What Real Stock Option Planning Looks Like
If you are an equity-compensated employee, you’ve probably scoured the internet and encountered an endless pit of information on stock option planning: YouTube videos, blogs, articles, Twitter threads, Reddit discussions… the list goes on. Or maybe you haven’t, and you just know you have stock but aren’t sure how it works, and want to learn more about equity compensation strategy.
While I began writing this blog as another educational resource, it dawned on me that readers might gain a better understanding of RSU and NQSO planning by seeing the plan we developed for one of our clients. I feel like specific examples always make it easier to learn something complicated.
Setting the Stage
Our clients, whom we’ll call “Bob” (52) and “Susie” (52), live in the Bay Area, like many equity-compensated employees. They have two children, ages 14 and 7. Bob is an engineer at a cutting-edge tech firm with a soaring stock price, while Susie runs the household.
Bob’s base salary is modest for Bay Area standards, but his compensation package is bolstered by equity: restricted stock units (RSUs), non-qualified stock options (NQSOs), and an employee stock purchase plan (ESPP). For today’s discussion, we’ll focus on RSUs and NQSOs, which make up the bulk of his equity compensation strategy.
A few years ago, Bob and Susie came to me after their 2021 income tax filing—what I like to call the “heart-attack tax bill.” Bob had accrued vested NQSOs and RSUs over the years but had left the majority of his equity untouched, mostly because they didn’t fully understand stock option taxation. They knew that logging into E*Trade and clicking a few buttons moved money from stock to bank accounts. Easy enough. Bob & Susie are exceptionally smart people, which goes to show the complexity of equity planning if even they don’t fully understand the ramifications of their actions as it relates to taxes.
In 2021, they purchased a beautiful home with a reasonable mortgage. A beautiful home with a reasonable mortgage in San Francisco, as many know, requires a pretty penny in capital. Using stock exercises and RSU sales for this purchase led to a surprise: the NQSO spread (stock value minus exercise price) was taxed as ordinary income, introducing them to the 37% federal tax bracket. Meanwhile, their RSUs had taxes withheld at vesting, meaning no taxes were withheld on gains upon sale. (For context, NQSOs usually have 22% withholding, but we won’t dive into the weeds today.)
The Planning Process
Bob and Susie realized they needed a comprehensive equity compensation strategy. They engaged Summit Wealth & Retirement Partners, and we began the financial planning process. We uncovered their goals, desired retirement date, and built a robust 10-year cash flow projection to understand their annual expenditures and income.
The first thing we do with any equity-compensated employee is build their financial plan as if they had no stock options at all. Why? This shows whether they can meet retirement and spending goals without equity, and if not, it clarifies how much of their equity needs to be diversified into a “boring,” diversified investment bucket—either annually or via lump sum. Choosing not to diversify any stock and planning around that decision is a conversation for another day.
We had built Bob and Susie a strong foundation: they knew their required savings and the rate of return needed on their current and future savings for financial independence, and how to prioritize family experiences without sacrificing financial goals.
Equity Compensation in Action
Every February, I meet with Bob and Susie—timed with Bob’s RSU vesting. I bring a plan showing how much should be diversified into long-term investments (after 401(k) and cash flow contributions into their trust), while they bring their discretionary spending goals. Together, we tally the total and create cash from stock sales. I have their tax projections in front of me, allowing us to recognize capital gains and ordinary income within the limits of additional federal and state withholding, ensuring they won't come out of their pockets for taxes at filing time.
Typically, stock sales have been a precise mix of newly vested RSUs at a nominal gain/loss and legacy NQSOs or RSUs at substantial gains. This allows us to generate proceeds efficiently while minimizing tax impact—a key element of any NQSO tax planning strategy.
With the proceeds, Bob and Susie fund their annual savings goals in their Charles Schwab trust account and 529 plans. They also leave the meeting with funds for discretionary spending—spring break in Costa Rica, summer trips to Hawaii, visiting family, hosting friends—all while knowing they’ve met savings goals and won’t face surprises at tax time.
Key Takeaways
Bob and Susie are just one case study. Equity compensation planning comes in many shapes: different equity types, amounts, risk tolerance, desire to hold stock, and overall financial composition. While this story highlights a successful strategy, equity concentration carries real risks—yes, stock values can decline! A plan should always be in place to navigate uncertainties.
A robust equity compensation strategy balances immediate needs, long-term savings, taxes, and lifestyle goals. With a thoughtful approach to RSU planning, NQSO/ISO tax planning, and overall portfolio diversification, equity-compensated employees can confidently pursue their financial goals while enjoying the life they’ve worked hard to build.
Author: Dustin Burkhart, CFP®, EA