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What would you choose & why?

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You tell your manager only after any and all background checks/drug checks etc are completed. And you have a written offer in hand.
BTW are you planning on taking vacation for the holidays? Kiss that goodbye if you think you’re going to resign and then take time off. I would enjoy the holidays, then give notice in January. Be professional.
If you left before the end of the year they would pay out anytime according to their schedule. If you are losing them at the end of the year they wouldn’t allow them to carry over. You should take the time off. Put your LOR in when the new year starts. Your new time would be or should be paid out.
Be as up front with your employer as possible. You might need references and it's easier for everyone. Make the conversation something like - your employer can't offer you what you need in the long run - I.e. growth, comp, experience, job function, direct reports, etc.