Severance and Retirement Planning: Make Every Dollar Count
A severance package is more than a farewell check - it's an opportunity to make strategic moves that could benefit your retirement for decades.
Key Takeaways
- 1Severance is taxable income - plan accordingly to avoid a surprise tax bill.
- 2You may be able to negotiate severance terms - outplacement, benefits extension, lump sum vs. salary continuation.
- 3A lower-income year creates opportunities for Roth conversions and tax planning.
- 4Your 401k rollover decision has long-term implications - don't rush it.
- 5Severance timing can affect unemployment benefits and ACA subsidies.
Understanding Your Severance Package
A typical severance package may include:
- **Severance pay** - Usually 1-2 weeks per year of service
- **Benefits continuation** - COBRA subsidized or extended
- **Outplacement services** - Career coaching, resume help
- **Unused PTO payout** - Required in some states
- **Bonus/commission proration** - For already-earned compensation
- **Stock vesting acceleration** - Especially in tech companies
Know Your Leverage
Severance is not required by law (except in WARN Act situations). It's offered to get you to sign a release of claims. This means there's room to negotiate.
Negotiating Better Terms
You have more power than you think. Consider asking for:
- **More weeks of pay** - Counter with 1.5-2x what they offer
- **Extended health insurance** - Often cheaper for them than extra cash
- **Outplacement services** - Free to them if they have a contract
- **Positive reference letter** - Get it in writing now
- **Accelerated vesting** - For any unvested stock or 401k match
- **Lump sum vs. salary continuation** - Each has different implications
| Payment Type | Pros | Cons |
|---|---|---|
| Lump sum | Get it all now, invest immediately | Higher tax bracket, may affect unemployment |
| Salary continuation | Spreads tax impact, may include benefits | Risk if company goes bankrupt, delays closure |
Lump sum vs. salary continuation trade-offs
Tax Strategies for Severance
Severance is ordinary income and typically has 22% withheld for federal tax. But smart planning can minimize your burden:
- **Estimate your total year income** - You may be in a lower bracket than usual
- **Roth conversion opportunity** - Convert traditional IRA while in lower bracket
- **Maximize 401k contribution** - If you can contribute before leaving
- **Time the severance** - If close to year-end, see if payment can be delayed to January
- **Deductible expenses** - Job search costs, career coaching may be deductible
- **Estimated taxes** - May need to pay quarterly to avoid underpayment penalty
The Roth Conversion Window
If severance is your only income this year, you might be in a 12% or 22% bracket instead of 32%. This is an ideal time to convert traditional IRA to Roth - pay taxes now at a low rate for tax-free growth forever.
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Your 401k Rollover Decision
With a job loss, you need to decide what to do with your 401k:
| Option | Pros | Cons |
|---|---|---|
| Leave in old plan | Rule of 55 intact, no action needed | Limited options, orphan account |
| Roll to IRA | More investment choices | Lose Rule of 55 (if under 59½) |
| Roll to Gold IRA | Crash protection, diversification | Must be done correctly |
| Roll to new employer | If you get new job quickly | Depends on new plan quality |
| Cash out | Immediate access | Taxes + penalties, ruins retirement |
401k options after job loss
Rule of 55 Warning
If you're 55-59½, carefully consider before rolling to an IRA. You'll lose penalty-free access to those funds until 59½.
Your Severance Action Checklist
Do these things in order:
- 1**Read the entire agreement carefully** - Look for non-compete, non-disparagement, and claim releases
- 2**Don't sign immediately** - You usually have 21-45 days to consider (40+ if over 40)
- 3**Calculate your total separation value** - Severance + PTO + bonuses + benefits
- 4**Consult a financial advisor** - For tax planning on this unusual income year
- 5**Apply for unemployment** - Don't delay; there may be a waiting period
- 6**Decide on health insurance** - COBRA election deadline is usually 60 days
- 7**Make a 401k decision** - But don't rush; you have time
- 8**Update your budget** - Know exactly how long your runway is
Don't Sign Under Pressure
Companies often pressure for quick signatures. For workers over 40, the Age Discrimination in Employment Act (ADEA) requires at least 21 days to consider (45 days if group layoff) plus 7 days to revoke after signing. Use this time.
Severance Is Your Rollover Window
This transition period is the perfect time to restructure your retirement accounts. You have attention, time, and a clear need to evaluate your situation.
- Roll 401k to Gold IRA while you have time to manage the process
- Severance creates a lower-income year - less tax impact
- Protect your life savings from market volatility
- Gold provides stability during uncertain employment periods
- No taxes or penalties when done as a direct rollover
Frequently Asked Questions
1Does severance affect my unemployment benefits?
It depends on your state and how severance is paid. Lump-sum severance often doesn't affect unemployment, but salary continuation might delay benefits. Check your state's specific rules or ask when you file.
2Should I negotiate for more severance or extended benefits?
Extended health benefits are often easier to get (costs the company less) and can be very valuable. More cash is harder to negotiate but worth asking. Start with a counter 50-100% higher than offered and settle somewhere in between.
3What happens to my 401k match if I'm not fully vested?
Unvested employer contributions are forfeited when you leave, regardless of whether it's voluntary or layoff. Severance negotiations cannot typically change this, as it's governed by the plan document.
4Can I contribute more to my 401k before my last day?
Possibly. If you have remaining paychecks (including severance if processed through payroll), you might be able to increase your contribution percentage. Check with HR immediately.
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