Equity Compensation Planning
Equity Compensation Planning for Pre-Retirees
How stock awards may affect your taxable income, cash flow, retirement timing and Medicare premiums in the years before you retire.
Equity compensation planning looks at how stock awards, such as RSUs, stock options and employee stock purchase plans, may affect your taxable income, cash flow, retirement timing and Medicare premiums. A large vest or sale could raise income in a year Medicare later reviews, and each approach carries trade-offs.
Rules reflect information as of November 2026.
Written for pre-retirees 5 to 10 years from retirement and high-earner professionals who hold stock awards. This is education, not a recommendation to exercise, hold, sell, or buy any security.
How common types of equity pay may affect your income
Each award type is taxed on its own schedule. The timing of income may matter as much as the amount, and each type comes with its own trade-off.
Restricted stock units (RSUs)
RSUs are generally taxed as ordinary income when the shares vest and are delivered to you, whether or not you sell them. Tax withheld at vest may be higher or lower than the tax you owe for the year.
Trade-off: income is recognized at vest, and holding the shares afterward ties more of your finances to one employer, on top of your paycheck.
Nonstatutory stock options
For most nonstatutory options, the spread between the market value and your exercise price is generally taxed as ordinary income and reported on your Form W-2 when you exercise.
Trade-off: exercising many options in one year could concentrate income in that year, while waiting leaves the option exposed to price changes and expiration.
Incentive stock options (ISOs)
ISOs generally do not create regular income tax when you exercise, but the spread may be counted for the alternative minimum tax (AMT) in that year. Special holding periods affect how a later sale is taxed.
Trade-off: AMT could create a tax bill in a year when you have not sold the shares and have no sale proceeds to pay it.
Employee stock purchase plans (ESPPs)
Under a qualifying ESPP, you generally report no income when you buy the shares. How a later sale is taxed, as ordinary income, capital gain, or both, depends on how long you hold the shares.
Trade-off: holding the shares to meet the required holding periods keeps you exposed to price changes during that time.
Plans differ. Your award agreement and plan documents control the vesting dates, exercise rules and holding periods that apply to you.
Why the 5 to 10 years before retirement matter
Equity pay often peaks late in a career. In the years before retirement, a large vest, exercise or sale could affect more than one part of your plan at once.
- Taxable income: a large vest or exercise adds to income in that year and could move part of it into a higher bracket. Spreading events across years may smooth income, but it can also mean holding concentrated shares longer.
- Cash flow: taxes on equity pay may come due before shares are sold, so a plan for paying them matters. Selling shares to pay taxes may realize gains or losses, and borrowing against shares adds its own costs and risks.
- Retirement timing: the date you stop working can change when awards vest, how long you have to exercise options, and which year's income Medicare reviews. Leaving earlier or later may help one item and hurt another.
- Concentration: a large share of your net worth in one employer's stock could affect your retirement income if the price falls. Selling to diversify may reduce that risk, and it may also trigger taxes and forgo later price gains.
Equity pay and the Medicare IRMAA look-back
Medicare Part B and Part D premiums for higher earners are generally set from your tax return two years earlier. A large vest or sale this year could therefore show up in premiums two years from now.
Social Security generally uses your modified adjusted gross income (MAGI) from two years earlier to decide whether you pay an income-related monthly adjustment amount (IRMAA). RSU income, option exercises and gains from sales all flow into that figure.
After a life-changing event such as retiring, you may ask Social Security to use a more recent year. Approval is not assured and documentation is required, so it is not a substitute for planning the timing of income.
Hypothetical example for illustration only: a household that normally has income below a Medicare premium threshold has a large RSU vest in the year it plans to retire. That year's tax return may be read two years later, when Medicare premiums are set, even if income has dropped by then. The effect could be a higher premium for a period of time. Your own thresholds, income and results would differ.
For more detail, read the IRMAA two-year look-back rule and the IRMAA Planning Guide.
How we coordinate equity pay within The Sentient System™
Equity pay is rarely a standalone decision. It touches your tax bracket, the cash you need, your investments, your retirement date and your Medicare premiums, and a change in one may change the others.
Within The Sentient System™, Patrick Thompson looks at your awards alongside your tax planning, retirement income planning and investment management. Coordination does not remove tax or concentration risk, results depend on your individual circumstances, and no approach fits every household. Our advisory fees are described in Form ADV Part 2A.
What to gather before a planning conversation
Having your award details in one place makes it easier to look at timing, taxes and cash needs with real numbers.
- Your grant and vesting schedule for each RSU, option and ESPP award
- Exercise prices, expiration dates and any post-employment exercise windows
- Recent pay statements showing how much tax was withheld at vest
- Form W-2, Form 1099-B and, if you have them, Form 3921 or Form 3922 from your employer
- The number of shares you hold and their cost basis
- Your expected retirement date and Medicare enrollment timeline
- Your last two tax returns and a rough estimate of this year's income
Equity compensation questions
Equity compensation planning coordinates stock awards, such as RSUs, stock options and employee stock purchase plans, with your taxes, cash needs, investments and retirement date. It may help you see the timing trade-offs before a vest, exercise or sale, though it cannot remove tax or market risk.
RSUs are generally taxed as ordinary income when the shares vest and are delivered to you, whether or not you sell them. Tax withheld at vest may be more or less than you owe for the year. Any later sale may create a capital gain or loss, depending on the price.
They could. Income from a vest, an exercise or a sale is part of your modified adjusted gross income, and Social Security generally uses your tax return from two years earlier to set Medicare Part B and Part D premiums. A large event in one year could raise premiums two years later.
Your retirement date may change when awards vest, how long you can exercise options, and which year's income Medicare reviews. Leaving before a vest could mean giving up unvested awards, while staying longer may add income in a higher-tax year. The right balance depends on your individual circumstances.
This page is educational and is not a recommendation to hold, exercise or sell any security. In a Fit Call, Patrick Thompson can discuss how your awards fit your broader plan. Any approach has trade-offs, including taxes and the risk that prices change, and it depends on your individual circumstances.
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Hold Stock Awards Before Retirement?
If you are 5 to 10 years from retirement and want to see how your awards could fit your tax and income picture, let's spend 20 minutes together to see if we are the right fit. You would speak directly with Patrick Thompson. No preparation needed.
Important disclosure
Sentient Financial, LLC is a state-registered investment adviser in California. This page is provided for educational and informational purposes only and is not individualized investment, tax, or legal advice. It is not a recommendation to exercise, hold, sell, or buy any security. Investing involves risk, including the potential loss of principal, and no strategy can guarantee a profit or protect against loss. Please consult a tax or legal professional about your situation. For fees and business practices, see our Form ADV Part 2A. See our Disclosures page.