What Should You Do with RSUs and Stock Options Before You Retire?
If you've built real wealth through RSUs, stock options, or company stock, you've already done the hard part. But here's what most people don't hear until it's too late: the plan that built that wealth is not the plan that gets you safely out of it.
The transition years right before retirement are exactly when RSU and stock option mistakes get expensive, sometimes six figures expensive. In this video, we walk through how each instrument is taxed, the concentrated stock problem most pre-retirees are sitting in, and how to build a multi-year plan that turns company stock into a diversified, tax-efficient retirement income stream.
RSU and stock option planning connects directly to your broader retirement income and tax strategy. You may also find our video on why account structure matters as much as account balance in retirement helpful for understanding how concentrated positions fit into your overall tax picture.
How RSUs, Stock Options, and Company Stock Are Each Taxed Differently
The first step is understanding exactly what you're holding, because RSUs and stock options are taxed completely differently from each other and mixing them up is where expensive mistakes start.
RSUs: Taxed at Vesting
RSUs are taxed as ordinary income the moment they vest, whether you sell the shares or not. If $150,000 of RSUs vest in a given year, you owe ordinary income tax on that $150,000 that year. The shares you receive are treated as compensation, not as an investment gain. This distinction matters significantly for planning.
Non-Qualified Stock Options: Taxed at Exercise
Non-qualified stock options are taxed as ordinary income when you exercise them, on the spread between the exercise price and the fair market value at the time of exercise. The timing of when you exercise is a planning lever you control, which makes these more flexible from a tax management standpoint than RSUs.
Incentive Stock Options: Capital Gains Treatment with AMT Risk
Incentive stock options can qualify for long-term capital gains treatment if holding period requirements are met, which is significantly more favorable than ordinary income rates. However, they can also trigger the alternative minimum tax if you're not careful. The AMT exposure is one of the most commonly overlooked risks in incentive stock option planning.
The Concentrated Company Stock Problem
The biggest issue we see is too much of someone's net worth tied to one stock, and it's often the same company that's been paying their salary for years. The concentration built quietly over time through vesting, option exercises, and ESPP participation, and now it represents a significant portion of their investable net worth heading into retirement.
Say company stock makes up 50% of your investable net worth when you retire. If that stock drops 30% in your first year of retirement, that's a permanent hit to a portfolio you're also pulling income from simultaneously. That combination can be genuinely damaging to a long-term retirement plan in a way that's difficult to recover from.
Diversifying out of company stock before you retire, not after, is one of the highest-value moves in this entire planning process.
Why Your Final Working Years Are Your Best Tax Planning Window
The second major mistake is waiting until the year you retire to think about taxes. Your final working years are often your best planning window because that's when you can spread vesting events, option exercises, and stock sales across multiple tax years instead of compressing everything into one.
Exercising options and selling shares over two or three years instead of one can help you stay out of the top capital gains bracket and reduce Medicare premium surcharge exposure, rather than creating a single high-income spike that triggers both.
The best practice is to build a multi-year plan that gradually reduces concentration while managing the tax bill. That often looks like selling a fixed percentage of company stock each year, perhaps 10 to 20 percent, reinvesting into a diversified portfolio, and timing option exercises for lower-income years. Done well, this turns one concentrated, unpredictable stock position into a diversified retirement income stream without one massive tax hit along the way.
For a closer look at how Roth conversions and tax diversification fit into this kind of planning, see our video on the retirement tax mistake most people miss .
Three Watch-Outs Before You Act
Don't wait until the year you retire to start. Your best planning window is the three to five years before retirement. The more time you have to spread the tax impact, the better the outcome.
Don't assume holding is a plan. Company stock is not automatically a retirement income strategy. Holding indefinitely concentrates risk and defers a tax problem that gets larger as the position grows.
Coordinate RSU and option decisions with your full picture. Social Security, Medicare premium thresholds, and your withdrawal strategy all interact with the income generated by vesting events and option exercises. A decision that looks efficient in isolation can create a problem somewhere else in your plan.
For a broader look at how retirement income timing and Social Security interact with high-income events, see our video on why your Social Security may be taxed more than you expect .
Frequently Asked Questions About RSUs and Stock Options Before Retirement
How are RSUs taxed when you retire?
RSUs are taxed as ordinary income at the time they vest, regardless of whether you sell the shares. If you have RSUs vesting in your final working years, those vesting events create ordinary income in the year they occur. Once vested, if you continue holding the shares, any subsequent gain or loss is treated as a capital gain or loss based on the fair market value at the time of vesting. RSUs that vest after you retire, if any remain unvested, are generally still taxed as ordinary income at vesting. Planning the timing of vesting relative to your overall income in your final working years is one of the most important levers available.
What is the difference between RSUs and stock options for tax purposes?
RSUs are taxed as ordinary income at vesting on the full fair market value of the shares received. You owe tax whether you sell or hold. Non-qualified stock options are taxed as ordinary income at exercise on the spread between the exercise price and the market value at that time. Incentive stock options can qualify for long-term capital gains treatment if holding period requirements are met, but they can trigger the alternative minimum tax if exercised in a high-income year. The key difference is timing: RSU tax is triggered by vesting, option tax is triggered by exercise, which gives option holders more control over when the tax event occurs.
What is the risk of holding concentrated company stock into retirement?
Concentrated company stock heading into retirement creates two risks simultaneously. First, single-stock concentration risk means a significant decline in one company's share price can permanently damage your portfolio. Second, sequence-of-returns risk means that if you're also withdrawing income from that portfolio in the early years of retirement, you're selling shares to fund spending at the same time the position may be declining. Together these risks are particularly damaging in early retirement. Diversifying the concentration before retirement, rather than during it, is one of the highest-value moves available to pre-retirees holding large company stock positions.
What is the best way to diversify out of company stock before retirement?
The most tax-efficient approach is typically a multi-year diversification plan that gradually reduces the concentration while spreading the tax impact across multiple years. That might look like selling 10 to 20 percent of the position each year, reinvesting proceeds into a diversified portfolio, and timing option exercises for years when your overall income is lower. Compressing all the sales into one year, particularly your retirement year when other income events may be happening simultaneously, tends to create the largest and most avoidable tax bill. Starting three to five years before your target retirement date gives you the most flexibility.
What is the alternative minimum tax and how does it affect stock options?
The alternative minimum tax is a parallel tax calculation that applies to certain taxpayers with specific preferences and adjustments. For incentive stock options, exercising and holding shares without selling in the same year can trigger AMT because the spread between the exercise price and fair market value is an AMT preference item, even though it isn't recognized as regular taxable income until the shares are sold. In a high-income year or a year when the stock price has appreciated significantly, this can create a substantial AMT liability. Modeling AMT exposure before exercising incentive stock options is an important step in any pre-retirement plan.
How do RSU and stock option decisions affect Medicare premiums?
Medicare Part B and Part D premiums are income-based through a surcharge called IRMAA. The calculation uses your modified adjusted gross income from two years prior. Large RSU vesting events, stock option exercises, and concentrated stock sales all increase ordinary income or capital gains in the year they occur. If those income events push your MAGI above the IRMAA thresholds, your Medicare premiums can increase significantly starting two years later. This is one of the reasons multi-year tax planning for RSUs and stock options is more efficient than compressing all the activity into a single year.
When is the best time to start planning RSU and stock option strategy before retirement?
The best window is three to five years before your target retirement date. That gives you enough time to spread vesting events, option exercises, and stock sales across multiple tax years rather than compressing them into one. It also gives you time to coordinate these decisions with your Social Security timing, Medicare enrollment planning, and overall retirement income strategy. Waiting until the year you retire typically means accepting a larger, more compressed tax bill than necessary and losing the flexibility that comes from having multiple planning years available.
Should I exercise stock options before I retire?
It depends on the type of option, the current stock price relative to your exercise price, your income in the years leading up to retirement, and how the exercise fits into your broader tax plan. Non-qualified options exercised in a lower-income year, perhaps after one income source has ended but before another begins, can be significantly more efficient than exercising in a peak-income year. Incentive stock options require careful AMT modeling before exercise. In general, exercising options strategically over multiple years before retirement tends to produce better outcomes than waiting and exercising everything at once near or after your retirement date.
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Investment advice is offered through Bayntree Wealth Advisors, LLC, an SEC-registered investment adviser. Insurance and annuity products are offered separately through Bayntree Wealth Advisors. Bayntree does not provide, and no statement contained herein shall constitute, tax or legal advice. You should consult a tax or legal professional on any such matters. Opinions expressed herein are solely those of Bayntree Wealth Advisors. All content is for informational purposes only and is not intended to provide the basis for any financial decisions.
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