of initial checklist items should they be following from an administrative standpoint to kind of get the process rolling and make it actually happen?
SARAH: It's mostly an exercise in gathering information.
So first, you want to make sure that you have all the appropriate accounts open, right? If you're going to be moving those funds, you want to make sure that you have that receiving account open and ready to go.
You really want to make sure that all of your contact information is up to date with all of the institutions that you're working with, especially that previous 401(k). Maybe you haven't looked at it in a while, maybe moved jobs a few years ago, things got busy, so you just want to make sure that they have updated contact information for you.
I also encourage folks to just take a look at what is inside that account in terms of the different contributions that you've made. You might have some pre-tax money, there could be Roth money, there could be after-tax money. Try to get a sense of the different values in those different buckets, if you will.
The last piece is just to keep track of any loans that you might have on that old 401(k). If you are leaving a company, that can sort of trigger a little bit of a time-sensitive moment with those. So you want to make sure that if you have any loans, you're aware of what you owe and what the rules are for that.
MARK: We'll circle back to some of those topics in a bit. But I wanted to ask you, you brought up kind of the tax treatment and the different types of accounts. How does the tax structure of the retirement account—how does that affect your decision about the process and what you need to do in order to make it happen?
SARAH: It can definitely be confusing. There are a lot of different retirement accounts. In fact, the IRS has a great rollover chart. You can truly just search in any internet search engine, "IRS rollover chart," and it will pull it up. I think it's like an eight-or-eight or nine-by-nine to show you where different accounts can go.
But ultimately, what we're trying to do in this process, is we're just trying to match the tax status. So if you have pre-tax dollars in a previous 401(k), we just want to make sure that that's going into an account that also holds pre-tax dollars. Same thing with Roth dollars, Roth to Roth. Having the tax status of the accounts match is really what makes that process tax neutral. So it never hurts to ask a tax advisor about what those tax consequences might look like for you specifically.
MARK: So Sarah, you mentioned pre-tax dollars in a 401(k). Could you take a moment and explain that in a little bit more detail?
SARAH: Yes, so your pre-tax dollars—this is the, I would say, default way that most people are contributing to an employer-sponsored plan, often a 401(k). But you might have other kinds, like a 403(b) or a 457. But basically what this means is you are choosing to take a tax break on those dollars today in exchange for paying taxes on them down the road.
So to make my math easy—if you made $100,000 this year, and you put $10,000 into your pre-tax 401(k), you're only going to be taxed as though you made $90,000. And so in exchange then, you've gotten that tax break today, you have not paid taxes on any of that 10,000. When you go to take that money out later on, that's when you're going to pay the taxes on it.
MARK: Let's say someone knows ahead of time that they'll be leaving an employer to start a new job soon. Maybe they haven't told their employer, but they're thinking about it, and they're getting things lined up. Are there any steps they can take ahead of time to prepare for this transition?
SARAH: Absolutely. So I tell folks that you don't have to wait for that moment of separation to start looking at your options. You can start that process now.
A lot of times, I find that people can identify one or two of those four options that sound best to them pretty quickly. And so we focus mostly on understanding what that process would look like in the event that you did leave. And so, be sure to evaluate those four different options. Try to narrow it down to one or two that sounds like it will fit your situation the best.
And then as far as some of the practical pieces—once again, if you have a loan in that 401(k), by leaving the company, you're going to need to make a decision on how you're going to pay that back. So in a perfect world, I'd love for someone to have the cash available to repay that loan.
And also just take a look at what you've contributed so far year-to-date. If you have an employer plan at your next job, it will be helpful for you to know what has already been contributed to a 401(k) plan so that you don't end up over-contributing and having a little bit of a tax mess then to fix that at the end of the year.
MARK: Yeah, and now in some situations, a less than ideal situation probably for most people, there's going to be kind of an involuntary separation between them and their employer. If somebody finds themselves going through that, what do they need to know to make, again, make this decision and make it in the best way possible?
SARAH: Yeah, that's always a tough one. It can be a really difficult time if you're losing a job. That oftentimes means that people don't have the time to prepare to potentially pay back a loan in that 401(k).
So you have two options. You can try to pay that back as best as you can. With the new Tax Cut and Jobs Act, borrowers have until their next tax filing deadline, so April 15th for most folks. You have until that time to pay that loan back. And if you don't think that that's going to be the best option for you, the other option is that loan just becomes a distribution. A lot of times when that's the case, there are going to be some taxes and penalties in mind. So I just encourage folks to do a little back -of-the-napkin math on that so that you're not surprised when tax time rolls around.
MARK: Yeah, so how do you think about that for the person—they separated from their job—nd for whatever reason, maybe they're still employed, but they find themselves short on funds? They need a source of funds, and they see that they've got that 401(k) balance right there. So you described a couple different options, just take a distribution or take a loan. What do you think about the advisability of just doing that? Do you think that's a good idea?
SARAH: It's not my first choice for folks when we're looking for liquidity. Not only because we want this money to continue to grow for retirement down the road, but also because it can be complicated and expensive from a tax and penalty standpoint. So in a perfect world, I would look to other sources of funding first, but you can access this money in a bind.
So for example, if you have a previous 401(k)—maybe you've started that new job or you're still looking for that new job and you just need a little bit of liquidity in the meantime—you can do something called an indirect rollover where the money is sent directly to you. You have 60 days to return that money to a similar tax status account. And so sometimes I find that folks will do that, and they hope that they will have the ability to repay that maybe with a signing bonus or something to that extent. So sometimes we can access that money and sort of put it back without incurring any penalties or fees.
A second piece to consider is you might have different types of contributions in your 401(k). I said earlier, it could be pre-tax, it could be Roth, it could be after-tax. You typically have the option to take post-tax contributions, so Roth contributions or after-tax contributions. You can access those without incurring any penalties or taxes. So maybe if you're looking to take money, you might take that first to try to avoid some of those penalties and taxes.
My last item would just be if you do kind of roll through all these options, and you're just going to need to take some pre-tax money, just account for the fact that distributions are typically taxed as income. So both federal and state taxes typically apply, plus a 10% penalty if you're taking that money before 59½. So budget for that so that, when tax time comes around, you're not just leaving that as a problem for future you.
MARK: Now that's a great point because there's a reason advisors discourage people from taking distributions early, because it's expensive to try to get access to that money. So excellent point there.
On the issue of loans, could you expand a little bit on that as to how that works? I think the numbers are something like 20% of 401(k) plan participants at any given time have a loan against their account. So how do you go about doing that? And as you talked about earlier, how do you pay it back?
SARAH: Yes, so it's becoming a much more popular feature of 401(k)s, but not all 401(k)s have it. So you'll have to check to see if it's offered in your plan. But you need to be employed in order to take a loan out of your 401(k) because you're going to be paying that back with payroll contributions.
There are some limits also as to how much you can take from your 401(k). You can take a loan of up to $50,000 or 50% of the balance, whichever is less. So for example, if your balance is $20,000, you could take a loan of up to $10,000. If your balance is $200,000, you can only take a loan up to $50K there.
I do sometimes hear people talk about 401(k) loans as it feels like a better option than taking loans from other areas because an interesting factor of these loans is the interest that you're paying, you're paying back to yourself. And so I think that sometimes makes people feel better about taking a loan from their 401(k). That being said, I will say that you can sort of achieve the same outcome by increasing your savings rate by whatever that interest rate would have been. So it's not the most effective way to save for retirement. You're not really increasing a savings rate by that much by doing it. So I just encourage folks—like taking that 401(k) loan, you just need to be really thoughtful about how you're going to be paying that back. Because if you're no longer employed with the company, the loan needs to be paid back, or it's going to be considered a distribution.
MARK: We haven't talked about the "leave it" option. So what are the consequences of someone who, they leave their employer and, you know, they just leave the account? What's involved with that option?
SARAH: This is the path of least resistance for a lot of folks, and it often feels like the easiest option. But it's really important that if you are choosing this, that you are committing yourself to logging into this account a few times a year and reviewing some details on it.
So you want to make sure you have updated contact information. You want to double-check any fees that you're paying. And you want to check your investment options. All of those details are things that can change within that 401(k) plan. And if you don't have updated information for them, you might not be getting good information about those changes or timely information about those changes.
And of course, plans can also change where they're held. And so I've had a couple situations with folks where they left it. They weren't really checking in on it. The plan moves to another company. They decide they want to do something with it, and it becomes not a particularly fun game of tracking down where that is. So even though that might seem like the easiest option, if folks are going to leave it, I tell them, "You got to make sure that you've got some calendar reminders in your phone, in your calendar app, whatever you use, that it's going to pop up and tell you to log in and check on this. And if that doesn't seem like a good option, if that seems like a lot of work, then maybe this isn't the best option for it."
MARK: I mean, it's one thing to leave it in its location. It's another thing to neglect it.
SARAH: Yes.
MARK: Right? I think that's what you're getting at. You can't neglect any of your accounts. That's good advice, not just for a 401(k). Anything—they all require a little bit of care and feeding.
One thing I wanted to kind of switch gears here a little bit, and you know, you deal with a lot of couples, and in many of those situations, the couples both are working. They both have their own kind of financial life. It seems to me that it's unusual that for spouses to kind of coordinate their retirement accounts, and I wonder if you had any kind of thoughts on that. You know, is it better for people to just … each one operate independently, or is it better to kind of coordinate things in a way so that there's a better collective outcome?
SARAH: So I will say that there's a different way of managing funds as a couple. There are as many ways to do that as there are couples in the world. So everybody does it a little bit differently.
That being said, I think these accounts are one of those areas that are hard for people to coordinate. And that's simply because these accounts are going to follow one person, one Social Security number. There's no joint IRA or joint 401(k) option. So sometimes, you know a lot of times with couples, we'll have slightly different investment preferences. And so we just want to make sure that we're sort of accounting for that from a household standpoint. A lot of times one spouse is really comfortable with risk, and the other person is not as comfortable with risk. And we see that reflected in how they've chosen to invest their funds.
So what I encourage folks to do is I encourage them to have a household target allocation. So based off of a combined risk tolerance, a combined time horizon for their goals. We're aiming for a portfolio with a certain balance of stocks and bonds. Not every account needs to have that exact balance, but from a household standpoint, that's what we would like to see. So maybe one person in the relationship is going to be a little heavier in stock in their accounts. And so it allows the other person to be a little bit less risky if that's what they prefer.
MARK: Couple more questions here, one of which is a little bit wonky. When you're moving your account from, let's say, one employer to another or moving it into a rollover IRA, are you moving the cash, like the positions are sold and then the cash is moved? Or are you moving the positions as-is to the new account?
SARAH: It is a strange process. I don't know that there are any other transfers quite like it. But most of the time, the positions are sold. And a check is sent to wherever—in a rollover process, it's sent to the new institution, whether that's going into an IRA or into a new employer sponsored account. And then once that cash is deposited, you need to go in and invest it. So it's very different than the process of maybe transferring a brokerage account. And it can feel strange that that's the process here.
I will say some companies—if you're moving from a 401(k) held at a certain institution into an IRA at that same institution—they might be able to transfer the funds themselves. It just depends on how those funds are structured.
So it's really a case-by-case basis in terms of keeping the original positions, but most of the time you will be sold out of your positions, and you will need to reinvest in its final destination.
MARK: Sarah, one more question for you. What kind of—because you're working with a lot of different types of people in a lot of different types of situations—what sort of emotional biases do you see play a part when people are making these kinds of decisions during these employment transitions? Do options like withdrawals or the "do nothing" option, are those more attractive or less attractive based on some of the tendencies we all know people have?
SARAH: I think the two common culprits when it comes to investing—they're pretty consistent across the board—fear and greed. They show up in these decisions as well.
I think a lot of times the decision to leave it is made from a position of fear. There's concern that they're going to make the wrong move in the process of changing things around. They might be afraid of losing out on something, and so it almost feels safer to just keep it as-is.
Leaving it can be an option, but I just encourage folks to make sure that they're making that decision based off of something that benefits them and their long-term goals and that we're not just doing that because it's the path of least resistance here.
The other culprit from a greed standpoint—I've heard a lot of folks say that the investments seem to be doing well. And so they just leave them, and sometimes that can make sense. But you want to make sure that investment fits with your long-term goals, not just because you're excited about that short-term performance.
And then from a cash-out standpoint—it's always tempting to have a little extra cash on hand, but we just want to make sure that, once again, we're taking a step back from that short-term moment and taking a look at our long-term goals and trying to make a decision that's going to benefit us not only now, but also many years down the line.
MARK: Yeah, I think that temptation to spend some of it—a very powerful temptation, but I think as you pointed out earlier, a very expensive temptation after you take into account penalties and the deferred taxes that you've got to pay.
So Sarah Buchardt, thanks for being here today.
SARAH: Thank you so much for having me, Mark. I really enjoyed our conversation.
MARK: Sarah provided a lot of food for thought, and I wanted to also mention that you should ask yourself two questions as you're thinking about this decision.
Am I saving the right amount? And am I investing the assets in the right way?
Because of the status quo bias, there's a good chance you haven't looked at your savings rate and your investment choices lately. The choices you made when you started working for your old employer might not be the best choices for you today.
As the name implies, that status quo bias[2] causes us to stay the course and not make changes to our routine even when our circumstances change a lot and we probably should make changes. This happens because sticking with what you've always done is easier than taking action and changing course. This matters because doing nothing could result in a sub-optimal situation.
It's easy to imagine how this could happen with a 401(k). In fact, the original study that identified the status quo bias was inspired by the behavior of employees in a tax-deferred savings plan like the 401(k).
So take this opportunity to review your old choices and adjust them as needed.
If you'd like to learn more about your options when it comes to saving for retirement, check out Schwab.com/retirement. You can find answers to common questions and try different calculators to estimate your retirement needs. We'll link to it in the show notes. Or call us and talk to a professional at 1-877-279-4476.
Now it's time for the "What's New?" segment, where I share with you a recent study on some of the themes that we cover periodically on this podcast.
As I mentioned at the opening, I'm recording this in December, and that's a month where a lot of people contribute to charities.
According to Nonprofits Source, 30% of annual giving occurs in December.[3]
And this isn't just a few people giving a lot of money. 69% of the U.S. population gives to charity,3 with the average person supporting 4.5 charities.3
Given those numbers, it wouldn't surprise me if many listeners volunteer at a charity, perhaps are on the board of a charitable organization, or contribute to a cause, and they'd like to see more people to do the same.
So how do you get people in a charitable mindset? It turns out there's a robust literature in academia focused on what drives charitable intentions and how to get people to give more money to your worthy cause.
And I just happened to read a study on this topic that was published this year.
The study's entitled "Gratitude, Finance, and Financial Gratitude Reminders in Charitable Giving: A Repeated Experiment Over Time."[4] There's a lot going on with this study, so I'm just going to focus on one part of it.
Researchers created a group of about 250 participants, and they were told to focus on "three good things" in any area of life—relationships, work, school, leisure, physical and mental health, etc.
By focus, I mean they had to write down answers to a variety of questions about the good things that they selected. For example: What was the thing? When did it happen? What exactly happened? How did this thing make you feel when it first happened? How do you feel about it now? And why did this good thing come about in the first place?"
Crucially, they didn't do this exercise just once. Every day for the next seven days, the participants were reminded to repeat the exercise.
The way this connects to charitable giving is that the participants were asked before this gratitude exercise started how likely they would be to contribute to various charities. They were again asked about their charitable intentions at the end of each of the seven days and again 30 days after the reminders stopped.
The bottom line is that performing this gratitude exercise appeared to have caused a large increase in their declared intent to make charitable contributions, but it dropped off after the 30 days passed with no reminders to perform the exercise.
So if you're trying to get people to donate to charity, have them think about the good things in their lives, the things they're grateful for, and that seems to make people more likely to share their good fortune with others.
That's it for this episode and for this season of Financial Decoder. We'll be back in early February with new episodes. And if you just can't wait and need a little more Financial Decoder, you can check out dozens of our previous episodes posted on Schwab.com/learn.
While the holidays are a magical season, this show doesn't happen because of magic. Many people make it happen, and I'd like to thank them in alphabetical order: Colette Auclair, Matt Bucher, Nathan Crenshaw, Kory Hill, Deb Hinton-Brown, and Patrick Ricci.
These professionals do great work on this show, but on Schwab's other podcasts as well, in addition to other work that they do on behalf of Schwab clients. So thank you again.
For those listening, if you like the show, consider telling a friend about us. You can follow us for free in your favorite podcasting app.
And consider leaving us a rating or review on Apple Podcasts or, again, on your favorite podcasting app.
And if you'd like to hear more from me, you can follow me on my LinkedIn page or X, formerly known as Twitter, at Mark Riepe: M-A-R-K-R-I-E-P-E.
As always, thanks for listening, and happy holidays.
[1] Campbell, Stefan, "Average Number of Jobs in a Lifetime (2023 Statistics)," The Small Business Blog, July 28, 2023, https://thesmallbusinessblog.net/average-number-of-jobs-in-a-lifetime
[2] William Samuelson and Richard Zeckhauser, "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, 1988.
[3] "The Ultimate List of Charitable Giving Statistics For 2023," nonprofitsource.com, accessed December 4, 2023, https://nonprofitssource.com/online-giving-statistics.
[4] Yi Lui et al, "Gratitude, finance, and financial gratitude reminders in charitable giving: A repeated experiment over time," Financial Services Review, 31 (2023), 23-24.