I was laid off - what to do with severance, 401k, etc?

Submitted by LastoftheGreatOnes t3_126psco in personalfinance

I was recently laid off as part of a tech layoff. Full details of the severance package are below:

  • $40,800 equal to 16 weeks' pay in a lump sum
  • $23,306 RSU payout (I assume this is heavily taxed)
  • $7,289 NET amount for COBRA (lump sum, don't need to use for Insurance)
  • I will also be getting my normal paycheck of $3800 (after tax) as well as my bonus, equal to around 3800 after tax as well.

In addition, I have $14k fully vested in my 401k.

Total Severence: ~$70k. After-tax in total cash, I'm expecting ~$40k from the severance package, conservatively. This doesn't include my bonus and paycheck listed above, another ~8k.

My wife works and is actually getting a raise on April 1 to $88k. We have a bit of saving amounting to around $5k plus about $5k in our checking account, around 25k in an IRA, another 3k in a different IRA, and then a collection of crypto, etc that amounts to around $5k.

I have a Mortgage, 1 car payment, a few personal loans to pay for home renovations amounting to $20k (average interest rate around 10%), and a bit of credit card debt around $15k (average interest rate around 20%).

I have a plan which is:

  • Pay off all CC debt immediately to decrease my monthly spending immediately (-$15k)
  • Re-evaluate afterward, perhaps pay off home reno loans as well, though I do think the interest and monthly payment are low enough to not impact largely. This would likely only happen after I get another position and am stable in that position.

But after that, I honestly have no idea what to do with the remaining ~$25k, smartly. Invest in a savings account that gives rewards after a few months? Invest it into the stock market? Keep it as a rainy day? Down payment on rental property?

The job search is going really well, already 6 REAL interviews lined up and I believe I'll get one of them. Compensation is comparable to my previous salary, so no real impact financially.

What would you do in this situation? What's the smart play here?

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Comments

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tharesabeveragehere t1_jea6jhf wrote

Sorry you're in the situation, but looks like the company has been fair enough.

The credit cards first and quickly, yes. Cringed when I read "and a bit of credit card debt around $15k (average interest rate around 20%)." You're currently paying ~$250/mo on credit card interest alone...gotta clear that ouchy.

After that, I'd hold in a money market account until new employment is paying me, then I'd pay off the personal loans...10% is still pretty high.

And then re-assess and ask the question again.

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LastoftheGreatOnes OP t1_jea72lc wrote

Any input into what to do with 401k? Transfer to a personal IRA?

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Spudmiester t1_jea7il4 wrote

You could wait until you have a new job and roll it into the new 401k or roll into a personal IRA. It won’t make a huge difference either way

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gsasquatch t1_jeabq0r wrote

You don't have to do anything with it, if it is in a good place in good funds, you can let it ride. If you get a new 401k with the next job, you can roll it into that new one. Main reason to transfer it is to make it easier for you to keep track of, or if you have some preference for a particular brokerage house.

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Arkonial t1_jeaaery wrote

Do you know, or do you think you'll ever make a back-door Roth IRA contribution? If so, I'd wait for the new job, and roll it into the 401k there.

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08b t1_jeahnw8 wrote

Unless the fees are high or fund options terrible leave it as is for now. Rolling into your next 401k may be better, especially if you ever need to make backdoor Roth contributions.

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Bad_DNA t1_jea7kt6 wrote

Yep. Vanguard or Fidelity are two great places to consider. You will likely have to wait 30 days before you can do it after leaving your job. If you get another job with a 401k, you can consider rolling the prior one into the new one. You can also leave the 401k where it is, but you should expect the trustee to fee you for the account periodically.

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polach11 t1_jeautx6 wrote

I’m sorry but your “bit” of credit card debt and personal loans is not everyone else’s “bit”. I know you’re already in a shitty situation with the layoff but in the future you might want to change your spending habits a bit. Carrying $35k in 10%+ loans can’t be good for your long term financial well being (unless of course those personal loans were for improvements that were immediately necessary like roof or water heater).

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LastoftheGreatOnes OP t1_jeaw1sm wrote

The home loans were 100% necessary to keep my home insured. Also, 'bit' was just a word I used. That amount of credit card debt was due to some unfortunate uncovered medical requirements and not indicative of normal spending habits.

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anynamemillennial t1_jeb5gqk wrote

After paying off your debts (which will also lower your monthly expenses), I’d keep the cash in a high yield savings account as an emergency fund. $5k in savings on a $200k+ annual family income is grossly inadequate, and probably why you ended up with the credit card debt to begin with.

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Cautious_General_177 t1_jebjoij wrote

Since nobody else is saying it. Apply for unemployment. With that severance you may not be eligible for a month or so, but get the paperwork in now and you should automatically collect once the grace period ends

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Ragnarotico t1_jebctkw wrote

FYI if your gross severance is $40K, you should expect to get $20K after taxes.

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LastoftheGreatOnes OP t1_jebdlea wrote

Why would my severence of 40k be taxes at 50%? This is higher than a bonus would be of that amount.

Everything I read is this is simply taxable at the rate my paycheck would have been

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Ragnarotico t1_jebdy3r wrote

I had also assumed the same thing. Mine was taxed at a rate of pretty much 49%. I might get it back at tax time, might not. Something to do with supplemental wages or what not. If you end up with more than 50%, consider it a bonus.

But do the math assuming you'll end up with half.

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LastoftheGreatOnes OP t1_jebe9v8 wrote

Yeah, my estimate is assuming that but I was trying to be conservative. I have it around - 20k wages, 12k from RSUs, 7k that is netted up to cover tax comes out to around 40k.

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Enigma7ic t1_jebghk8 wrote

My severance last year was also taxed higher than my normal paycheck (43% vs 27%). Not sure why, but I had no say in the matter. I did get most of that money back when I filed my tax return last month though

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Cautious_General_177 t1_jebjfhx wrote

They’ll probably withhold taxes as a bonus, so you’ll have less available now, but you should get the difference back next year.

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gcollins047 t1_jecque1 wrote

Was this a layoff that happened last week?

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RylaiOnMe t1_jed1g86 wrote

Follow the Prime Directive and/or windfall wiki.

Considering you are no longer employed (and probably far behind on your emergency fund), after paying off CC, you should be saving all the money in cash until you are employed again for real.

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Think about building up a bigger emergency fund. The severance is nice, but it wasn't guaranteed and without it I think it would look pretty grim.

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