6 Money Decisions to Make in the First 90 Days After a Layoff
Sam's List Editorial | 2026-08-12
The hardest part of figuring out what to do financially after a layoff is that several clocks start at once, and none of them are on your calendar.
You have 60 days to elect COBRA. You have 60 days to complete an indirect 401(k) rollover. Your severance was probably withheld at a flat rate that has nothing to do with your actual tax situation. And the thing almost nobody mentions: the year you get laid off is often the lowest-income year of your working life, which changes several decisions that would be wrong in any other year.
Six decisions, roughly in the order they come due.
1. Check What Was Actually Withheld From Your Severance
Severance is wages. It goes on your W-2, it is subject to Social Security and Medicare tax, and employers commonly withhold federal income tax on it at the flat supplemental wage rate of 22 percent for amounts up to $1 million in a year.
That rate is a default, not an estimate of what you owe. If you earned a full salary for eight months and then took a six-figure severance, 22 percent is very likely too little and you have a balance building. If you were laid off in February and severance is most of your income for the year, 22 percent may be too much and you have money sitting with the IRS until spring.
Run a rough projection of full-year income before you spend the severance. If you are under-withheld, an estimated payment now costs less than an underpayment penalty later. The limitation: this is an estimate against a year that is not over, and a new job in the fall changes the answer.
2. Make the Health Insurance Decision Before Day 60
You generally have 60 days from the later of the loss of coverage or the date of the COBRA election notice to elect continuation coverage. Losing job-based coverage also opens a special enrollment period on the health insurance marketplace, typically 60 days as well.
COBRA keeps your exact plan, your deductible progress, and your doctors, and it costs the full premium plus up to a 2 percent administrative fee, which is usually a shock. A marketplace plan may cost far less, particularly because premium tax credits are based on your projected income for the year, and your projected income just fell.
The trade-off is real: a marketplace plan usually means a new network and a deductible that resets. If you or a family member is mid-treatment, that reset can cost more than the premium difference saves. Price both before the window closes, because it does close.
3. Decide What Happens to the Old 401(k)
You generally have four options: leave it in the old plan, roll it to the new employer's plan, roll it to an IRA, or cash it out.
Cashing out is the one that costs the most. A distribution before age 59 and a half is generally taxable and subject to a 10 percent additional tax, and a direct payment to you triggers mandatory 20 percent federal withholding. If you do take a distribution and want to undo it, you have 60 days to complete a rollover, and you have to replace the withheld amount out of pocket to roll the full balance.
There is one exception worth knowing. Under IRC 72(t)(2)(A)(v), sometimes called the rule of 55, distributions from the plan of the employer you separated from can avoid the 10 percent additional tax if you leave service during or after the year you turn 55. It applies to the employer plan, not to an IRA, which means rolling the money to an IRA gives up the exception. That is a genuine reason to slow down before consolidating accounts.
4. Look Hard at the Gap-Year Tax Window
This is the decision most people miss because it does not feel urgent.
A year with a partial salary and no bonus can drop you a bracket or two. That creates a window for moves that are expensive in a normal year: realizing capital gains at a lower rate, exercising certain equity, or converting part of a traditional IRA to a Roth and paying tax on the conversion at an unusually low marginal rate.
None of this is automatic. A conversion adds to your adjusted gross income, which can reduce or eliminate a marketplace premium tax credit you were counting on in decision two, and if you are within two years of Medicare it can raise future IRMAA surcharges. The point is not to convert. The point is to run the number in the one year where it might be worth running.
5. Turn On Withholding for Unemployment Benefits
Unemployment compensation is taxable at the federal level, and nothing is withheld unless you ask. You can request flat 10 percent federal withholding by filing Form W-4V with the paying state agency.
Ten percent is not necessarily the right amount, and state treatment varies, with some states not taxing benefits at all. But zero is almost never right. People who skip this reliably find out in April, in the same month they are trying to conserve cash.
6. Cut the Right Things, and Keep the Boring Ones
The instinct is to cut everything. Most of that is fine. Two categories usually should not go.
Term life and disability coverage tied to your employer generally ends with the job, and both get more expensive as you age and as your health history grows. Replacing coverage during a period of unemployment is inconvenient and sometimes uninsurable later. Dropping protection right when your income is least stable is the expensive kind of frugal.
The counterweight: if cash is genuinely tight, keeping every policy is not a virtue either. Rank coverage by what it protects against and how bad the uncovered outcome would be, then cut from the bottom.
Getting a Second Set of Eyes
These six decisions interact. The COBRA choice depends on projected income. Projected income depends on whether you convert. Whether you convert depends on the rule of 55 and on when you expect to be working again. Handling them one at a time, in the order the paperwork arrives, is how people end up with a good answer to each question and a bad answer overall.
Bull Oak is a San Diego advisory firm founded in 2014 that works with retirees and young professionals, which spans both ends of this problem: the person weighing the rule of 55 and the person deciding what to do with a first meaningful 401(k) balance.
Working with an advisor does not remove the risk in any of these decisions, and no professional can tell you when you will be working again, which is the variable most of this hinges on. Ask any advisor how they are compensated and whether they act as a fiduciary before you share your numbers.
You can compare advisors by specialty, location, and client reviews in the Sam's List financial advisor directory.
Frequently Asked Questions
Is severance pay taxed differently than regular pay? No. Severance is treated as wages, reported on your W-2, and subject to Social Security and Medicare tax. What differs is withholding: employers commonly apply the flat 22 percent supplemental wage rate rather than your W-4 elections, which frequently over- or under-withholds relative to what you actually owe.
How long do I have to elect COBRA after a layoff? Generally 60 days from the later of the date coverage is lost or the date you receive your COBRA election notice. Losing job-based coverage also typically opens a 60-day special enrollment period on the health insurance marketplace, so compare both before the window closes.
Should I roll my 401(k) into an IRA after being laid off? It depends. An IRA usually offers more investment choice and consolidation, but rolling out of the employer plan gives up the rule of 55 exception under IRC 72(t)(2)(A)(v), which can matter if you separated at 55 or later and may need the money before 59 and a half. Compare fees, creditor protection, and access before moving anything.
Do I have to pay taxes on unemployment benefits? Yes, unemployment compensation is taxable federally, and no tax is withheld unless you request it by filing Form W-4V with the state agency, which withholds at a flat 10 percent. State treatment varies, and some states do not tax benefits at all.
About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.