For executives, there is a list of key strategic decisions made starting in Q4 and carried into Q1. In Q4, we’re primarily focusing on decisions around deferred compensation and 401(k) changes.
Fast forward to the first quarter, when some of the most consequential financial decisions of the year quietly get made. With our clients, we regularly field questions about equity elections, bonus planning, and tax exposure that will not fully show up until next April.
The first quarter is what we call the election window. The impact of those elections shows up months later in tax exposure, net worth realization, and sometimes surprise bills. Here is a practical framework we use for thinking through the key decisions that tend to surface early in the year.
The Equity Election: RSUs vs. Employer Awarded Stock Options
When choosing between Restricted Stock Units (RSUs) and employer awarded stock options, the answer depends on your risk tolerance and your stage of wealth accumulation.
RSUs provide immediate ownership and value upon vesting. They offer simplicity and immediate value on your balance sheet. Unless the stock goes to zero, they always carry some value. The tradeoff is immediate tax liability at vesting and less upside leverage.
Employer awarded stock options give the right to buy shares at a set price in the future. They offer a magnified upside if the company performs well and no loss of owned value if the stock price falls. The trade-off is that they can expire worthless, offering no guaranteed value.A practical rule of thumb that we use as a starting point for client conversations:
- Earlier in wealth accumulation, RSUs often provided stability and substance.
- Later in wealth accumulation, employer awarded stock options can be used selectively to target upside.
- Many plans allow a blend of both.
The mistake is not choosing the “wrong” instrument. The mistake is failing to make the decision deliberately and failing to align it with your broader financial plan.
Avoiding the Most Expensive Equity Mistakes
The most costly equity mistakes we see rarely come from complexity as much as unstrategic behavior. Common pitfalls include:
- Defaulting into elections without revisiting your plan
- Treating equity compensation as separate from personal finances
- Relying on a colleague or “water cooler” advice that may not apply to you
- Allowing stock concentration to grow unintentionally creates risk
- Letting employer awarded stock options expire during job transitions
Equity compensation should be integrated into your overall balance sheet and financial strategy. It is not a side account. It is part of your life plan.
Stock Concentration: Risk or Advantage?
Many of the clients we work with have used stock compensation as a key driver of their financial growth. For executives at strong, growing companies, holding shares longer may defer capital gains taxes and extend the compounding window. It can also unintentionally turn into a risk as those shares represent a larger and larger portion of your balance sheet.
It’s not uncommon for us to meet professionals who are carrying 10%-30% or more of their net worth just in their employer stock. While we love when company stock growth drives up the score, it also can create a situation where too much of your financial plan depends on that stock going up and to the right.
This doesn't mean that there's a one-size-fits-all recommendation if you are carrying a large amount of RSUs or employer awarded stock options. It just means that we need to understand how the performance of that one stock ticker affects your personal financial plan for better or for worse.
Whether concentration is a risk or an advantage depends on four factors:
- Cash-flow needs – How many of my personal financial decisions depend on this stock to maintain its current value?
- Planned holding period – Are there restrictions we need to be mindful of, such as vesting schedules or blackout periods?
- Other assets on the balance sheet* – Do we have strong diversification and access to liquidity in other areas?
- Emotional tolerance for volatility – This is different for everyone. How much stress do you experience with a large portion of your net worth in a single stock?
There is no one-size-fits-all answer. What matters is that the decision is intentional and informed.
Bonus Planning: Don’t Let Withholding Fool You
The gap between statutory withholding and your actual tax rate often creates surprise bills. Bonus withholding is typically calculated at a flat rate. Your actual marginal tax rate may be higher. That difference can surface months later.
Money set aside for taxes does not need to sit idle. Tax reserves can be parked in short-term treasuries or money markets** to compound before April.
Year-end tax planning is often treated as a scramble. It should instead be a strategic window initiated by the decisions you make now. Compensation drives tax outcomes. Proactive planning may allow you to keep more of what you earn.
Deferred Compensation: Powerful, but Not Free
Deferred compensation elections are typically made before the year begins, but their impact shows up long after. Used strategically, deferred compensation can help:
- Manage marginal tax brackets
- Smooth income across high-earning years
- Coordinate future retirement or relocation plans
But there are hidden risks:
- Payments depend on the future financial health of the employer
- Flexibility is limited once elections are made
- Long deferral periods increase exposure to forfeiture
Deferred compensation should never be evaluated in isolation of cash-flow needs. It can be an excellent tax-planning tool, but it also carries risks. We need to know what you are trading to accomplish a potential upside.
A Final Word on Planning
The most successful executives seek clarity around what to spend, clarity around what to keep, and clarity around what to risk. If we can create that understanding through the planning process, we are better positioned to provide confidence, improve decision-making, and often strengthen family conversations around money.
The goal is to ensure that every decision fits the life you are building. If you are entering the year with important compensation decisions ahead, the first quarter is your strategic window. Use it intentionally.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Stock investing includes risks, including fluctuating prices and loss of principal.
No strategy assures success or protects against loss.
*There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.(26-LPL)
**Government bonds and Treasury bills are guaranteed by the U.S. Government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value.
**An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.