Getting laid off forces a dozen money decisions into a few weeks, and several of them come with hard deadlines. You'll need to review your severance before signing, decide on health insurance within 60 days, figure out what happens to your stock, and choose what to do with your 401(k), all while you're dealing with the shock of losing your job.
The checklist below covers what everyone should do. What it can't tell you is how the pieces fit together for you: whether to exercise your options before they expire, whether rolling your 401(k) into an IRA will cause problems later, or how to use a lower-income year to your advantage. Those decisions depend on your stock, your savings and your plans, and getting them in the right order can be worth far more than the severance check itself. That's the work I do with tech professionals and executives after a layoff, and the earlier you start, the more options you have.
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Here's everything to work through, roughly in the order it comes up:
1. Before you sign anything
Your severance agreement is usually the first thing put in front of you, and it's the one document you shouldn't rush.
Take your time: You rarely have to sign on the spot. If you're 40 or older, federal law generally gives you 21 days to consider a severance agreement (45 days in a group layoff) and 7 days to change your mind after signing.
Read what you're giving up: Most agreements ask you to release legal claims against the company. Look for non-compete, non-solicit and confidentiality terms too.
Know what's negotiable: Severance pay, a prorated bonus, extra vesting, a longer window to exercise stock options, COBRA premiums paid by the company, and your official termination date can all be on the table. Moving your termination date past your next vest date can be worth more than extra weeks of pay.
Save your documents: Before your access ends, keep personal copies of your pay stubs, offer letter, equity grant agreements, benefits summaries and 401(k) information. You'll need them for almost every decision below.
If the package is large or the terms are complicated, having an employment attorney review it before you sign is often worth the cost.
2. Your company stock/options
For tech employees, this is often where the most money is at stake, and where the deadlines are least forgiving.
Unvested RSUs: Usually forfeited on your termination date unless your severance agreement or a change-in-control plan says otherwise. Know exactly when your next vest was scheduled and whether your termination date falls before or after it.
Vested stock options: Most companies give you about 90 days after you leave to exercise, and options you don't exercise in that window are gone. Check your plan, since some companies offer longer windows.
Incentive stock options: If you exercise more than three months after leaving, they're generally treated as nonqualified options, which means losing the ISO tax benefits. Exercising and holding can also trigger alternative minimum tax.
ESPP: Your participation ends, and contributions for the current purchase period are typically refunded. Shares you've already bought are yours, but selling before the holding periods are met changes how they're taxed.
Trading restrictions: Leaving the company doesn't automatically free you to trade. If you know anything material that isn't public, you still can't trade on it, and some companies keep blackout rules in place for a period after you leave.
The bigger question is what you do with the shares you keep. Without new grants coming, this is often the right moment to decide how much of your net worth you want in one stock.
3. Health insurance
Your coverage usually ends on your last day or at the end of that month, so this one can't wait.
Use your FSA first: If you have a health care FSA, you can generally spend your full annual election before your last day, even if you haven't contributed all of it yet. Schedule appointments and refill prescriptions while you still can.
COBRA: Lets you keep your exact plan for up to 18 months, but you'll pay the full premium plus a small admin fee. You typically have 60 days to elect it, and coverage is retroactive, so you won't have a gap if you sign up within that window.
ACA marketplace: Losing job-based coverage gives you a 60-day special enrollment period. Premium subsidies depend on your income for the year, and severance counts toward it, so run the numbers both ways.
A spouse's plan: Losing your coverage usually lets you join a spouse's employer plan, but the window is often just 30 days.
Your HSA: The money is yours to keep. You can generally use it tax-free to pay COBRA premiums, one of the few times an HSA can cover insurance premiums.
4. Cash and income
The goal here is simple: know how long your money lasts, so you can look for the right job instead of the first one.
File for unemployment right away: Benefits can take weeks to start. Depending on your state, severance may delay or reduce them, but that's not a reason to wait to apply.
Check your final paycheck: Make sure it includes everything you're owed. Whether unused vacation is paid out depends on your state and company policy.
Calculate your runway: Add up your monthly spending, including your new health insurance cost, and divide your cash plus after-tax severance by that number. That's how many months you have.
Protect your retirement savings: Pull from cash and taxable accounts before retirement accounts. Early withdrawals usually come with taxes and penalties.
5. Your 401(k)
There's no rush to move it, but there are a few traps worth knowing before you do.
Don't cash it out: Cashing out means income tax on the full amount, plus a 10% penalty if you're under 59½. It's one of the most expensive mistakes people make after a layoff.
Know your options: You can leave it where it is, roll it into a new employer's plan, or roll it into an IRA. Each has tradeoffs in fees, investment choices and flexibility.
The rule of 55: If you leave your job in or after the year you turn 55, you can generally take penalty-free withdrawals from that employer's 401(k). Rolling it into an IRA gives that up.
Outstanding 401(k) loans: An unpaid loan is usually deducted from your balance after you leave and treated as a distribution. You generally have until your tax filing deadline, including extensions, to put that amount into an IRA and avoid the tax.
Company stock in the plan: If your 401(k) holds your employer's stock, look into net unrealized appreciation before rolling it over. It can let you pay capital gains rates instead of income tax on the growth.
Backdoor Roth contributions: If you make backdoor Roth contributions, rolling a large 401(k) into a traditional IRA can make future ones partly taxable. Rolling into a new employer's plan avoids that.
6. Taxes
A layoff changes your tax picture in two directions at once: severance can leave you underpaid this year, while time off can make next year unusually cheap.
Check your withholding on severance: Severance is taxed as wages, and federal withholding is often a flat 22%. For higher earners, that's usually not enough, especially with stock vesting or option exercises in the same year. Adjust withholding or make an estimated payment to avoid a surprise in April.
Unemployment benefits are taxable: They're taxed federally, and many states tax them too. You can usually choose to have tax withheld.
Use a lower-income year: If you take time off, your income may drop enough to make Roth conversions, or selling appreciated stock at a lower capital gains rate, unusually cheap. This is one of the most overlooked opportunities after a layoff.
Watch your health insurance subsidies: If you're on a marketplace plan, a large Roth conversion or stock sale can shrink your premium subsidy. Plan the two together.
7. Other benefits that end with your job
Life and disability insurance: Coverage through your employer usually ends when you leave. Many policies can be converted or carried over to an individual policy, but often only within about 31 days.
Other perks: Commuter benefits, wellness credits and education stipends usually stop on your last day. Use what you can before then.
Where to start
If you only do three things this week, make them these: don't sign your severance agreement until you've read it, write down every deadline (option exercise window, COBRA, insurance conversions), and figure out how many months of runway you have.
After that, the decisions start to connect. When to exercise options, whether to roll your 401(k), and how to use a lower-income year all affect each other. If you'd like help putting them in the right order, click here to book a free strategy session.
About the Author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm based in Hoboken, New Jersey. He helps executives, tech professionals, and business owners make smart decisions about equity compensation, taxes, and investing.
This article is for educational purposes only and is not tax, legal, or investment advice. Rules for severance, unemployment, benefits and equity compensation vary by state, employer and plan. Consult a qualified professional about your specific situation.
