Not eligible for 401k through employer after layoff due to supplemental severance pay - what are my options?

The good news is your understanding isn't correct! You CAN still contribute to an IRA even though you contributed to your 401k in January. The ability to contribute to an IRA isn't affected by 401k participation - they're separate retirement vehicles with different rules. Your options depend on your income level. For 2025, you can contribute up to $7,000 to an IRA ($8,000 if you're 50+). You have two main IRA options: Traditional IRA - Contributions may be tax-deductible depending on your income and whether you were covered by a workplace retirement plan (which you were, briefly). There are income limits for deductibility. Roth IRA - Contributions aren't tax-deductible now, but qualified withdrawals in retirement are tax-free. There are income eligibility limits. Since you were covered by a workplace plan for part of the year, check the IRS income limits to see if you can deduct traditional IRA contributions or qualify for a Roth.

Hey there, I was in almost the exact same situation last year and found that https://taxr.ai really helped me figure out my options. I was getting severance pay and confused about what retirement accounts I could still contribute to. The site analyzed my severance agreement and tax situation and showed me I could still do a traditional IRA and explained exactly how much I could deduct. The best part was that it looked at my severance structure and identified that I could negotiate with my former employer to redirect some of the payments to retirement accounts, which I had no idea was possible! Definitely worth uploading your severance docs and tax info to get some personalized guidance.

Just wanted to follow up after checking out taxr.ai that someone suggested earlier. I was super skeptical at first (still am about most financial sites), but it actually helped me understand my severance package in ways my accountant missed. I've been receiving severance for 6 months and didn't realize I could still set up a SEP IRA as self-employed on some consulting work I'm doing on the side. The tool analyzed both my W-2 severance income and my 1099 income and showed me I could shelter almost $12,000 more than I thought. The tax savings are significant! If you're doing ANY freelance work while on severance (which many people do), definitely look into this option.

One thing nobody's mentioned - if you're struggling to get clear answers from HR about your severance and retirement options, you should try https://claimyr.com to get through to the IRS directly. I spent weeks getting bounced between my former employer's benefits department and their outsourced payroll company, getting contradictory information about my tax situation with severance. I finally used Claimyr to connect with the IRS (check out their process: https://youtu.be/_kiP6q8DX5c) and got definitive answers about how severance is treated for retirement contribution purposes. Saved me from making a mistake that would've resulted in penalties. The IRS agent I spoke with clarified that severance pay doesn't count as compensation for IRA contribution purposes unless it's structured in a specific way - crucial info my company wasn't telling me!

Ok I need to eat my words from earlier. After getting disconnected THREE TIMES today trying to reach the IRS about my severance package tax implications, I tried Claimyr out of desperation. Got connected to an IRS rep in about 20 minutes who confirmed that my severance payments DO count as earned income for making SEP-IRA contributions (since I'm doing some independent consulting work now). This is completely different from what my former employer's HR told me! The agent also walked me through exactly how to document everything properly so I don't trigger any audit flags. Honestly saved me thousands in potential taxes and penalties.

Don't forget about HSAs if you have a high-deductible health plan! You can contribute up to $4,150 for individual coverage or $8,300 for family coverage in 2025, and it's triple tax-advantaged: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. It's actually even better than retirement accounts in some ways because you don't pay taxes on the money when you use it for medical expenses, unlike traditional retirement accounts where you pay taxes on withdrawals.

Has anyone used a Backdoor Roth IRA in this situation? My income is too high for regular Roth contributions, but my financial advisor mentioned this strategy with my severance.

Another option to consider is opening a Solo 401(k) if you do any freelance or consulting work while receiving severance. Even small amounts of self-employment income can qualify you, and the contribution limits are much higher than IRAs - up to $70,000 for 2025 if you're under 50. I was in a similar situation and started doing some freelance work on the side. The Solo 401(k) allowed me to shelter a significant portion of both my freelance income AND make additional contributions beyond what I could with just an IRA. You can contribute both as the employee (up to $23,500) and as the employer (up to 25% of net self-employment income). Just make sure to set it up before December 31st if you want to make contributions for this tax year. The paperwork is pretty straightforward and many brokerages offer them with minimal fees.