Laid Off: A Financial Checklist for the First 30 Days

What should you do first after a layoff?

Get three things clear before you make any big decision: the full terms of your severance and the release you are being asked to sign, how long your health insurance lasts and what replaces it, and how many months your cash reserves actually cover. Those three answers set every decision that follows, and none of them require you to move money in the first week.

A layoff is stressful precisely because several clocks start at once: a severance signing deadline, a 60-day health-insurance window, and the pressure of watching your cash balance. The instinct is to do something fast. The better instinct is to get the facts on paper first. When I sit down with someone who has just been let go, the first thing I do is slow the decisions down to the ones that actually have a deadline.

How should you evaluate your severance package?

Read the severance agreement as a set of separate pieces, because each one is negotiable and each is taxed. The main components are the severance pay itself (a lump sum or salary continuation), any payout of unused PTO, a prorated bonus, the treatment of your unvested equity, and the release of claims you sign in exchange.

• Severance pay: often a few weeks per year of service. Lump sum gets you the cash now; salary continuation may keep benefits running longer. Both are taxable.
• Equity: unvested RSUs and options are usually forfeited at your exit date, though some packages accelerate a portion. This is often the largest number in the whole decision, so confirm it in writing.
• The release: you are typically giving up the right to sue in exchange for the payment. You usually have time to review it, and for group layoffs, extra time by law. Do not sign it the day it lands.
• Outplacement and references: low-cost to the company and genuinely useful to you. Ask if it is not offered.

Severance is taxable ordinary income and is usually withheld at the flat 22 percent supplemental-wage rate. If you are a higher earner, 22 percent can under-withhold, so a lump sum can leave you owing in April. See the IRS rules on supplemental wages for how that withholding works.

What happens to your health insurance?

Your employer coverage usually ends on your last day or the end of that month, and you have three main replacements, each with a time limit. This is the most time-sensitive decision after a layoff, so handle it early.

• COBRA: continues your exact plan, but you pay the full premium plus a 2 percent fee. Comprehensive coverage, and often expensive. You have 60 days to elect it.
• ACA marketplace: a job loss opens a special enrollment period, also 60 days. Because subsidies are based on your new, lower income, a marketplace plan is frequently cheaper than COBRA.
• A spouse plan: a job loss is a qualifying event to join your spouse coverage, usually within 30 days.

A useful trick: COBRA is retroactive. You can waive it, shop the marketplace, and if you have a medical event inside the 60-day window before choosing, you can still elect COBRA back to your coverage end date. That lets you compare on price without a gap.

What should you do with your 401(k)?

You have four options, and one of them is almost always a mistake. You can leave the money in the plan, roll it to an IRA, roll it to a new employer plan, or cash it out. Cashing out is the trap: you owe income tax on the whole balance plus a 10 percent early-withdrawal penalty if you are under 59.5, which can vaporize a third of it.

Two details change the math. If you were 55 or older in the year you left, the rule of 55 lets you take penalty-free withdrawals from that specific employer 401(k), so rolling it to an IRA too quickly can actually cost you that flexibility. And if your 401(k) holds appreciated company stock, net unrealized appreciation (NUA) treatment can tax the growth at capital-gains rates instead of ordinary income. Both are worth checking before you move anything.

Before you decide, it helps to see your runway. You can map how many months your savings and severance cover so the 401(k) decision is about strategy, not panic.

How does a layoff change your taxes?

A layoff usually splits your year into two: normal income up to your exit, then a much lower income for the rest of the year. That lower-income stretch is a planning opportunity most people miss. Your severance and any unemployment benefits are both taxable, but the drop in income afterward can put you in a lower bracket than usual.

That opens two moves. A lower-income year can be an ideal time for a Roth conversion at a reduced rate, the same logic I cover in the Roth conversion window before 62 and IRMAA. You can model a conversion against your new bracket to size it. And if a severance lump sum over-taxed you, a quick withholding check keeps April from surprising you.

Hypothetical illustration only, not a projection of actual results. Figures assume the stated inputs and returns, which are not guaranteed; your outcome depends on your contributions, investment returns, tax rates, and time horizon. Past performance does not guarantee future results.

What decisions should you not rush?

The moves that feel urgent under stress are usually the ones worth slowing down. A layoff is a bad time to make an irreversible financial decision on adrenaline.

• Do not cash out the 401(k) to feel liquid. Roll it or leave it; the tax and penalty are rarely worth it.
• Do not sign the release the day you get it. Read every line, and get advice on the equity and non-compete terms.
• Do not sell investments in a panic to raise cash before you have mapped your actual runway.
• Do not skip unemployment benefits because they feel small. They are taxable income you are entitled to, and they extend your runway.

If your situation is more of a forced early retirement than a between-jobs gap, the timeline and choices shift, and I walk through that specific case in forced early retirement and the 60-day decisions.

Your first-30-days checklist

• Week 1: read the severance and release in full; confirm your equity treatment in writing; note every deadline.
• Week 1-2: compare COBRA against an ACA marketplace plan or a spouse plan; elect before the 60-day window.
• Week 2: map your cash runway; file for unemployment.
• Week 2-3: decide on the 401(k) (leave, roll to IRA, or roll to a new plan); check the rule of 55 and NUA first.
• Week 3-4: plan the tax year: whether the low-income stretch supports a Roth conversion, and whether your severance withholding was enough.

Most of this you can do yourself with a clear head. Where I help is the sequencing and the reversible-versus-irreversible calls: the 401(k) rollover, the Roth conversion size, the equity decisions, so the moves you make in a stressful month still look right a year later.

Frequently asked questions

What should you do first after being laid off?

Get three things clear before any big decision: the terms of your severance and release, how long your health insurance lasts and your options, and how many months your reserves cover. Those set everything that follows, and none require moving money in the first week.

What should you do with your 401(k) after a layoff?

Leave it, roll it to an IRA, roll it to a new employer plan, or cash it out. Cashing out is almost always worst: income tax plus a 10% penalty under 59.5. If you left at 55 or older, the rule of 55 allows penalty-free withdrawals from that employer plan.

Is COBRA or the ACA marketplace cheaper after a layoff?

COBRA continues your plan but costs the full premium plus 2%. A job loss opens a 60-day special enrollment on the ACA marketplace, where subsidies based on your lower income often make it cheaper. Compare both before the window closes.

Do you pay taxes on severance pay?

Yes, severance is taxable ordinary income, usually withheld at the flat 22% supplemental rate, which can under-withhold higher earners. The lower-income months that follow can open a lower-rate window for a Roth conversion.