Why Is Concentrated Stock In Your Employer Riskier Than Concentrated Stock In Another Company?
Holding concentrated stock in your employer often means that your paycheck, equity portfolio, and retirement plan are tied to the same company. Thus, a decline in your company’s performance affects more than the share price. Betting on yourself and your company can present an opportunity for meaningful wealth creation, but diversification is often the safer path to wealth preservation.
Approaches commonly used to manage concentration in employer stock include:
- Setting a target exposure as a percentage of investable net worth, counting vested shares, unvested Restricted Stock Units, and in-the-money options separately.
- Reducing exposure on a schedule rather than at a price, which removes the need to forecast the stock’s performance.
- Revisiting the target annually, because each vesting event increases concentration by “default”.
What Does It Cost to Unwind a Concentrated Stock Position?
Unwinding a concentrated position costs a top-bracket California resident roughly 37% of the embedded gain: a 20% top federal long-term capital gains rate, the 3.8% Net Investment Income Tax above $200,000 of modified adjusted gross income for single filers and $250,000 for married filers, and a California rate reaching 13.3%, because the state taxes capital gains as ordinary income. Low-basis shares carry nearly the full sale price as gain, so the bill lands close to that rate.
Approaches commonly used to reduce the tax bill when selling concentrated stock include:
- Spreading sales across several tax years, which may keep more of the gain below the top bracket than a single liquidation would.
- Using specific identification at sale so higher-basis lots go first.
- Pairing sales with realized losses elsewhere in the portfolio in the same tax year.
Why Is the Tax Bill on Vested RSUs Larger Than the Amount Withheld?
Taxes on Restricted Stock Units (RSUs) are typically withheld at flat statutory rates, so the amount withheld may not reflect an executive’s marginal tax rate. Federal supplemental withholding is 22% on the first $1,000,000 of supplemental wages and 37% on the excess, while California applies a flat 10.23% to stock options and bonus payments under Revenue and Taxation Code Section 18663. On supplemental wages subject to 22% federal withholding, an executive in the 37% federal bracket may face a federal withholding shortfall of roughly 15 percentage points. Actual withholding and tax liability depend on the amount of supplemental wages and the executive’s circumstances.
Approaches commonly used to close the RSU withholding gap include:
- Projecting the full-year liability before the first vest of the year.
- Covering the shortfall through quarterly estimated payments or additional payroll withholding.
- Using the estimated tax safe harbor, which for prior-year adjusted gross income above $150,000 means paying 110% of the prior year’s tax or 90% of the current year’s.
What Rules Restrict When Company Stock Can Be Sold?
Four rule sets commonly govern insider sales, and the company’s own policy is routinely stricter than federal law. A company insider trading policy sets blackout windows and pre-clearance requirements. Section 16 requires officers, directors, and 10% beneficial owners to report transactions on Form 4 within 2 business days. Rule 144 limits an affiliate’s sales in any three-month period to the greater of 1% of outstanding shares or the average weekly trading volume over the preceding 4 calendar weeks.
Approaches commonly used to adhere to company policy and federal law include:
- Reading the policy itself, which public companies generally file as Exhibit 19 to the Form 10-K.
- Mapping the window calendar against known cash needs before a window opens.
- Considering a Rule 10b5-1 Trading Plan, adopted during an open window without material nonpublic information.
How Can Liquidity Be Unlocked Without Selling?
Concentrated stock positions aren’t always immediately sellable, which may present a challenge when a liquidity need lands outside an open trading window. Further, selling after the share price has declined can crystallize a loss relative to prior values.
Approaches commonly used to raise cash without an outright sale include:
- Borrowing against the position with a securities-based line of credit. Note: a price decline may trigger a maintenance call, and many company policies restrict pledging employer stock.
- Using an Exchange Fund, which contributes shares to a partnership holding stock from many contributors. Note: exchange funds generally require a seven-year holding period and at least 20% of assets in qualifying non-stock property.
- A Prepaid Variable Forward delivers cash now against a variable number of shares later, and Revenue Ruling 2003-7 supports open transaction treatment only where the deliverable count varies meaningfully with the price.
How Does Concentrated Stock Fit Into The Estate Planning Picture?
A concentrated position compounds inside a taxable estate while gifting decisions get postponed. The federal basic exclusion amount is $15,000,000 per person for 2026, and a position that keeps growing can cross that line while the household is still deciding whether to sell.
Approaches commonly used to address estate planning concerns include:
- Contributing appreciated shares held more than one year to a Donor-Advised Fund. Shares are generally deductible at fair market value, subject to applicable limits. Depending on applicable tax rules and the circumstances of the gift, capital gains tax may not be recognized on the donated shares.
- Lifetime gifts carry the donor’s cost basis to the recipient, while shares held until death generally receive a basis adjustment under Section 1014, which erases the gain and leaves the concentration untouched.
- Coordinating gifting with plans for diversification.
How Do These Solutions Fit Together?
Spectrum Asset Management has developed its own approach to address the challenges presented by concentrated stock positions, called the DREAM framework. Feel free to Contact Us to discuss your own situation.
By Garrett Peterson, Wealth Advisor | Spectrum Asset Management | Reviewed October 2026
Disclaimer: This material is for informational and educational purposes only and should not be construed as investment, legal, or tax advice. All investing involves risk, including the potential loss of principal. Consult your financial, legal, and tax professionals regarding your personal circumstances. Certain strategies referenced, including exchange funds, securities-based lending, and prepaid variable forwards, involve additional risks, costs, complexity, and eligibility requirements, and may not be appropriate for all investors. Hypothetical examples are for illustration only and do not represent any specific client or investment result. Nothing herein constitutes an offer to enter into an advisory relationship. Spectrum Asset Management, Inc. (SAM) is an SEC-registered investment adviser headquartered in Newport Beach, California. SAM is not affiliated with any other firm using a similar name.
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