If a meaningful part of your pay arrives as company stock, your retirement planning has a specific problem: your salary and a large share of your savings depend on the same company.
This page explains the forms equity compensation takes, why concentration is the specific risk, what the rules let you do about it, and what the tradeoffs are. It does not tell you what to do. That answer depends on your tax situation, your holding periods, your view of the company and how much of your net worth sits in the position.
If you are a senior executive, the instruments below are only half the problem; the other half is the order in which they are handled in the last few years. That is on the executives page, which covers the deferred compensation election, the Rule 10b5-1 calendar, the incentive stock option year and the final-year tax stack.
On this page
What you hold
What you may be holding
- Restricted stock units. Shares delivered on a vesting schedule. At vest, the value counts as ordinary compensation income and is reported on your W-2. A plan can sell a portion automatically to cover withholding, and the flat federal rate on supplemental wages, 22% up to $1 million, can be lower than the rate you actually pay, which is where April surprises come from.
- Employee stock purchase plans. Payroll deductions buy shares, at a discount of up to 15% in a qualified plan. Under a plan qualified under Section 423 of the Internal Revenue Code, the discount is capped at 15% and purchases are limited to $25,000 of stock value per calendar year. Whether you hold long enough changes how the discount is taxed, which is the difference between a qualifying and a disqualifying disposition.
- Incentive stock options. No ordinary income at exercise, but the spread between the exercise price and the market price is an alternative minimum tax adjustment in the year you exercise. People have owed AMT on a paper gain that later evaporated. There is also a $100,000 statutory limit on the value of options that can first become exercisable in a year and still receive ISO treatment.
- Non-qualified stock options. The spread at exercise is ordinary income and is withheld on. Simpler than ISOs; the gain at exercise is reported as wages on Form W-2.
- Company stock inside a 401(k). Treated differently from everything above, and covered separately below.
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Why concentration is the risk, not volatility
A single stock is more volatile than a diversified portfolio. That is true and widely understood. It is not the main issue here.
The issue is that your job and your savings are exposed to the same event. If the company struggles, the stock falls at the same time as your bonus, your hours, or your role. The two things you would normally rely on to offset each other move together. Households in this position are less diversified than the account statement suggests, because future earnings can be the largest asset a working household owns.
This is why the same position can be reasonable for one person and unreasonable for another. A 30% concentration matters differently to someone with a pension and eight years to retirement than to someone whose entire retirement depends on that account.
The rules that limit what you can do
Before considering any change, know which constraints apply to you. These are set by your employer and by securities law, not by your own preference:
- Trading windows. An employer can permit trades only during open windows after earnings. Outside those windows you may be unable to act at all.
- Insider status. If you have material non-public information, you cannot trade on it, regardless of the window.
- Section 16 officers and directors face reporting obligations and short-swing profit rules that apply only to officers, directors and holders of more than 10% of a class of the company’s stock.
- Rule 10b5-1 plans. A written plan adopted while you are not in possession of material non-public information can allow sales to occur on a preset schedule. There is a mandatory cooling-off period before the first trade, and the rules were tightened in 2022. Setting one up requires your company’s counsel.
- Holding requirements. Some employers require executives to hold stock equal to a multiple of salary.
What people do about it
The approaches people use, and what each costs
There is no single right method. Each of these carries a tradeoff, and the tax consequences are specific to your basis, holding period and bracket:
- Selling at vest. Because RSUs are taxed as ordinary income at vest, your basis resets to the value on that date. Selling immediately creates little or no additional gain, because the basis is the value already taxed as income. The cost is that you give up any further appreciation. The question worth asking is whether you would buy that many shares with cash today. If not, holding is a decision, not a default.
- Selling gradually on a schedule. Spreads the tax and removes the temptation to time the market. Run through a 10b5-1 plan if you are subject to windows.
- Holding for long-term treatment. Waiting for a long-term holding period can reduce the tax rate on gains. It also means holding a concentrated position for longer, which is the risk you were trying to reduce. Tax efficiency and risk reduction pull against each other here.
- Charitable gifting of appreciated shares. For people who already give, donating appreciated stock held long enough can avoid tax on the gain. Only relevant if charitable giving is something you do anyway.
- Hedging and exchange structures. Collars, exchange funds and similar arrangements exist. They are complex, can be expensive, carry their own tax rules, and are generally only worth discussing at large position sizes. Treat any pitch for one with scepticism until the costs are shown to you in dollars.
Company stock in a 401(k) is a separate question
The 401(k) side of this, including how concentration builds up through the match, is covered under corporate 401(k) and legacy pensions.
If you hold employer securities inside your workplace plan, there is a provision worth knowing about before you roll anything over: net unrealized appreciation.
In broad terms, employer stock distributed from a qualified plan as part of a lump-sum distribution can be taxed on its original cost basis as ordinary income, with the appreciation taxed at long-term capital gains rates when you eventually sell. Rolling that stock into an IRA instead converts all of it into future ordinary income.
The conditions are strict and the calculation is fact-specific. The relevant point for this page is simpler: a routine rollover can permanently forfeit this treatment, and it cannot be undone. If you have appreciated company stock in a plan, that is a question to settle before the paperwork, not after.
What to look at first
- What percentage of your investable assets is this one position, counting shares, unvested awards and options together.
- Your cost basis and holding period for each lot, which your plan administrator can provide.
- Whether you are subject to trading windows, and when the next one opens.
- Whether any of it sits inside your 401(k), and what the basis is.
- What your withholding on the last vest actually was, compared with your marginal rate.
None of that requires a decision. It requires knowing what you have, which can show you are further from diversified than you thought.
Sources: Internal Revenue Code sections 422, 423 and 402 governing incentive stock options, employee stock purchase plans and plan distributions; SEC Rule 10b5-1 and the amendments adopted in December 2022; Section 16 of the Securities Exchange Act. Plan-specific rules are set by your employer’s plan documents, which govern over any general description here. Figures cited are statutory and were current when this page was written.
Several of these choices cannot be undone.
Concentration is easier to unwind across several tax years than in one, and the time to plan it is before a vesting date or a liquidity event rather than after. We can cover it in a short conversation, at no charge and with no obligation.
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