By Mary Pilon

Reader Liza writes:

I was laid off from a company I had been with for 15 years and
suddenly I have to figure out what to do with my worthless stock, my
SERP and 401K. Do I leave it with the current investment company or do
I move it to an IRA through my bank/credit union? I have heard rules
around the amount you have in a 401(k) and if its less than $5,000
there are penalties and or issues with that.

The other question I had was what are severance packages
supposed to be taxed at? We were taxed at 43% because they treated it
as a bonus and indicate they didn’t have to give it to us so in turn
its like a bonus. What are the rules around that and can companies just
tax what they want?

Good questions, these. Especially as we continue to hear from
readers who have been laid off and are wondering what to do with their
stray investments.

We called a few financial planners to find out what Liza, or anyone
facing similar questions about layoffs and investments, should do.

When it comes to company stock, Liza should sell
and claim the loss on her taxes only if the stock is truly worthless
and no longer trading, says Connie Stone, a certified financial planner
in Chagrin Falls, Oh. If she holds the stock in an IRA or 401(k), then
she should diversify by exchanging the company stock for other
investment options, preferably mutual funds.

For those who hold lots of valuable company stock in their
retirement accounts, it might be worthwhile to withdraw the stock from
their 401(k) and take the Net Unrealized Appreciation (NUA)
distribution, which pulls the company stock from the 401(k) and leaves
you with the shares. (Here’s more information on why company stock can be risky.)
With a NUA distribution, you pay taxes on the lump sum. If the stock
rises in value, you will pay capital gains when you sell. You may also
have to pay a penalty for withdrawing the stock from your retirement
account, though you still hold the shares.

This maneuver, Ms. Stone says, generally makes sense if the investor
has large amounts of company stock that have gone up in value.

“It’s not worth it unless you have several hundred thousand
dollars,” Ms. Stone says. People who hold less than that might consider
diversifying their exposure, as Ms. Stone suggested for Liza.

As for other money accumulated in a 401(k) plan,
planners suggest rolling those into an IRA with a discount brokerage
firm, such as Vanguard or Fidelity. Opt for no- or low-fee investments
like index or mutual funds to keep costs down and benefit from compound
interest. Some workplaces only give you a month or two to roll over
your 401(k) before penalty fees kick in, so be sure to ask. Most of the
planners we spoke with do not advise anyone to cash out their policy.

Liza also asked about her Supplemental Executive Retirement Plan (SERP).
A SERP is a plan that’s usually offered to employees as a perk so that
they can save for retirement above their 401(k) annual limits. Think of
it more like a pension plan. Since it’s taxable money, she can’t roll
it into her 401(k), according to Ms. Stone, so it might be smartest to
take a distribution and invest it. For those without cash reserves, a
SERP distribution may be a better source of cash than raiding a 401(k).



Restricted Stock Units (RSUs) are similar to
stock options. They offer workers shares of the company stock at a
discounted price. If employees have not reached their vesting date at
the time of their dismissal, it’s unlikely that they’ll be able to
purchase company stock at the discounted rate. If workers are fully
vested, they can decide whether they want to use their own money to buy
shares. Ask your employer if there is a time limit on making this
decision. Any sale of that stock would be subject to capital gains tax,
but if the spread between the discount price and current price is
substantial, selling the shares later could result in much-needed extra
money.

For more information on Company after a layoff.

Posted by Dan Walter

Performensation: Equity Compensation for High Performance Companies.