Smart Money Podcast: ‘I Got Laid Off. What Should I Do With My Retirement Fund?’
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s question is from Kaylyn, who says, "Hello, Nerds. Like so many other people right now, I was laid off this week. I've done some research about what to do with my 403(b) retirement account, and I think I should roll it into an IRA. How do I do that?"
In normal times, it can make sense to leave your retirement money in a former employer’s plan until you get your next job. Then you can (usually) transfer the money straight from the old plan to the new one. Employer plans have benefits that IRAs don’t and often offer cheaper investment options than you would get from an IRA.
With unemployment so high, though, you could be out of work for a while. You may need to tap that retirement money for living expenses — something we at NerdWallet normally discourage, but which is sometimes necessary.
Check to see if your former employer allows "coronavirus hardship withdrawals," a newly created way to access your retirement money without penalty if you were physically or financially affected by the coronavirus pandemic. (Because your layoff was likely related to the pandemic, you would qualify.) You still have to pay taxes on any withdrawals, but you can spread the tax bill over three years. You can even get those taxes refunded if you pay the money back within three years and amend your tax returns.
If the employer doesn’t offer that option, or your plan isn’t great — it has high costs or limited investment options — then a direct IRA rollover could be a good move. You can open the rollover IRA at a discount brokerage, and they will help you move the money. Don’t let the old plan send you a check, because they will withhold 20% of your money. Instead, make sure your account balance is sent directly to the brokerage.
You can decrease the odds of needing to raid your retirement by taking certain steps after you’re laid off. The first and most important: Apply for unemployment immediately. Due to the huge numbers of applicants, systems are overwhelmed, which means it’s taking longer to get approved.
Cut expenses where you can; then see how long your current resources, including any emergency fund and expected unemployment insurance, will last. You may need to cut expenses further, search for other government benefits or turn for help from your community.
Apply for unemployment immediately. Then seek out other potential sources of help, including possible forbearance on your debts, government benefits and community resources.
Get your retirement plan sorted out. Rolling a workplace plan into an IRA could give you better access to the money if your former employer doesn’t offer coronavirus hardship withdrawals.
Cut costs where you can. You could be out of work for a while, and ditching expenses can help make your money last longer.
More about unemployment issues on NerdWallet:
Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, return to the podcast homepage.
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 your host, Sean Pyles.
Liz Weston: And I'm your other host, 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]
Sean: In this episode, we're going to talk about steps you should take if you're newly unemployed, including how to manage your retirement account. But first, in our “This Week in Your Money” segment, Liz and I will talk about why the stock market is on an upswing when we're seeing record unemployment, and what that does and doesn't mean for your personal finances.
Liz: Yeah, there's a huge disconnect between what's going on in the stock market and what's going on in real life. So, Sean, can you give us a recap of what's been happening?
Sean: Sure. So, as everyone probably knows, there are record numbers of Americans out of work due to the pandemic. But as of early May, the stock market rebounded more than 30% from its low in late March, and it’s been up and down since then. The stock market is alternating between optimism that there will be a quick recovery and despair that we’re heading into a deep recession.
But the stock market's performance is also a reflection of a handful of companies, some of which have been doing really, really well, like Microsoft and Apple. These tech companies are having a heyday right now, making tons of money off of all the services that we have to rely on right now. So it's more of a reflection of a small handful of factors more than what's happening on Main Street. So this is all to say, to quote Kai Ryssdal, the host of NPR’s "Marketplace," that the stock market is not the economy.
Liz: Yeah, and I really want to drill down on that a bit because we've gotten this idea somehow that the stock market reflects the economy or is the economy, and those have become so disconnected. I think this idea actually goes all the way back to the Great Depression because we saw the stock market crash back then — or the people who were alive saw the stock market crash — and then the economy crashed with it. So in the popular imagination, these two things are inextricably linked. And so seeing the stock market just go bananas — I was commenting to a friend that it was like, you know, watching a frat party on the edge of a volcano. It's like, nothing good can happen from this.
Sean: All of your Solo cups are gonna melt.
Liz: Yes, yes! But that said, the stock market in general is a bunch of super big, big companies, as you mentioned, and the brunt of the economic impact is happening to small businesses.
Sean: Yeah. And it can be easy to conflate what's happening with the stock market and the economy and think that the stock market is somehow cheering for people to be unemployed. That's not really the case. They can be echoes of each other, but they are very separate in some key ways.
Especially because the vast majority of stocks are held by a very small percentage of people. So that's something to consider here as well.
Liz: You want to be one of those people if you possibly can be. That's kind of the one way that the little guy can have a piece of the action is if they are an investor.
Sean: Right. And there are some easy ways to invest. Which brings me to something that I wanted to talk about. You know, at NerdWallet, we're super keen on the actionable advice, talking about how big economic trends and daily actions can fit into your personal money picture. And so investing is a way that your personal economy can connect to the stock market, but what I would like to hear from you is how you think people might be able to take advantage of these recent swings, or if they should just totally tune it out. What do you think?
Liz: Well, I think it's a really good time to think about your goals. OK. So I think a lot of people had money in the stock market that they actually needed. And Betterment did this survey and they found like 20% of their investors pulled money out of the market, because — I think — the majority of them needed it for current bills. And this is not good, you should not have money that you need within five years, within 10 years sitting in stocks, because that's just too dangerous. So I think we've got to remind ourselves that it's really important to have a long-term perspective, if you're going to have money in the stock market.
Sean: Liz, I'm wondering how this current economic moment, the swings in the stock market, are affecting the way that you're managing your personal finances? Have you made any changes? Or are you holding steady?
Liz: Well, you know, they beat it into you in CFP school that the stock market always comes back, the stock market always comes back, and that's what the history shows. So, for our retirement, we’re letting that ride. I did go in and make sure that my daughter's college fund was safe, that it was in cash and Treasury bonds because I want that money to be there. I also looked around and thought, you know what, I think I want to save a little bit more. So I bumped up our savings rate just to make sure that we have extra cash. We also have access to a lot of credit. I have a ton of credit cards because I love chasing rewards. And we also have, you know, a home equity line of credit that we keep on the house that we have there just for emergencies. So I feel like we're in pretty good shape. How about you, Sean, did you do anything different?
Sean: Yes and no. I also upped the amount that I was saving, I have a pretty lofty savings goal for myself this year, and I'm making sure that I can hit it. And that means cutting back where I'm spending money, but also just to make sure that I'm more financially resilient in this uncertain time, I made sure that I could really hit that goal and have as much in my savings as possible. So that's one small change I made. I am pretty new to investing and I have a robo-advisor account that I deposit money into monthly and I just kept that the same. I haven't touched it because as I've heard over and over again, the stock market is going to go down, but it's gonna come up. So I just didn't really want to touch it. And I think that's probably the best thing for me for the long run.
Liz: Is this retirement money?
Sean: No, this is just general kind of dabbling, investing money I've never really invested before. I'm really new to it. So I do have my retirement account. But I don't touch that at all, besides making sure that I am contributing as much as I can to get my match and all of that, but no, this is just money that I want to have become more money. So I'm keeping it in my robo-advisor account to do that, over the course of you know, five to 10 years.
Liz: OK. Again, they beat it into you in CFP school that you have to have a goal for your money before you put it in the stock market, but making more money is definitely, you know, experimenting with it or playing, having play money — that's a legitimate goal.
Sean: And it's also a way for me to learn how to do this, and to figure out what I do and don't feel comfortable doing, so this is really kind of like educational money for me.
Liz: I like that. And maybe that's what was happening when people were pulling money out of the market — at least a portion of it — was people had been experimenting. And then they thought, "Oh, I don't have nearly the risk tolerance that I thought, I want my money back."
Sean: Learning their lessons the hard way, maybe.
Liz: Yeah, yeah. But the retirement money, that absolutely should stay in for the long haul.
Sean: Well, speaking of retirement accounts, that's really the core of this week's money question. And I think that we can just head on into that. What do you think Liz?
Liz: Yeah, sounds good.
Sean: All right. This week's money question, which comes from Kaylyn, and they say, "Hello, Nerds. Like so many other people right now, I was laid off this week. I've done some research about what to do with my 403(b) retirement account, and I think I should roll it into an IRA. How do I do that?"
Liz: I actually love this question because Kaylyn is thinking about doing the right thing, rather than pulling the money out right away. So I'm really glad she asked us.
Sean: Yeah. And it's interesting because there are so many things to tackle right when you're laid off. I'm a little surprised and impressed that Kaylyn is thinking what to do with their retirement account right now. So kudos to you, Kaylyn. And also, I'm really sorry to hear about your situation. I'm sure you're going through a pretty hard time right now, but we are really happy to be of help however we can. So in this episode of the NerdWallet Smart Money podcast, Liz and I are talking with Kelsey Sheehy, a Nerd who's done a lot of reporting on how to handle unemployment. We'll talk with her about the steps you should take right after getting laid off, and then we'll get some help from Liz about how to manage your workplace retirement account when you've been laid off.
Liz: All right, great. Let's get to it.
Sean: All right. Hey Kelsey, thank you so much for joining us.
Kelsey Sheehy: Thanks for having me. This is such an important topic right now.
Liz: Yes, absolutely. And we're really glad to have your help with it. So here's the deal, like tens of millions of other Americans, our listener Kaylyn was recently laid off. Let's start by talking about what people should do immediately after getting laid off. What's your advice there?
Kelsey: So the absolute first thing you should do is apply for unemployment. And the reason for that is that it takes a few weeks for claims to be processed under normal circumstances. And these circumstances are anything but normal. So there are going to be delays. You want to get that process started as soon as possible. Once you get your unemployment claim in, start to triage your bills. If you have an emergency fund, how far is that going to get you? You need to have that information, so you can start to prioritize. Call your banks and lenders, anyone you owe money to — and a lot of companies, thankfully, are offering some relief right now. But you have to be proactive and connect to them. That way, if you can, you can suspend payments and free up some cash for things you can't delay.
Liz: And Kelsey, people should really be taking a look at their spending and their budgets, right?
Kelsey: Yes, absolutely. Once you have determined how much of an emergency fund you have, if you have one, take a look at your expenses and cut back anywhere that you can. It's going to be tough, but remember this is temporary, and it's really to be able to free up as much room in your budget as possible, for those things that can't be paused. So look at things like gym memberships, subscription services, premium cable channels, anything extra. Just trying to cut things down to the basics, to get you through until you have money coming in again. Because remember, those unemployment checks are going to take a while to come. Some people have been waiting months to get their unemployment. So you really need to be prepared and make any funds that you have stretch as far as you possibly can.
Liz: This is something that probably every millennial knows, but if you don't, you might be able to save money by hopping onto someone else's cell phone plan. So that's something a friend of mine did when she got laid off; she was basically included in her friend's family's cell phone plan and saved a lot of money that way.
Sean: Yeah, I'll admit I'm still on my mom's cell phone plan that I've had since middle school, at this point. And I'm saving a lot of money on it. I did some shopping around, but I will say it's worth everyone's effort to maybe double-check your parents or your friends, do some homework there because we found our bill creeping up year over year. And that was basically because the people that were talking to my mom at the cell phone company were like, "Oh, hey, you need this thing and this thing." And our cell phone bill doubled over the course of a couple of years. And when I began to shop around and maybe think about pulling out, that's when she called them again and was like, "Hey, how can we pare this back?" Now we have, like, the same quality of service, but it's a lot less.
Kelsey: Yeah. That kind of goes for every single bill you have. Cutting back on expenses isn't just looking at the obvious things. It's looking at your car insurance, looking at your cell phone bill, looking at every single thing that you're paying out and seeing what you can save money on. Most people never shop around for car insurance and will actually find out that they could save quite a bit. The same goes for your cell phone plan; stick with the same thing for years and years and years and that bill just slowly creeps up on you. So seeing are there things you can take off? Can you take off cell phone insurance? If your phone is pretty much paid off, that might be a good way, even just to shave $10 off of your bill.
One thing that's interesting that my family has found, because all six of us are on a cell phone plan together as well, is that we're using far less data right now because we're all home together and we're on Wi-Fi. So instead of using 20 gigabytes of data, between the six of us, we're using three gigabytes of data. So take a look at your usage and you might be able to change your plan depending on how you're using your phone. Now, unfortunately, some cell phone carriers only offer unlimited plans anymore, but it's definitely worth looking at your bill. It's a good habit to get into anyhow and see how you're using your phone and whether you're on the right plan for you.
Liz: There are a couple of other places to look for some cash, which Kelsey mentioned, like auto insurance. A lot of auto insurers right now are kicking back money to their customers, because people are not driving as much and the claims are way, way down. So insurance companies actually have extra profits and they are kicking those back, I think before the regulators forced them to do so. If your auto insurer hasn't reached out to you, maybe reach out to them and see if you can get your premiums refunded, or at least part of it.
Sean: All right. So first off you apply for unemployment, and then while you're waiting, sort out your finances, make sure you're making cuts where you can in your budget. And then you wait for your benefits. But some people have been waiting and waiting and waiting and calling and calling and calling and they still don't have their benefits. What do you think people should do if they're in this situation?
Kelsey: Yeah, that is so frustrating. And everyone is experiencing that same thing right now. So my advice is to use all of the avenues available to you — email, website, chat functions, even social media — a lot of state unemployment agencies are sharing frequent updates on their Facebook pages, but they're also answering people's questions. So look through and see, maybe your question has already been answered. The same thing goes with FAQs on your state unemployment agency's website. These can be hard to find, but they're great resources and you may find the question that you have has already been answered, which can save you hours and hours and hours of waiting on hold.
Liz: And a lot of people are getting denied, I hear.
Kelsey: A lot of people are getting denied, but it's important to understand the reason why. A lot of people who are getting denied are maybe either self-employed, gig workers, independent contractors, or people who work part time and normally wouldn't qualify for unemployment benefits. The good news is they do qualify for what's called pandemic unemployment assistance, which was part of that massive coronavirus relief bill that Congress passed at the end of March. It's not well communicated on unemployment websites, but in a lot of states, you actually have to be denied for unemployment before you'll even be considered for this pandemic unemployment assistance. So if you do get denied for unemployment, it's not the end of the road — you do have other options. Especially right now with these different federal programs in place.
Sean: Yeah. And one thing that I heard that was some good news, if you live in the state of New York, the New York Bar Association is offering free help for people who have had their application denied. So if you're in that state, look into it. And that actually reminds me of something I wanted to talk with you about, Kelsey, which is community resources. I'm wondering how you think people can tap them and what sort of help they might be able to get, if they've just been laid off?
Kelsey: That's such a great question, because there are so many different resources for people right now because everyone's in this position. So, for example, restaurant workers, hospitality workers, they're just unemployed, laid off by the tens of thousands. And so there are groups that are popping up in different cities that are supporting these workers. I live in D.C., for example, and there is a place you can go to get a free meal every night for you and your family, if you're in the hospitality industry. So it's important to find these resources, these community programs, and connect with them.
But also don't forget the more obvious resources like food banks, like food assistance and food stamps. Those are still available, too. They're overwhelmed by the number of people needing those benefits, but they're still available and they're getting lots of donations to help with this unprecedented demand. But talk to your co-workers, talk to other people in the industry, look for Facebook groups, look on Nextdoor, ask people if there are resources available to get meals, to feed your kids. A lot of schools are still offering free lunches for students, even though school's not in session anymore.
Liz: I wanted to throw in, as well, that there are a lot of financial advisors who are offering free help, and this can be super helpful if you need to get forbearance, for example, or you need help working out a budget for this period. So a couple of the organizations are the Association for Financial Counseling and Planning Education. That's a mouthful, AFCPE, but they are working with Wells Fargo to set people up with counselors and with coaches for free help. The Financial Planning Association's doing that as well. The XY Planning Network and our friends at the National Foundation for Credit Counseling, they have a lot of free help available. So you can look into those resources as well, if you have money questions.
Sean: All right. So this advice, so far, will help anyone who's been laid off recently. I want to turn now to the core of Kaylyn's question, which is about how to handle a retirement account after getting laid off. Specifically, how to roll a 403(b) account into an IRA. And Liz, this is something that you know about, right?
Liz: Yes. And like so many other areas of personal finance, the pandemic's kind of put the usual advice on its head. Normally I would tell people: If you can, leave the money where it is, in your employer's account, once you leave the job. And then maybe roll it over to the new employer's account when you get your next job. The advantage to that is workplace retirement funds tend to have low-cost investment options and it's one less thing to worry about. Now, the problem today is that not all employers are offering the new coronavirus hardship withdrawals. This is a really helpful option for a lot of people, which allows them to pull their money out of their retirement funds without having to pay a penalty. They do have to pay taxes, but they can spread those taxes over three years. So if things get worse for Kaylyn, she would have access to her retirement money through a coronavirus hardship withdrawal.
If her former employer does not offer that option, then she could move the money into an IRA. She could do that rollover, and then she could do her own coronavirus hardship withdrawal. So I think I would say in this case, probably a good idea to do the rollover. The important thing to remember is it needs to be a direct rollover. So what that means is you need to go to the discount brokerage, open up the rollover IRA, and have them help you move that money from the employer's account to the new IRA. You do not want to get a check in the mail. And the reason for that is if you get a check in the mail, they're going to withhold 20% of your money and you don't want that to happen.
Sean: OK. So it seems like there are some pretty specific technical aspects of what you want to have done, in what order to make sure this goes through as cost-effectively and as efficiently as possible. One thing I wanted to clarify is that Kaylyn has a 403(b), which if people don't know is basically like a 401(k), but if you're typically in the nonprofit sector, this is your equivalent to that. I'm wondering, Liz, if there are any weird quirks of 403(b)s and rolling them into IRAs, that people should be aware of?
Liz: The only thing that I can think of is that if you are in a 403(b), they're kind of notorious for being expensive. So with other people, if you're in a 401(k) and it's a big company, you've got access to super cheap index funds and other really low-cost investments. That hasn't traditionally been true for 403(b)s. So there's actually less of a reason to leave the money there, because if you move it over into an IRA, now you'll be getting access to — maybe it's more expensive than what a 401(k) account would give you, but it's going to be probably less expensive than what you had in your 403(b), if you can follow all that. So once again, it's another reason to move that money and get it into an IRA. And if you're not an investing expert, you basically pick a target-date retirement fund and you put your money there, let that do the heavy lifting for you.
Sean: We have all sorts of articles at NerdWallet that can help you parse all these different kinds of accounts. So if your head's spinning a little bit, I know there's a lot of weird words in here, we have some links on the show notes post, so you can check that out. But I have another question for you, Liz, which is how to decide between a traditional or a Roth IRA and what you think would maybe be a good idea for Kaylyn?
Liz: That's another interesting dilemma, because since her income has gone down, it might be a really great time to do a Roth conversion. The problem with that is you're paying taxes on all this money now, and you may not want to take on a tax bill at this point. We just don't know what the future is going to bring in terms of unemployment. It could be that by the time the fall rolls around, you'll be back in a job and you might feel comfortable paying that tax bill. Or you could roll around to December and think I really shouldn't have done that Roth IRA, I really could use those taxes right now. So in general, we say if you expect to be in a higher tax bracket in retirement, a Roth conversion can make sense.
Most people are not going to be in a higher tax bracket in retirement; most people's tax bracket drops. Once again, if you're younger, there's probably more of a chance you're going to be paying higher taxes down the road because there's a lot of debt going on right now and tax rates are probably going to go up. Again, a lot of moving parts. This would be a great question to take to a financial advisor. So those resources that we mentioned earlier, that can give you free help with these kinds of questions, or if you have a tax pro or you already have a financial advisor, that's something to ask them.
Sean: All right. Well, I think that about covers it. Kaylyn, I hope this has helped you figure out (1) how to manage your current state of unemployment and (2) make the most of your retirement account right now. With that, let's head into our takeaway tips. First up, if you were recently laid off, take advantage of all resources available, from unemployment insurance to community resources.
Liz: Get your retirement plan sorted out. It may be a good idea to roll a workplace plan into an IRA.
Sean: And lastly, while you wait for your unemployment check to come, cut expenses where you can and leave no rock unturned. And that is all we have for this episode. If you have a money question of your own, turn to the Nerds and call or text us on the Nerd hotline 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 of course, remember to subscribe, rate and review us wherever you're getting this podcast.
Liz: And 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.
Sean: And with that said, until next time, turn to the Nerds.