We get some version of the same question all the time. Do we have enough to retire? The honest answer is that the number on your statement doesn’t tell you much on its own. So instead of using one client’s real numbers, we built a hypothetical couple, Dave and Susan, out of patterns we see across a lot of client conversations, and used their situation to walk through what actually goes into a retirement plan.
Meet Dave and Susan: A Hypothetical Case Study
Dave is 61 and burned out. He’s ready to stop working. Susan is 60 and wants to retire alongside him rather than one of them sitting at home while the other keeps working. Their home is paid off and worth $500,000. They’re both healthy, and they want $100,000 a year in net income, with plans to travel more in the early years of retirement.
Their portfolio sits at $2.4 million. On paper, that sounds like a reasonable place to retire from. Whether it actually works depends on how well a handful of moving pieces get coordinated, not just the size of the number.
Where the Money Sits: A $2.4 Million Portfolio Breakdown
Before we can talk about spending, we have to talk about taxes, because not all $2.4 million is created equal. Here’s how Dave and Susan’s portfolio breaks down:
1.5 million dollars sits in 401(k) and IRA accounts. This is tax deferred, meaning every dollar withdrawn is taxed at ordinary income rates.
500,000 dollars sits in a taxable brokerage account, taxed at capital gains rates and generally more flexible to access.
250,000 dollars sits in a Roth IRA, which grows and can be withdrawn tax free.
150,000 dollars sits in cash or money market funds, their emergency reserve.
This is a very typical distribution for a pre-retiree. Most people accumulate the bulk of their savings pre-tax through an employer plan, then build an after-tax reserve alongside it. Where the money sits changes almost everything about how a plan gets built.
The Five Levers of Retirement Planning
Once we know the guaranteed income sources and the account breakdown, the real planning work comes down to coordinating five levers over the next 10 to 15 years. It’s not a switch that gets flipped the day someone retires. It’s an ongoing process.
Lever 1: Spending Isn’t a Hard Number
Most people have heard of the 4 percent rule, introduced by Bill Bengen in 1994. On Dave and Susan’s 2.4 million dollar portfolio, that works out to about 96,000 dollars a year. Morningstar’s most recent base case suggests 3.9 percent, or 93,600 dollars, though that assumes rigid, inflation adjusted spending. In practice, a safe withdrawal rate can run anywhere from around 4 percent up toward 6 percent as required minimum distributions increase over time.
Dave and Susan’s target of 100,000 dollars a year works out to about 4.2 percent of their portfolio, which sits within a reasonable range. But the real point is flexibility. The plan should be able to adjust up or down with market returns, rather than locking in one number and refusing to move. The number on your statement isn’t what tells you whether you can retire. The plan is.
Lever 2: Bridging the Healthcare Gap
Healthcare is often the biggest surprise for people retiring before 65. Dave has a four year gap until Medicare begins, with no employer plan to bridge it. For 2026, the ACA’s enhanced premium tax credit has expired and the 400 percent poverty subsidy cliff is back, which means marketplace premiums for a couple in their early sixties can run well into 2,000 dollars a month, or 24,000 dollars a year, on top of the 100,000 dollars they need for everyday spending.
The planning tension here is real. Keeping taxable income under the subsidy threshold, around 85,000 dollars for a couple, works directly against doing Roth conversions in the same years. Solving for both at once is one of the more delicate parts of the plan.
Lever 3: When to Claim Social Security
There’s no single right answer here, only trade offs. If Dave claims at 62, he protects the portfolio early but locks in the lowest benefit, at a little over 2,300 dollars a month, and shrinks Susan’s potential survivor benefit. If he waits until 70, he gets the largest guaranteed, inflation adjusted benefit, around 4,100 dollars a month, and maximizes what Susan could receive as a survivor. The break even point for waiting typically falls in the mid to late 80s.
The decision usually comes down to whether the priority is preserving the portfolio for beneficiaries or securing guaranteed income for as long as possible. There isn’t a universal right answer, only the one that fits a given family’s goals.
Lever 4: The Tax Bomb and the Roth Conversion Window
Because Dave was born after 1959, his required minimum distributions won’t begin until age 75. That gives him a long runway, from 61 to 75, and the years where he isn’t earning a paycheck are the richest tax planning years of his life.
For 2026, the standard deduction for married couples filing jointly is 32,200 dollars, and the 12 percent tax bracket runs up to 100,800 dollars of taxable income. The strategy is to fill up whatever bracket makes sense each year with Roth conversions, paying tax now at a known, lower rate instead of later at an unknown, possibly higher one. If that 1.5 million dollars in pre-tax accounts doubles or triples by age 75, the required withdrawals could push Dave and Susan into a much higher bracket, and trigger IRMAA surcharges on Medicare, which currently begin around 218,000 dollars for a couple.
There’s also a temporary boost worth knowing about. The Big Beautiful Bill Act added a 6,000 dollar per person senior deduction starting at 65, available through 2028 with a phase out at 150,000 dollars, which quietly widens the conversion window for a few years.
Lever 5: Sequence of Returns Risk
The first five years of retirement matter more than almost any other stretch. The same average return, in a different order, can produce very different outcomes. If Dave and Susan retire and the market drops significantly in year one, that’s one of the biggest risks to the whole plan, especially if they’re withdrawing on the higher end of the safe range.
This is where their 150,000 dollar cash reserve earns its keep. It acts as a buffer, along with spending guardrails, so they aren’t forced to sell shares at a loss just to generate income during a downturn. Selling into a down market to generate the same dollar amount consumes more of the portfolio. Selling into an up market is just harvesting gains. That difference, repeated over years, is what sequence of returns risk really means.
So, Can Dave and Susan Retire?
The honest answer is a qualified yes. Yes, if the levers get used well. Spending holds near 100,000 dollars a year, with room to flex. The healthcare bridge to 65 is funded and income is managed around it. Social Security is claimed strategically rather than by default. The Roth conversion window gets used before RMDs begin at 75. And the portfolio keeps a growth sleeve instead of turning conservative the moment retirement starts.
It tips toward no if spending is rigid at 140,000 to 150,000 dollars, if Social Security gets claimed without weighing the other factors, if a market drop early on meets a plan with no cash buffer, or if the 1.5 million dollars in pre-tax accounts gets ignored until age 75 and detonates into a tax and IRMAA problem all at once.
The question of whether 2.4 million dollars is enough to retire on doesn’t have a real answer by itself. The plan is what answers it.
EverPar Advisors is a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only. It is not intended as investment, tax, or legal advice. Consult with a qualified professional before making any investment decisions. Past performance is not indicative of future results.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Oklahoma business owners and high-income earners have access to a tax strategy that goes well beyond standard deductions. Here’s how transferable tax credits work and who they make sense for.
When most people think about reducing their tax bill, they think about deductions. Charitable giving, property taxes, retirement contributions. These are familiar tools, and for good reason. But there is another category of tax planning strategy that goes largely unnoticed, even among high earners: transferable tax credits.
In this video, I sat down with Shawn Alexander, CPA and owner of Alexander Accounting Services, to walk through exactly how these credits work, where they come from, and whether they might be worth exploring in your own financial plan. Shawn brings a perspective that is hard to find. Before running her own firm, she spent time at the IRS, which gives her a firsthand understanding of tax regulations and audit processes that directly benefits the clients she advises today.
Deductions vs. Credits: Why the Distinction Matters
Before getting into transferable credits specifically, it helps to understand the difference between a deduction and a credit, because they are not the same thing.
A deduction lowers the amount of income that gets taxed. Depending on your bracket, a $1,000 deduction might save you anywhere from $200 to $370. A credit, on the other hand, reduces your actual tax bill dollar for dollar. A $1,000 credit can save you exactly $1,000, regardless of your bracket.
That distinction matters because it changes the math significantly, and it is the foundation for understanding why transferable tax credits can be such a meaningful planning tool.
What Is a Transferable Tax Credit?
A transferable tax credit is a credit that was earned by one person or business but can be sold to another taxpayer. The original credit holder is typically a developer or investor who completed a qualifying project, such as a historic renovation or an energy project. Rather than waiting years to use the credit themselves, they prefer to sell it now and free up cash flow for their next investment.
As the buyer, you purchase that credit at a discount. Right now, buyers are typically paying 94 to 96 cents on the dollar. That means you are buying $1 of tax savings for roughly $0.95. There is no generalized framework that applies to all transferable credits. Each credit type has its own rules, so it is important to verify transferability before moving forward.
A Real Oklahoma Example: The Historic Rehabilitation Credit
Oklahoma has offered the Historic Rehabilitation Credit for decades, and the statutes expressly allow transfers. The credit is based on qualified rehabilitation expenditures for certified historic structures, and the Oklahoma credit mirrors the federal rehabilitation credit dollar for dollar.
Here is how it works in practice. A developer rehabilitates a historic property in downtown Tulsa. The Oklahoma credits come out to $500,000. The developer wants that value in cash now so they can move on to their next project, so they sell the credit at a discount. You, as the buyer, purchase $500,000 in credits for approximately $475,000. That is an immediate $25,000 in savings, plus the full $500,000 credit applied to your Oklahoma tax bill.
One thing worth noting: there is a risk of recapture with these credits. In practice, credits are typically not sold until the recapture period has passed, which means the purchaser generally carries no recapture risk. That said, this is something to confirm with your CPA before proceeding.
Other Transferable Credits Available in Oklahoma
The Historic Rehabilitation Credit is one of the more well-known examples, but it is not the only option. Oklahoma is an energy-producing state, and there are quite a few energy-related credits available, including the coal credit and a variety of others that have appeared in state law over the years. The landscape does shift as legislation adds, modifies, or sunsets different programs, which is why working with a CPA and financial planner who track these changes is important.
At Everpar, we work with a significant number of clients in the oil and gas industry, so this conversation comes up regularly. When we identify a client who may be a candidate, we bring in a CPA like Shawn early so the planning is done properly and proactively.
How to Purchase a Transferable Credit
If you think this might apply to your situation, here is how the process generally works.
Consult your CPA and financial planner first. Make sure the strategy actually works within your tax situation before going further.
Find a seller. This is typically a bank that has purchased credits from a developer, investor, or project owner.
Verify transferability. Confirm that the specific credit is legally transferable under Oklahoma law. Many credits are not.
Execute the transfer. States often require a written transfer agreement, notice to the tax agency, and sometimes surrender of the original certificate with a replacement certificate issued to the buyer.
Claim the credit. Once you have the replacement certificate or state acknowledgment, you can apply the credit on your Oklahoma tax return with the required documentation attached.
This is not something you can do overnight. Starting the conversation early is critical so you are not working against the clock come tax season.
How This Fits Into Your Broader Financial Plan
A transferable tax credit does not live in isolation. Before pursuing one, there are several factors that need to be evaluated alongside the potential tax benefit.
Cash flow and liquidity. You have to purchase the credit upfront, so timing and available cash matter.
Risk. Like any strategy, this has to fit within your overall financial plan and risk profile.
Oklahoma tax liability. This is a state-level strategy, not a federal one. Your Oklahoma tax liability needs to be significant enough to make it worthwhile.
CPA and advisor collaboration. Your financial planner identifies the opportunity and evaluates the fit. Your CPA models the tax mechanics and handles the compliance. Both are necessary for this to work well.
At Everpar, when we identify a client who looks like a potential fit, we take a step back and look at the full picture before moving forward. Once we have confirmed it makes sense, we bring in the CPA to model it out and take it from a planning idea to an actionable strategy.
Who This Strategy Is Right For
Transferable tax credits are not a fit for everyone. This is a very specific planning tool that tends to apply to a narrow group of people.
It works well for business owners with significant Oklahoma tax liability, high-income earners with meaningful state income tax exposure, investors looking for tax-efficient strategies, and those with the cash flow to purchase the credit upfront.
It is generally not a fit for W-2 employees with standard employment income, those without meaningful Oklahoma tax liability, or anyone with limited liquidity or looking for a quick solution.
If you have heard of this strategy but are not sure whether it applies to your situation, that is exactly the kind of conversation we have with clients. Feel free to reach out to us or schedule an introductory strategy session.
EverPar Advisors is a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only. It is not intended as investment, tax, or legal advice. Consult with a qualified professional before making any investment decisions. Past performance is not indicative of future results.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Most retired public safety officers qualify for a $3,000 annual tax exclusion on healthcare premiums. Here’s what it is, how SECURE Act 2.0 made it easier to claim, and what to do if you’ve been missing it.
If you’re a retired public safety officer, there’s a federal tax benefit sitting in the Internal Revenue Code that was written specifically for you. A lot of officers have never heard of it, and a fair number who have heard of it aren’t claiming it correctly.
I recently sat down with Ken Petrashek, CFP® to walk through some of the most common questions we’ve been getting since the SB102 campaign, and this topic kept coming up. So we put together a full video on it, and this post covers the key points for anyone who wants it in writing.
What the PSO Exclusion Is
The PSO exclusion was created under the Pension Protection Act of 2006 and lives in Section 402(l) of the Internal Revenue Code. It allows eligible retired public safety officers to exclude up to $3,000 per year from their gross income, as long as that amount goes toward qualified health insurance premiums.
This applies to retired law enforcement officers, firefighters, and other public safety personnel covered under a governmental pension plan. It is not limited to OPPRS members. If you retired from any qualifying public safety position anywhere in the country, this likely applies to you.
The dollar amount on its own is not life-changing. At a 22% federal tax bracket, $3,000 excluded saves you around $660 in federal taxes for the year. But across a 25-year retirement, that compounds to roughly $16,500, and it stacks with other planning decisions in ways that matter.
One other thing worth noting: the Fraternal Order of Police is currently lobbying Congress to raise that ceiling from $3,000 to $6,000. Nothing is guaranteed, but if that change happens it would be a significant benefit for retired officers and their families.
How SECURE Act 2.0 Changed the Rules
Under the original 2006 legislation, claiming the exclusion required your pension system to pay your insurance premiums directly to the carrier. That created a significant administrative burden for pension boards, and a lot of officers either gave up on the process or never knew it was available to them.
SECURE Act 2.0, passed at the end of 2022, removed that requirement. Under the updated rules, you can pay your premiums yourself and still claim the exclusion when you file your taxes at year end. Both paths now work, direct billing through your pension or self-pay and reconcile at tax time. This change meaningfully reduced the friction for officers trying to use the benefit, and most people haven’t heard about it yet.
How to Claim It on Your Tax Return
This is where a lot of returns go wrong, even with a competent preparer involved.
When you file, you will receive a 1099-R showing your gross pension distribution for the year. Here is how the exclusion gets applied on your 1040:
Line 5A is where you report the full gross distribution. If you received $50,000 in pension distributions, that full $50,000 goes on line 5A.
Line 5B is where you report the taxable amount. You subtract the qualified premium amount, up to $3,000, and report the reduced figure there. In the same example, that would be $47,000 on line 5B.
The letters PSO must appear next to line 5B. That stands for Public Safety Officer, and it is the signal to the IRS that you are claiming this exclusion. Tax software will generally walk you through this, but a fair number of CPAs will miss it if you don’t bring it up directly. If someone else is filing your return, make sure they know about this before they file.
On the documentation side, you do not need to attach proof to your return, but you should keep it on file in case of an audit. That means premium receipts, explanations of benefits from your insurer, and a copy of your 1099-R for the year. Think of it similarly to how you would document an HSA.
What Counts as a Qualified Premium
The range of qualifying coverage is broader than most people expect. The following all count:
Accident or health insurance
Qualified long-term care insurance
Medicare Part B and Part D
Premiums through your department’s retiree plan
ACA Marketplace policies
A spouse’s employer group plan, if you are covered under it
COBRA coverage
Coverage can be for you, your spouse, or your dependents.
One important exception: Medigap premiums, also known as Medicare Supplement premiums, do not qualify. If that is your only coverage, the exclusion would not apply to those specific costs.
The DROP Withdrawal Trap Most Officers Don’t See Coming
This is a planning issue that comes up frequently and deserves its own mention.
When you take a large distribution from your DROP account, that amount is taxable in the year you receive it. A large enough withdrawal can push your income into a higher tax bracket for that year, which is something most people are aware of going in.
What catches people off guard is the IRMAA bracket. IRMAA stands for Income Related Monthly Adjustment Amount, and it determines how much you pay for Medicare Part B and Part D premiums. The way it works is that Medicare looks back two years at your income to set your premium amount. So if you take a large DROP distribution today, you may not feel the impact until two years from now when your Medicare premiums come in significantly higher than expected.
The way to handle this is through coordinated planning. You may not be able to avoid it entirely, but if you know it is coming you can plan around it and set aside what you need ahead of time. The problem compounds when the planning is not done ahead of the distribution.
When to Start the Planning Process
We recommend starting six to twelve months before your anticipated retirement date. That gives us enough runway to look at your retirement date, your DROP distribution timing, your healthcare bridge strategy, and your tax situation as one coordinated plan rather than a series of separate decisions made at the last minute.
If you are already retired and are not sure whether you have been claiming the PSO exclusion, go back and look at your last few tax returns. Check line 5B on your 1040. If PSO is not listed there and you were paying qualified premiums, you may be able to amend those returns and recover what you missed. The standard amendment window is three years.
The planning window is genuinely wide before retirement. It gets narrow quickly once you are past it. If you have questions about any of this or want to walk through your specific situation, reach out to our team at everpar.com. We would be glad to help.
EverPar Advisors is a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only. It is not intended as investment, tax, or legal advice. Consult with a qualified professional before making any investment decisions. Past performance is not indicative of future results.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Social Security seems straightforward until you start getting close to claiming it. At that point, most people realize there are a lot of moving pieces, and the decisions you make are some of the most permanent ones in your entire retirement plan.
In a recent conversation, Ken Petrashek, CFP® and I walked through six of the most common Social Security myths we hear from clients. Here is what we covered.
Myth 1: Waiting Until 70 Is Always the Smartest Move
Delaying Social Security until 70 is often presented as the obvious choice, but whether it actually makes sense depends on your individual situation.
The math behind the decision comes down to a break-even analysis. If you delay claiming, your monthly benefit increases, but you receive fewer years of payments. For most people, the break-even point lands somewhere in the early eighties. If you have strong longevity in your family, waiting can make a lot of sense. If you have known health factors that may shorten your life expectancy, claiming earlier could result in a higher total lifetime benefit.
Marital status is another major factor. If one spouse is a significantly higher earner, delaying their benefit can protect the surviving spouse, since the survivor will step up to the higher amount when the first spouse passes. Cash flow also plays a role. If you have limited savings and need the income, claiming earlier may be the right call. If you have a large portfolio and do not need the money, waiting gives you more flexibility.
The bottom line is that the right age to claim is not a universal answer. It requires running a personalized break-even analysis that accounts for your health, your spouse’s situation, your cash flow needs, and your overall financial picture.
Myth 2: My Social Security Decision Only Affects Me
If you are married, your Social Security decision has a direct impact on your spouse, both while you are both alive and after one of you passes.
On the spousal benefit side, the lower-earning spouse can receive up to 50% of the higher earner’s benefit at their full retirement age. That calculation is based on the higher earner’s primary insurance amount, meaning the benefit at their full retirement age, not the delayed amount at 70. When the higher-earning spouse passes, the surviving spouse steps up to that larger benefit amount. This means that if the higher earner claimed early and locked in a reduced benefit, the survivor carries that reduction for the rest of their life.
There is also a provision worth knowing for divorced individuals. If you were married for ten years or more and have not remarried, you may be eligible to claim benefits based on your ex-spouse’s earning record, with no impact to them whatsoever. The key requirements are that the marriage lasted at least ten years, you remain unmarried, and your benefit based on their record would be higher than your own.
Myth 3: Social Security Income Is Not Taxed in Retirement
This one surprises a lot of people. Up to 85% of your Social Security benefit can be subject to federal income tax, depending on your total income in retirement.
The calculation is based on something called provisional income, which is your adjusted gross income plus any tax-exempt interest plus 50% of your Social Security benefits. For individuals, provisional income above $34,000 means up to 85% of your benefits are included in taxable income. For married couples filing jointly, that threshold is $44,000.¹
What makes this particularly important is that these thresholds were set in 1984 and have never been adjusted for inflation. In today’s dollars, a retiree drawing from an IRA, receiving a pension, and collecting Social Security will often exceed these thresholds without realizing it.
There are a couple of things people commonly overlook in this calculation. Municipal bond interest is often thought of as federally tax-exempt, but it does count toward your provisional income. Large one-time IRA withdrawals, such as purchasing a vehicle or funding a major trip, can also spike your income in that year and pull more of your Social Security benefit into taxable territory.
The best approach is to model these scenarios in advance as part of your broader financial plan so you are not caught off guard when it happens.
Myth 4: I Should Claim Early Before Social Security Goes Broke
Concerns about Social Security’s long-term funding are legitimate, but the conclusion many people draw from them — that they should claim as early as possible to lock in their benefit — tends to work against them.
Current projections suggest there could be a shortfall in the Social Security trust fund around 2035, but that projection assumes Congress takes no action. Congress has addressed Social Security shortfalls more than 20 times since 1935. Given the sheer number of Americans who depend on these benefits, it would be politically untenable to let the program fail. The more realistic worst-case scenario is a reduction in benefits, not a complete suspension.
The flawed logic of claiming early to protect yourself is worth examining directly. If Social Security actually ran out of funds entirely, the fact that you started receiving benefits at 62 would not protect you. What it would do is lock in a permanent 30% reduction to your benefit for the rest of your life.
Myth 5: I Can Take Social Security Any Time After 62
Technically, you can begin collecting Social Security at 62. But if you are still working when you do, there is an important rule that most people are not aware of until it affects them.
The Retirement Earnings Test applies to anyone who claims benefits before their full retirement age, which is 67 for most people today, while continuing to earn income from work. In 2026, if you earn more than $24,480 in wages or self-employment income, one dollar of your Social Security benefit is withheld for every two dollars you earn over that limit. In the year you reach full retirement age, the limit rises to $65,160,¹ and the withholding rate drops to one dollar for every three dollars over the limit. Once you actually reach 67, the test no longer applies and you can earn as much as you want without any reduction.
It is worth noting that the test only looks at wages and self-employment income. Investment income, IRA withdrawals, pension income, rental income, and capital gains do not count.
To put real numbers to it: imagine you are 64 years old, collecting $1,500 per month in Social Security, and earning $44,480 in part-time income. You are $20,000 over the limit. That means $10,000 of your Social Security benefits would either be withheld or need to be paid back. You do eventually get that money back once you reach full retirement age, but in the meantime the government holds it, which is effectively six or seven months of benefits you do not have access to.
This rule catches a lot of people off guard, particularly those who plan to retire from a full-time career but continue doing consulting work. The most important factor when considering early claiming is whether you will still be earning income.
Myth 6: My Advisor Automatically Handles All of This
Social Security planning does not happen in isolation. It connects directly to Medicare, and one of the most overlooked connections involves something called IRMAA, which stands for Income Related Monthly Adjustment Amount.
IRMAA is a surcharge added to your Medicare premiums based on your income from two years prior. This two-year lookback is where people run into trouble. A large income event at age 63, whether that is a Roth conversion, a significant IRA withdrawal, or a pension-to-annuity transfer, can show up in your Medicare premium calculation at age 65.
Ken shared a real example from his practice: a client whose company converted his defined benefit pension into an annuity. His monthly take-home income did not change at all, but the transaction appeared as over a million dollars of income on paper for that year. His Medicare premiums spiked as a result. He appealed twice and was denied both times.
Some of these situations are outside your control. But many are not. If you are considering a Roth conversion in your early 60s, modeling the downstream impact on your Medicare premiums is an important part of the analysis. A little forward planning can prevent a significant and avoidable increase in lifetime costs.
Every Situation Is Different
Social Security touches almost every part of a retirement plan, and the right approach looks different for every person. Nearly everyone is eligible for it, which means these questions come up constantly in our practice.If you are getting close to making a Social Security decision and want to work through it with someone, we would love to hear from you. Reach out to the team at EverPar to set up a foundation meeting.
EverPar Advisors is a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only. It is not intended as investment, tax, or legal advice. Consult with a qualified professional before making any investment decisions. Past performance is not indicative of future results.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
You’ve probably seen private credit in the headlines lately. It’s been a hot topic, and we’ve been getting more questions about it from clients. So I sat down with David Ellis, our Director of Investments, to get into the details. What is it, how does it work, and should it have a place in your portfolio? I’ll let him explain it in his own words.
So What Exactly is Private Credit?
I asked David to start from scratch, as if we were explaining it to someone who’d never heard the term.
“Think of it this way,” he said. “Everybody associates credit with banks. A company needs money, they go to a bank, they get a loan. Private credit is essentially a private lender stepping in and making that loan instead of the bank.”
The space really took off after the 2008 global financial crisis. New regulations required banks to hold more capital against the loans they were issuing. A lot of them stepped back. And when banks step back, someone else steps in. That’s where private credit managers found their footing, and they’ve been growing ever since.
I followed up by asking David what kinds of companies are on the other end of these loans.
“It runs the spectrum,” he said. “Midsize companies, large cap, ultra large cap. Any company that needs funding and wants to avoid the bank process.”
The appeal to borrowers is speed and flexibility. Bank loans mean paperwork, regulatory filings, and a long approval process. Private lenders can move faster. Companies pay a higher interest rate for that, but a lot of them are willing to. Getting access to capital quickly can be worth the premium, especially if the bank wouldn’t have approved them in the first place.
How We Evaluate Private Credit Managers
Not all private credit managers are created equal, and this is an area where our investment committee spends a lot of time. David walked me through what we look for.
Experience through multiple cycles is the first thing. Have they been through a period where fixed income markets got stressed? How did they handle it? Were they able to restructure loans and avoid defaults, or did things fall apart when the going got tough?
The second thing is underwriting quality. “What we’re finding,” David said, “is that private credit lenders tend to go deeper on underwriting than banks do. The covenants are tighter. That protects the investor.” We look closely at the structure of the loans before we make a decision on a manager.
What Clients Can Expect
The question we hear most often is: if I can get yield from public bonds, why bother with private credit? David’s answer is pretty straightforward.
You get paid more. Historically, private credit has generated returns roughly 2% to 3% higher than comparable public credit. Right now in 2026, the yields you can expect to see are around 9%. Last year it was closer to 10%, and rates have come down a bit. But even if rates dropped dramatically to the lows we saw in the past, David’s view is that these funds would still be yielding around 7%. Public fixed income won’t be anywhere near that in that environment.
The tradeoff is liquidity. This is the part of the conversation that matters most for clients.
With public bonds, you can sell and have your money back in a couple of days. Private credit doesn’t work that way. These funds typically allow quarterly redemptions equal to about 5% of the fund’s value. So if you need your money and a lot of other investors want out at the same time, you might not get everything back in one quarter. It could take a few quarters.
You’re being compensated for that illiquidity. That’s the trade. If your client accepts it going in, it usually works well. If they don’t, private credit is the wrong fit.
I asked David directly: who shouldn’t be in this space?
His answer was clear. If you might need that money within the next 18 months to two years, don’t do it. Many of these funds have a one-year lock where you’re simply not getting out early. And if you do exit before the lock period ends, there’s a penalty.
The second type of client who shouldn’t be here is someone who needs to check their account value every day. These funds price once a month. If a client calls us every week asking what their position is worth, that’s going to be a frustrating experience for everyone.
The Tax Picture
There’s no special tax treatment here. The income from private credit funds comes through as interest income, which means ordinary income tax rates. Most funds pay monthly, some quarterly.
Because of that, where we hold private credit matters. For clients who are using it for stability and yield rather than income they need right now, we’ll often place those assets inside an IRA. That way they’re not taking a tax hit every year on the distributions. It’s very client-specific. We look at the full picture before we decide where it sits in the portfolio.
What’s Behind All the Headlines
I wanted to end by asking David about the recent news around private credit, because clients have been bringing it up.
The concern started when a major AI coding tool came out and rattled confidence in software companies. Private credit portfolios often hold 15% to 20% in software company loans. These were considered safe bets because software businesses generate recurring subscription revenue, which makes them attractive to underwriters. When people started questioning whether AI would make those businesses obsolete, panic set in. Some investors rushed to withdraw, requesting more than the standard 5% quarterly limit. They got prorated and had to wait for the next quarter to get the rest.
David’s read on it is measured. “We’re still seeing revenue growth in those companies. We’re not seeing the AI disruption materialize in the loan data yet.” He also pointed to something I thought was worth highlighting: a large private credit lender recently sold about $1.5 billion worth of loans from their portfolio. The buyers were major pension funds in North America, some of the more sophisticated institutional investors out there. They paid 99.70 cents on the dollar. Basically par.
That says something. If the underlying loans were genuinely at risk, sophisticated pension funds don’t buy them at cost. They believe the underwriting holds up, and they’re not concerned about these companies defaulting before the loans mature.
Our view is that the media narrative got ahead of the facts. It usually does.
Private credit is a real option for clients who need more income than public bonds can provide today, and who can accept the tradeoff of less liquidity. It’s not right for everyone. But for the right client, it earns its place in a portfolio.
If you want to talk through whether this makes sense for your situation, reach out to us directly.
EverPar Advisors is a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only. It is not intended as investment, tax, or legal advice. Consult with a qualified professional before making any investment decisions. Past performance is not indicative of future results.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
High earners who exceed the Roth IRA income limits often assume tax-free retirement savings are no longer available to them. The backdoor Roth and mega backdoor Roth strategies exist precisely for this situation, and for those who execute them correctly, the long-term impact can be significant.
Why the Backdoor Roth Exists
The Roth IRA is one of the most powerful retirement accounts available. Money grows tax-free, withdrawals in retirement are tax-free, and unlike traditional IRAs, there are no required minimum distributions during your lifetime. The IRS limits who can contribute directly based on income, which is where high earners run into a wall.
1In 2026, the phase-out for single filers begins at $153,000 and cuts off completely at $168,000. For married couples filing jointly, the phase-out begins at $242,000 and ends at $252,000. For many high earners, direct contributions are simply off the table.
The backdoor Roth is the workaround. Income limits apply to Roth IRA contributions, but not to conversions. That distinction is the foundation of the entire strategy.
The mechanics are straightforward. You open both a traditional IRA and a Roth IRA. 1You make an after-tax, non-deductible contribution to the traditional IRA, up to $7,500 in 2026, or $8,600 if you are age 50 or older. Then you convert that traditional IRA balance to your Roth IRA as quickly as possible, ideally within days.
Keep the funds in cash between contribution and conversion to avoid any taxable earnings accumulating in the traditional IRA. Every year you execute this strategy, you must file IRS Form 8606 with your tax return. This form tracks your after-tax basis and proves to the IRS that you have already paid tax on the contribution. Missing it is one of the most costly backdoor Roth mistakes you can make.
While $7,500 per year may not sound like much, the compounding impact over time is substantial. As Michael walks through in the video, a couple each contributing the maximum from age 40 to age 65, $15,000 per year combined and stepping up to the catch-up amount in their 50s, could accumulate over $1 million in tax-free retirement savings assuming 8% annual growth.
The Pro-Rata Rule: The Part That Trips People Up
The backdoor Roth works cleanly when your only traditional IRA is the one you just opened for this purpose. If you have existing pre-tax money in any traditional IRA, including rollover IRAs from old 401(k)s, the pro-rata rule comes into play.
The IRS treats all of your traditional IRA balances as one combined pool. When you convert, they look at the ratio of pre-tax money to after-tax money across all your IRAs, not just the account you are converting from. You cannot choose to convert only the after-tax dollars.
For example, if you have $92,500 in an existing traditional IRA and you contribute $7,500 for the backdoor, your total IRA balance is $100,000. Your new after-tax contribution represents only 7.5% of that pool, meaning roughly 92.5% of your conversion would be taxable. The strategy becomes far less efficient.
If your current employer plan accepts incoming rollovers, you can roll your pre-tax IRA balances back into your 401(k) before executing the backdoor. This removes them from the pro-rata calculation entirely.
The Mega Backdoor Roth: A Much Larger Opportunity
For those who want to go further, the mega backdoor Roth operates through your 401(k) rather than an IRA, and the contribution potential is dramatically higher.
1Your 401(k) has three contribution buckets: your employee deferrals (up to $24,500 in 2026), your employer match, and a third bucket most people have never heard of, after-tax contributions. The IRS sets a total plan cap under Section 415(c) of $72,000 in 2026. The gap between what you and your employer contribute and that $72,000 cap can potentially be filled with after-tax contributions and then converted to Roth, either through an in-plan Roth conversion or an in-service distribution to a Roth IRA.
In the example Michael walks through in the video, a $200,000 salary with a 5% employer match leaves a gap of $37,500 between combined contributions and the $72,000 cap. That $37,500 could potentially go into Roth through the mega backdoor strategy.
Not all 401(k) plans support the mega backdoor Roth. Two specific features must both be present.
First, the plan must allow after-tax, non-Roth contributions, a separate bucket beyond standard pre-tax and Roth deferrals. Second, the plan must allow either an in-plan Roth conversion or an in-service distribution so you can move those after-tax contributions into Roth status. To find out, ask your HR department directly or review the plan documents.
This feature is more common at large tech and finance employers and among business owners who control their own plan design. If you own your business, you can work with your plan administrator to add these provisions if they are not already there.
When These Strategies Come Up in Planning
In practice, these conversations tend to come up in three situations. The first is when someone has already maxed out their 401(k) and is looking for additional tax-advantaged savings vehicles. The second is when someone has a small existing traditional IRA balance. Sometimes it makes sense to do a one-time conversion, pay the tax, clear the balance, and then execute the backdoor cleanly going forward. The third is the gap between retirement and RMD age. If you retire at 65 but are not required to take RMDs until 73, those eight years of lower income can be a good window for Roth conversions.
The Estate Planning Case for Roth Accounts
Beyond the tax-free growth during your lifetime, Roth IRAs carry a significant estate planning advantage. Traditional IRAs passed to non-spouse heirs are subject to the 10-year rule. Heirs must fully distribute the account within 10 years and pay income tax on every dollar along the way. Inherited Roth IRAs are subject to the same 10-year rule, but heirs are not required to take annual distributions. They can let the account grow tax-free for the full 10 years and then take the entire balance out tax-free at the end. For high earners building wealth to pass on, that distinction matters enormously.
Common Mistakes to Avoid
The most common errors we see are ignoring the pro-rata rule, waiting too long to convert after contributing, failing to file Form 8606, over-converting in high-income years which can trigger IRMAA Medicare surcharges or push you into a higher bracket, and assuming your 401(k) supports the mega backdoor without verifying it in the plan documents.
Is the Backdoor Roth Right for You?
The backdoor Roth and mega backdoor Roth are powerful tools, but they require careful execution. The right approach depends on your income, your existing IRA balances, your employer plan, and your broader tax picture. If you are a high earner who has not explored these strategies yet, there is a good chance you are leaving tax-free growth on the table.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The order you withdraw from your retirement accounts can shape your tax bill, your Medicare premiums, and how long your money lasts. Here is how to think through it.
Most of my clients come in thinking retirement income is a math problem. Add up the accounts, divide by years, figure out how much you can spend. That part is actually the easy part.
What takes longer to work through is this: where do you pull from first?
Withdrawal sequencing (which accounts you draw from and in what order) is one of the most consequential decisions in retirement planning. I’ve seen the tax side of this many times with clients. And I can tell you that two retirees with the same account balances can end up in very different places over a 20-year retirement depending on how they structure their withdrawals.
Small differences in timing quietly shape your tax brackets for years. They affect your Medicare premiums. They determine how much of your Social Security is taxable. They influence how long your portfolio actually holds up.
In this video, Ken and I walk through the full picture. We start with the basics and build toward a framework you can actually apply.
The Three Types of Retirement Accounts
Before you can make smart withdrawal decisions, you need to understand the tax character of each account. There are three categories, and each one behaves differently when it’s time to take money out.
Tax-deferred accounts like Traditional IRAs and 401(k) plans are funded with pre-tax dollars. You get a deduction today, the money grows without being taxed along the way, and you pay ordinary income taxes when you withdraw in retirement. The original assumption built into these accounts is that you’ll be in a lower tax bracket in retirement than you were during your working years.
That assumption holds for some people. For others, it doesn’t.
Tax-exempt accounts like Roth IRAs and Roth 401(k)s work the other way. You contribute after-tax dollars, the money grows tax-free, and qualified withdrawals come out without owing federal income tax. There are no Required Minimum Distributions, which gives you more control over when you take money out. These accounts tend to make the most sense when you expect your tax rate to be higher in retirement, or when you’re early in your career and have decades of tax-free growth ahead of you.
Taxable brokerage accounts are funded with after-tax money as well, but the tax treatment along the way is different. Dividends and interest are taxed in the year you receive them. Selling an investment triggers a capital gain or loss. Investments held longer than a year qualify for long-term capital gains rates, which range from zero to 20% depending on your income. These accounts are the most flexible since there are no contribution limits, no distribution requirements, and no penalties for early withdrawal.
Most people have assets spread across all three. Understanding how each one is taxed is the foundation for everything else.
A comparison worth running through
Let me make this concrete with a side-by-side example.
Take someone earning $100,000 a year who contributes 10% to their retirement account. Here’s how the math plays out differently depending on which account type they use.
With a Traditional 401(k), that $10,000 contribution comes out pre-tax, so they’re effectively paying taxes on $90,000. At a 22% marginal rate, they get a real tax break today. Then, in retirement, if their income drops to $40,000 and they take a $5,000 withdrawal, their taxable income bumps to $45,000 and they’re paying roughly half the tax rate they were during their working years.
With a Roth 401(k), they contribute the same $10,000 but pay taxes on it now. At 22%, that’s $2,200 in taxes, leaving a net contribution of $7,800. At a 6% average growth rate over 30 years, that $7,800 becomes approximately $44,800. When they withdraw it in retirement, they owe nothing in federal income tax.
Same income. Same contribution rate. Very different outcomes depending on when you pay the taxes.
I want to flag something I don’t think gets enough attention: tax diversification deserves as much thought as investment diversification. Having assets spread across all three account types gives you flexibility to manage your tax bracket in retirement. It lets you respond to legislative changes, unexpected income events, and shifts in your spending.
Why Withdrawal Order Matters so Much
Once you’re retired and no longer receiving a paycheck, the question shifts from how to save to how to draw down what you’ve built. And the order matters far more than most people expect.
The sequence you choose affects your current and future tax brackets. It affects your Medicare premium calculations (IRMAA is a real consideration for a lot of our clients). It shapes how your Required Minimum Distributions play out later in retirement. And it has a direct impact on how your portfolio holds up through a market downturn.
Taking money out of growth-oriented accounts during a down market locks in losses and can permanently reduce your portfolio’s lifespan, particularly in the first five to ten years of retirement. This is what planners call sequence-of-return risk, and it’s one of the reasons that thoughtful withdrawal planning matters before the first withdrawal ever happens.
The traditional approach, and where it breaks down
The most commonly recommended strategy draws from accounts in this order: taxable accounts first, tax-deferred accounts second, and tax-exempt accounts last.
The logic is straightforward. You pull from accounts taxed at lower capital gains rates before touching accounts that will generate ordinary income on withdrawal. Roth accounts are preserved as long as possible to maximize tax-free growth and keep the most efficient assets available for heirs.
This is a reasonable starting point. It’s not the right answer for everyone.
The better way to think about it: sequencing isn’t really about avoiding taxes. It’s about controlling when and how they happen. In many cases, a blended approach that draws from multiple account types in the same year can smooth out the tax impact and outperform a strict sequential strategy over a 20-year retirement.
This is a reasonable starting point, but it is not the right answer for everyone. Sequencing is less about avoiding taxes and more about controlling when and how they occur. In many cases, a blended approach that draws from multiple account types in the same year can smooth out the tax impact and ultimately outperform a strict sequential strategy.
Your situation is specific
The right approach depends on your specific numbers, your specific timeline, and what else is going on in your financial life.
Before settling on a strategy, there are several things worth working through carefully: your current and expected future tax brackets, when your RMDs are set to begin, large one-time expenses or deductions you’re expecting, your legacy and charitable goals, current market conditions, any upcoming tax law changes, and shifts in your lifestyle or spending.
That list isn’t exhaustive. It’s just a starting point.
How we work through this at Everpar – 5 steps
Here’s the process we use with clients.
Step 1: Map spending against guaranteed income
That means identifying what’s already covered by Social Security, pensions, or other fixed sources before we look at investment accounts. You need to know what the base looks like before you know how much flexibility you have.
Step 2: Look at RMDs and Roth conversion windows
If you have time before RMDs are required at age 73 or 75, that gap is often valuable. It’s a window to reduce pre-tax balances through strategic conversions, at tax rates that may be lower than what you’ll face once RMDs begin.
Step 3: Identify the spending gap
What’s left after guaranteed income is accounted for? That gap, combined with your current tax bracket and everything else on the list above, determines which accounts make the most sense to draw from.
Step 4: Run actual tax estimates
This is where my accounting background comes in handy. We model the impact on Medicare premiums, identify years where long-term capital gains may be taxed at 0%, and account for known one-time income events or legislative changes on the horizon.
Step 5: Define net spendable income
Once that number is clearly established, planning shifts from reactive to intentional. Instead of making decisions in response to market moves or unexpected expenses, you’re working from a defined plan that can be adjusted thoughtfully each year.
There’s no fixed formula here. Retirement income planning is a year-by-year process, and it’s highly personal. What works for one client doesn’t automatically work for the next.
If you have questions about how to structure your own withdrawal strategy, we’re happy to talk through it.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Understand the key difference between NQSOs and ISOs, how each is taxed, and the planning strategies executives can use to manage cash flow, minimize taxed, and reduce concentration risk.
Every year, usually in the first quarter, I start getting the same questions. Clients call or email. They’ve just received their stock awards for the prior year’s performance. They want to know what to do with them.
I love these conversations. Not because the answers are simple (they’re not), but because the decisions you make around stock options have real consequences for your tax bill, your cash flow, and your long-term financial picture. Getting it right matters.
So let me walk you through the basics: what types of options exist, how they work, when taxes come into play, and how to build a plan around them.
Two types of stock options: NQSOs and ISOs
When your company grants you stock options, they’re going to fall into one of two buckets.
The first is non-qualified stock options, or NQSOs. These are the broader category. Any option that isn’t an incentive stock option qualifies here. You get more flexibility with NQSOs, but in exchange, you give up favorable tax treatment. There are no special requirements under the Internal Revenue Code. They’re straightforward, but the tax hit is something to keep in mind.
The second is incentive stock options, or ISOs. These must meet specific requirements under IRC Section 422. There are more rules and restrictions, but the upside is more advantageous tax treatment. To qualify for that treatment, you have to hold the shares for at least one year from the exercise date and two years from the grant date. Those two dates are the ones you need to keep in mind.
More on what those terms mean in a moment. First, let’s walk through how both types move through their lifecycle.
The lifecycle of a stock option
Both NQSOs and ISOs follow a similar path from start to finish.
Step 1: Grant
You receive the options on a grant date. There’s a grant price associated with them. That’s the price used as the baseline for calculating your eventual tax obligation.
Step 2: Vest
Options don’t belong to you immediately. They vest over time. Different plans have different rules. A common structure is a three-year cliff vest, meaning you wait three years and all the options become available at once. Others vest incrementally. You’ll want to know exactly what your plan says.
Step 3: Exercise
Once vested, you can exercise your options, meaning you buy the shares at the grant price. This is where the tax consequences kick in, and where the two types of options behave very differently.
Step 4: Sell
After you’ve exercised, you’ll eventually decide when to sell the shares. How long you hold them determines your final tax treatment.
How NQSOs are taxed
With non-qualified stock options, when you exercise, the spread between your grant price and the current market price gets reported as W-2 income. It’s subject to payroll taxes and taxed at ordinary income rates. There’s no way around that part.
Here’s a simple example. You were granted $100,000 worth of NQSOs in 2026. Three years later, after a cliff vest, they’re worth $150,000. When you exercise, that $150,000 becomes your new cost basis, adjusted for the original grant price plus the taxes you paid.
Now you hold the shares. A year later, they’re worth $180,000 and you sell. That $30,000 difference is a capital gain. If you held the shares for more than a year after exercising, it’s a long-term capital gain, taxed at 0%, 15%, or 20% depending on your bracket. Some people in higher brackets may also owe the 3.8% net investment income tax. If you sold within a year of exercising, it’s short-term, taxed at ordinary income rates.
The holding period after exercise is the lever you can control. The grant-to-exercise piece generates ordinary income regardless. But what happens next is up to you.
How ISOs are taxed
Incentive stock options follow the same grant-vest-exercise-sell cycle, but the tax treatment is different enough that it’s worth walking through carefully.
When you exercise ISOs, there’s no regular taxable income at that point. That’s the key difference from NQSOs. However, there is an alternative minimum tax (AMT) adjustment. The way it works: you take the difference between the fair market value and the grant price at exercise. That spread is called the bargain element. The larger the spread, the higher the likelihood that you’ll trigger AMT. Yes, the IRS calls it a bargain element. It doesn’t always feel like one.
After you’ve exercised, you get an adjusted tax basis equal to the fair market value on the exercise date. Then it comes down to how long you hold the shares before selling.
Qualified vs. disqualified dispositions
With ISOs, the language is different. Instead of long-term and short-term, you’re dealing with qualified and disqualified dispositions.
A qualified disposition means you’ve held the shares for at least one year after exercise AND at least two years from the original grant date. If you satisfy both conditions, the entire gain from grant price to sale price gets treated as a long-term capital gain. That’s the truly favorable treatment ISOs are known for.
A disqualified disposition is anything that doesn’t meet those thresholds. If you sell too early, the spread at exercise gets treated as ordinary income, similar to what happens with NQSOs. You give up the tax advantage you were working toward.
Using the same example: granted at $100,000, vested at $150,000, sold at $180,000. If you satisfy the holding requirements, that full $80,000 gain from $100,000 to $180,000 over roughly four years is treated as a long-term capital gain. Compared to the NQSO scenario where $50,000 was ordinary income at exercise, that’s a meaningful difference.
How to build a plan around your options
Most clients lead with the same question: how do I minimize taxes? That’s the right instinct, but tax liability is just one of three factors we look at.
Cash flow and concentration risk matter just as much.
1. Tax liability
Understanding the lifecycle, where the trigger points are and what they mean, is the foundation of planning. You don’t always have to chase the most favorable tax treatment if it doesn’t fit your situation. But you need to know what the tradeoffs are before you decide.
For ISOs, AMT planning is a big piece of this. Some clients want to avoid AMT entirely. Others want to trigger it deliberately so they can recapture AMT credits in future years. Timing the disposition to align with your AMT goals is one approach. For NQSOs, we sometimes look at gifting or transferring options, which opens up additional planning opportunities.
Working with your investment team on tax-loss harvesting can also help offset gains when you exercise or sell. It doesn’t eliminate the liability, but it can reduce it meaningfully.
2. Cash flow
This comes up more than people expect. If you exercise and hold ISOs, you could have an AMT liability to cover without having actually sold anything. That’s a real cash challenge. We model this with clients at the beginning of the year and revisit it at year-end, when we know what’s actually happened: what’s been exercised, where income landed, what’s left to manage.
On the other side, some clients want to sell immediately because they need the cash. That’s a legitimate reason. But you have to weigh that need against your income tax brackets and what it does to your overall tax picture that year. Planning is what allows you to make that tradeoff clearly instead of reactively.
3. Concentration risk
There’s a saying: concentration builds wealth, but diversification protects it. Michael quotes it often, and he’s right.
When you’re accumulating options from your employer over years, you can end up with a lot of your net worth tied to one company’s stock. That’s unsystematic risk, risk that’s entirely dependent on how that specific company performs, not the broader market.
There are real psychological barriers that make it hard to reduce that concentration. Tax consequences, obviously. Emotional attachment if the stock was gifted or inherited. Company loyalty, where selling shares can feel like a vote of no confidence. And recency bias: if the stock has done well, it’s easy to assume it’ll keep going.
We don’t try to talk clients out of those feelings. We work around them. The goal is to develop a target concentration percentage that feels manageable long-term, then build a systematic plan to get there. Whether that’s quarterly sales, annual sales, or some other cadence depends on the client’s situation and goals.
What happens if you leave your company
This one comes up a lot, especially as clients start thinking about retirement or a job change. The rules are different for NQSOs and ISOs.
NQSOs when you leave
Non-qualified options are more flexible, but the specifics are controlled by your company’s plan documents. Before you make any decisions, review your grant agreements.
If your options have vested, they’re yours. You’ll typically have a limited window to exercise them, often 90 days. If you don’t act within that window, you lose them.
Unvested options are generally forfeited immediately when you leave. That’s what creates the golden handcuffs effect. If you’re on an ongoing grant cycle, there’s always a point where the cycle has to break, and that decision involves a real financial tradeoff.
If you were terminated for cause, expect forfeiture. If you left in good standing, most plans give you a path to exercise within the limited timeframe.
ISOs when you leave
Incentive stock options have stricter rules. In most cases, they must be exercised within 90 days of leaving to retain their tax-advantaged status. After 90 days, they may get treated as NQSOs.
Some companies allow conversion to non-qualified options. You lose some of the favorable treatment, but if you believe in the stock’s long-term performance, it might be worth converting rather than forfeiting. Just know that the IRS’s 90-day rule applies regardless of what your company allows. After 90 days, the ISO status is gone even if your plan says otherwise.
There are also special provisions for death, disability, and other circumstances. The details are always in your plan documents. Read them, understand them, and plan accordingly.
A few final thoughts and your next steps
If you take one thing from all of this: know your lifecycle. Know your dates. Know where the trigger points are.
That knowledge is the foundation. From there, you can build a plan that accounts for your tax situation, your cash flow needs, and your overall wealth picture.
The three things to keep top of mind:
Be aware of concentration. Own your employer’s stock intentionally, not by default.
Have a plan and pay attention to cashflow, especially around tax liabilities.
Stay flexible. There’s more than one right answer, and the best outcome usually comes from working through it over time with an advisor who knows your full picture.
If you have options and you’re not sure where you stand, that’s exactly the kind of conversation we have at EverPar. Our planning and investment team works through these together, and that coordination makes a real difference when the decisions get complex.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
I start almost every discovery meeting with pre-retirees the same way. I ask them: what does retirement mean to you?
The question catches people off guard sometimes. They’re expecting to talk about numbers and accounts and investment returns. But I’ve learned over the years that the most important question isn’t “how much do you have saved?”
The most important question is “what are you actually retiring to?”
Here’s what I typically see. Someone comes in and they’ve done everything right. They’ve saved consistently. They’ve built up $800,000, or $1.2 million, or whatever their number is. They’ve read the articles that say they need $1.5 million to retire comfortably. And they’re anxious.
The textbook definition of retirement is that you quit working at your company and you live off your pension or 401(k) or some combination of the two. But that’s not how most people think about it anymore.
Most people in their 50s and early 60s don’t want to fully retire. They want to downshift. They want to change gears. They’ve been doing the same thing for most of their career, and they’ve saved some money, and now they’re asking: when can I shift?
That’s a fundamentally different question than “when can I stop working entirely?”
I have clients who retire from their corporate job but keep consulting. I have clients who leave full-time work but pick up adjunct teaching, or serve on boards, or start something completely new. I have clients who do truly retire in the traditional sense.
The point is, you need to define what retirement actually looks like for you before you can plan for it.
And that definition changes everything about how we approach the numbers.
What the research shows
The anxiety around retirement timing is real, and it’s pervasive.
According to the Employee Benefit Research Institute, 70% of workers with more than $500,000 in retirement savings still express significant anxiety about retirement timing.* Even people who have saved substantial amounts feel uncertain.
Northwestern Mutual found that Americans believe they need $1.26 million to retire comfortably.** That number has fluctuated over the years, but the larger point is this: people are fixated on hitting a specific savings target, and they’re stressed about whether they’ll get there.
J.P. Morgan research shows that 6 in 10 retirees experience spending fluctuations of 20% or more during their first three years of retirement. Half of retirees between ages 75 and 80 continue to experience year-to-year spending volatility.***
This data tells us something important. Having a number in your account doesn’t mean you’re ready to retire. Knowing your “number” and psychological readiness are two different things.
And your spending in retirement is going to change in ways you probably haven’t fully anticipated.
So if you’re five years out, here’s what we need to work through.
1. Clarify what retirement actually looks like
I talked about this at the start, but it’s worth drilling down on because everything else flows from this.
Will you actually retire, or are you downshifting?
Are you planning to stop earning income entirely? Or are you thinking about moving to part-time work, consulting, or something less demanding?
There’s no right answer here. But the answer changes your income planning, your Social Security strategy, and your withdrawal approach.
If you’re going to keep earning $40,000 or $50,000 a year doing consulting work or part-time teaching, that’s $40,000 or $50,000 you don’t need to withdraw from your portfolio. That changes the math significantly.
A lot of the people I work with, especially those in their 50s, realize they don’t actually want to stop working. They just want to stop doing what they’ve been doing. That’s a critical distinction.
Housing: staying or moving?
Are you staying in your current home? Downsizing? Moving to a different state?
If you’re considering a move, you need to understand the cost-of-living comparison. Some people assume they’ll save money by moving somewhere cheaper, but they don’t always factor in things like higher property taxes, healthcare costs, or the reality that they end up traveling back to see family more often than they planned.
And if you’re thinking about downsizing, when does that happen? Is it something you do right as you retire, or is it a few years down the road?
These lifestyle questions can have financial consequences.
How will you fill your time?
This one is harder for people to think about, but it matters.
If your identity and your sense of purpose have been wrapped up in your work for the last 30 years, what replaces that when you retire?
I’m not a therapist, so I’m not going to tell you how to solve this. But I will tell you that the clients I work with who have the smoothest transitions are the ones who’ve thought this through. They have hobbies. They volunteer, and they have projects. They know what they’re going to do with their time.
The ones who struggle are the ones who retire because they think they should, or because they hit some magic age, but they haven’t really figured out what they’re retiring to.
Have you gone through comprehensive financial planning?
If you haven’t worked with a CFP® professional to build out a real plan, now is the time.
That plan should show you how all the pieces fit together. Your investments, your Social Security strategy, your tax situation, your estate documents, your insurance needs. How does it all work?
Here at EverPar Advisors, we have a coordinated team of planners & investment specialists that can help you map it all out.
2. Understand your expenses
Most people have a reasonable sense of what they spend now. But retirement spending is different.
What will your debt service look like?
Are you going into retirement with a mortgage? Student loans? Car payments?
For a lot of people, the house is the biggest remaining debt. And the question is: does it make sense to pay that off before you retire, or do you carry it into retirement?
The answer has changed over the years. Five or seven years ago, when interest rates were 2.5%, I told people: don’t pay off your house. If you can afford the mortgage payment, keep it. It’s cheap money. You’ve got this big chunk of capital that you can save, invest, and live off instead of tying it up in home equity.
Today, if somebody financed a house in the last couple of years and they’re paying 6% or 7%, that’s expensive money. That changes the calculation.
There’s no universal rule. It depends on your interest rate, your cash flow needs, and your overall financial situation.
How will your spending change?
You’re going to have more time in retirement. What does that mean for your spending?
Maybe you’re planning to travel more. Maybe you’re picking up new hobbies. Maybe you’re helping your kids financially in ways you weren’t before.
On the flip side, maybe you’re spending less on commuting, work clothes, or going out to lunch every day.
The research shows that spending is volatile in the early years of retirement. Some people spend more than they expected. Some people spend less. It’s hard to predict.
But you should at least think through what your spending might look like. Don’t just assume it’ll be 80% of what you’re spending now. That rule of thumb doesn’t always hold.
Have you planned for healthcare costs?
This is where people consistently underestimate.
In 2026, Medicare Part B premiums are $202.90 per month. That’s up 11.6% from 2025. Medicare Part D has a $2,100 out-of-pocket maximum.*
According to HealthView Services, the average 65-year-old couple will spend $955,411 on lifetime healthcare costs. That includes premiums, deductibles, copays, vision, hearing, and dental. First-year costs average $17,003 and rise to $55,513 by age 85.**
Healthcare inflation is running at about 5.8%, while Social Security’s cost-of-living adjustment for 2026 is 2.8%. Healthcare costs are rising faster than your Social Security benefits will keep pace with.
If you’re retiring before 65, you need a plan for health insurance. Are you buying coverage on the ACA marketplace? Do you have retiree coverage from your employer? Can you get on your spouse’s plan?
Silver-level ACA plans can run $800 to $1,200 per month, depending on where you live and your income level. That’s $10,000 to $15,000 a year just for health insurance before you retire on Medicare.
And if you need long-term care down the road, those costs are substantial. A private nursing home room averages $11,294 per month. Assisted living is $6,313 per month.***
You don’t have to solve all of this right now. But you need to understand the scale of these costs and factor them into your planning.
3. Understand your income sources
When the paycheck stops, where does the money come from?
Your withdrawal strategy
If you have a combination of IRA money, Roth money, and taxable accounts, there’s a right way and a wrong way to withdraw.
It depends on what resources you have and what your goals are.
The SECURE Act changed a lot of this. There was a time earlier in my career when we were telling people: don’t withdraw from your IRA. Let that be the last bucket you tap. Take money from your taxable accounts first, avoid triggering taxes on the IRA for as long as you can.
Now, for people with heirs, that advice has flipped. If you’ve got non-qualified accounts that will get a step-up in basis when you die, it often makes more sense to spend down the IRA money during your lifetime. You pass the taxable accounts to your kids with the step-up, and they avoid the capital gains tax.
Beyond the account structure, there’s also the type of investments you own. Some investments pay interest and dividends. Some are focused on growth.
When you’re in the accumulation phase, you’re saving so you can live off it someday. When you’re in the distribution phase, you’re living off those savings. The investment strategy should change between those two phases.
In a perfect world, you want to generate enough interest and dividends from your portfolio that you never have to sell shares to produce income. If you can do that, you’re never going to run out of money, because you’re not even touching the principal.
That’s not always realistic. But the point is, we want to think about how your portfolio is structured to produce the income you need.
Social Security
Here’s my philosophy: if you can delay Social Security, delay it.
When you delay, you increase your monthly benefit. And when you increase your benefit, you decrease how much you need to withdraw from your portfolio.
That’s important for two reasons.
First, obviously, a higher Social Security check gives you more guaranteed income. That’s valuable.
Second, and this is something people don’t always think about: you can’t pass your Social Security benefits to your kids. But you can pass your investment accounts. So if you take Social Security earlier and live off that income, you’re preserving more of your portfolio for the next generation.
Now, that advice assumes you have heirs you want to leave money to. If you don’t have kids, or if you’re not concerned about leaving an inheritance, the calculation might be different. You might decide to take Social Security at 62 or 65 and start enjoying it.
There’s no one right answer. But you need to coordinate your Social Security claiming strategy with your overall tax plan and your withdrawal strategy.
Pensions
If you’re leaving a job with a pension, you need to understand your settlement options.
Do you take a lump sum or an annuity? If you take the annuity, what happens to your spouse when you die? Do you have survivor benefits?
There’s also the question of early withdrawal penalties. If you’re under 59½, you generally pay a 10% penalty on distributions from retirement accounts. But there are exceptions.
One exception that’s relevant for many of the public safety folks I work with through the Trade Priorities & Accountabilities Act of 2025: if you’re in law enforcement and you have a defined benefit pension with a DROP fund, you can avoid that penalty if you leave the money in the DROP account or in a qualified retirement account. If you roll it to an IRA, you lose that public safety status and you’re subject to the 10% penalty if you withdraw before 59½.
I’ve had to fix this for people who got bad advice from someone who didn’t understand the rules. They were told they could roll it to an IRA and still avoid the penalty. That’s not true.
So if you have a pension, especially if you’re in public safety, make sure you understand the rules.
Required Minimum Distributions (RMDs)
RMDs begin at age 73 under current law. That’s going to increase to age 75 in 2033.
If you don’t take your RMD, the penalty is 25% of the amount you should have withdrawn. That’s down from 50% before the SECURE 2.0 Act, but it’s still substantial.
The strategy here is to plan ahead. If you’re 67 or 68 and you’re not taking distributions yet, this is a great time to think about Roth conversions or other strategies to reduce the size of your IRA before RMDs kick in.
Health Savings Accounts (HSAs)
If you have an HSA, this is one of the best accounts you can own.
You get a tax deduction when you contribute. The money grows tax-deferred. And if you use it for qualified medical expenses, it comes out tax-free.
That’s a triple tax advantage. No other account offers that.
If you’re still working and you’re on a high-deductible health plan, maximize your HSA contributions. And if you can afford to pay your medical expenses out-of-pocket and let the HSA grow, even better. You’re building a tax-free pool of money for healthcare costs in retirement.
4. Optimize your investment strategy
As you get closer to retirement, your investment strategy should evolve.
What types of investments do you own?
Are your investments focused on growth, or are they producing income through interest and dividends?
When you’re 10 or 15 years from retirement, you can take more risk. You’ve got time to ride out market downturns. But when you’re three or five years out, you need to start thinking about stability.
The research shows that many people stay too aggressive as they approach retirement. Morningstar warns about this. U.S. stocks have returned about 15% annualized over the past decade, and that’s created some complacency. But sequence of returns risk is real. If the market drops 30% in the first two years of your retirement and you’re withdrawing money, that can permanently damage your portfolio’s ability to recover.
The recommendation from most advisors is to de-risk five to ten years of spending needs. That means you’ve got five to ten years’ worth of expenses in more stable investments, cash, bonds, income-producing assets, so you’re not forced to sell stocks at the worst possible time.
Will your risk tolerance change?
Your risk tolerance should change as you move from the accumulation phase to the distribution phase.
When you’re accumulating, you’re adding money to the portfolio. Market downturns are buying opportunities. You’re dollar-cost averaging into cheaper prices.
When you’re in the distribution phase, you’re taking money out. Market downturns hurt more, because you’re selling shares at depressed prices to fund your spending.
Your portfolio structure needs to reflect this fundamental shift.
Do you have concentrated stock positions?
If you have a large position in a single stock, maybe from company stock options or a stock that’s appreciated significantly, you need a plan to diversify.
If you’re five years from retirement and you’ve got 40% or 50% of your net worth in a single stock, we need to start working on that now.
Would a Roth conversion strategy make sense?
Roth conversions can be powerful, but they’re not right for everyone.
The benefit of a Roth conversion is that you pay taxes now at your current rate, and then the money grows tax-free. You don’t pay taxes on the growth, and you don’t pay taxes when you withdraw it in retirement.
The challenge is that conversions work best when you have time. The more years the money sits in the Roth, the more valuable the strategy becomes.
In retirement, there’s a window where Roth conversions can make sense. You’ve lost your earned income, so you’ve got a gap in your tax bracket. If you’re in your early 60s and you’re not taking Social Security yet, and your RMDs haven’t started, you might have a few years where your taxable income is relatively low. That’s a great time to do conversions.
But here’s the double-edged sword. Conversions usually work better the earlier you do them. But when you’re working, any conversion you do bumps you into a higher tax bracket because you’ve still got earned income.
I tell clients: we always want to have the conversation about Roth conversions. But I find myself recommending against it more often than I recommend for it.
The times when it makes sense are when you have a low-income year, a tax-loss harvesting opportunity, or a long time horizon.
If you do convert, you need to coordinate with your Medicare strategy, because conversions affect your income two years later, and that impacts your Medicare premiums (IRMAA thresholds).
Stock options and restricted stock units (RSUs)
If you’re an executive with stock options, RSUs, or other equity compensation, you need to understand your timelines.
The question I ask clients is: how much longer do you want to stay?
I’ve worked with a number of executives over the years. One of them comes to mind when writing this article. She’s a CFO and her company just kept dangling more stock options in front of her. They wanted her to stay 5-7 years longer than she was planning.
The problem is that the compensation is attractive. It’s the golden handcuffs. But it’s also stressful. Being a CFO of a public company is demanding. At some point, you have to decide whether the additional compensation is worth the additional years of stress.
If you’re five years out and your company is offering you another round of options that vest over the next five years, you need to decide if that aligns with your retirement timeline.
The risk is that you keep accepting the carrot on the stick, and you end up working longer than you actually want to.
So think through your timeline. If the options vest before your planned retirement date, great. If they don’t, be clear-eyed about whether you’re willing to delay retirement to capture that compensation.
Your five-year timeline
If you’re five years out from retirement, here’s a roadmap.
5 years out
This is when you do comprehensive financial planning. It’s time to move away from estimates & ideas and embrace a real, detailed plan.
You need a realistic assessment of your resources. You need to understand your retirement budget. And you need to evaluate major life decisions, like whether you’re moving, downsizing, or staying put.
This is also the time to review any concentrated stock positions and start thinking about diversification strategies.
3 to 4 years out
Review your Social Security strategy. When are you planning to claim? How does that coordinate with your spouse’s benefit?
Start making tax and portfolio adjustments. If Roth conversions make sense, this is when you begin. If you need to rebalance toward more conservative investments, start that process.
Finalize your Medicare strategy. Understand the enrollment windows. Understand IRMAA and how your income affects your premiums.
1 to 2 years out
Finalize your withdrawal strategy and income plan. Which accounts are you pulling from first? What’s the sequencing?
Complete your healthcare plan shopping. If you’re retiring before 65, where are you getting insurance? If you’re 65 or older, what Medicare plans are you choosing?
Review and update your estate plan. Make sure your beneficiaries are correct. Make sure your will and powers of attorney are up to date.
This is also when you coordinate your Social Security claiming with your overall tax strategy.
1 year out or retirement year
Maximize your final-year retirement contributions. If you’re still working, max out your 401(k), your IRA, your HSA.
Complete any consolidation or rollover planning. If you’ve got multiple old 401(k)s sitting around, get those consolidated.
Handle all your employer retirement paperwork. Pension elections, final benefits, all of that.
And plan for your insurance transitions. When does your group health insurance end? When does your individual coverage begin? Make sure there’s no gap.
Final thoughts & your next steps
Retirement planning is about getting to a certain dollar amount yes, but it’s also about understanding what retirement means to you.
It’s about understanding what retirement means to you. It’s about knowing your expenses and your income sources. It’s about making sure your investment strategy matches your stage of life.
And it’s about having a plan that accounts for all the variables, taxes, healthcare, Social Security, withdrawal sequencing, and coordinates them in a way that actually works.
If you’re five years out, you have time to get this right. But you need to start now.
Because the cost of not planning is almost always higher than the cost of planning.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. This commentary may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
For many individuals, delaying Social Security can increase lifetime benefits, particularly for those in good health with longevity expectations. However, the optimal strategy depends on individual circumstances.
The information in this material is not intended as tax advice. Please consult your tax professional(s) for specific information regarding your individual situation.
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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance shown is not indicative of future results, which could differ substantially.
Diversification does not ensure a profit or guarantee against loss.
Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.
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The same investment that built your wealth can also threaten it. Learn how to systematically diversify a concentrated stock position while minimizing taxes, whether you’re an executive with vested options, sitting on a big stock winner, or holding inherited shares.
Over the years, I’ve had many conversations that start with a version of the same story. A potential client comes in, and they’ve done well. Really well. Maybe they’ve been with their company for 15 years, and those stock options they received early on have vested and appreciated significantly. Or they bought shares of a company 20 years ago, and it turned out to be one of the big winners. Or they inherited a position from a parent or grandparent.
The details vary, but the core is the same: a single stock now represents 40%, 50%, sometimes even 70% of their net worth.
The paradox about concentrated positions is this: the same investment that built your wealth can also threaten it. You’re sitting on significant gains, which is fantastic. But you also have most of your eggs in one basket, and that creates real risk.
And then there’s the tax issue. When you’re looking at a position with millions of dollars in embedded capital gains, the idea of selling and triggering a massive tax bill can feel paralyzing. I get it. Nobody wants to write a check to the IRS for hundreds of thousands of dollars, or more.
Here’s what I’ve learned: the cost of inaction often exceeds the cost of taking action. The research bears this out. There’s roughly $1 trillion in concentrated stock held by U.S. investors right now.* And when you look at stocks that have suffered what we’d call catastrophic losses (a 50% peak-to-trough drop), nearly 40% of them never fully recovered.**
*Source: BlackRock, “Diversify concentrated stock with long/short” – https://www.blackrock.com/us/financial-professionals/insights/diversify-with-long-short
**Source: Morgan Stanley Wealth Management, “Diversify Concentrated Stock Positions: A Guide” – https://www.morganstanley.com/articles/diversify-risks-concentrated-positions
That’s the risk you’re taking by staying concentrated.
There are sophisticated, tax-efficient strategies to diversify over time. You don’t have to choose between paying massive taxes today or staying dangerously concentrated. There’s a middle path, and that’s what I want to walk through with you.
3 ways concentrated positions develop:
In my experience, concentrated stock positions really show up in three distinct ways. Each one has its own nuances, but they all share the same fundamental challenge: significant capital gains stand between you and diversification.
Scenario 1: Executive Compensation
The first way is through executive compensation packages. You receive restricted shares or stock options as part of your comp plan. These are awarded to you and then vest over time.
What I see with the executives we work with is that they often have large embedded gains in these positions, and understandably so. They’re intricately involved in the success of their company. They know the business inside and out. They’re bullish on the stock because they’re helping drive the results.
So there’s often some reluctance to sell. I understand that completely.
At the same time, these executives also appreciate and understand that this is a concentrated position. They recognize that they have a lot of non-systematic risk (company-specific risk) sitting in a single stock. They’re open to a systematic plan to reduce that position over time. They just want to do it in a way that makes sense and minimizes the tax hit.
The tax consequences here are primarily long-term capital gains. And that’s where we can put together some real strategies (see section below).
Scenario 2: Positions That Have Taken Off
The second scenario is simply positions that have had fantastic runs.
We have clients that have owned NVIDIA, Google, Microsoft, or Amazon. Over the last 20 years or so, these stocks have just crushed it. Incredible performance.
But now you’re sitting on a position that’s become 30%, 40%, 50% of your portfolio. And when you look at how elevated prices have become in what people call the MAG-7 or MAG-10 (the mega-cap tech stocks) or the hyperscalers, it raises the question: how do we start to reduce some of that risk?
You made a great investment. You held on to it. You were rewarded for that patience. But at a certain point, you need to think about portfolio construction and diversification, not just individual stock performance.
Scenario 3: Inherited Stock Positions
The third way concentrated positions develop is through inheritance.
This could be stock you received when you were young, or stock that’s held in a trust. Maybe it didn’t get a step-up in basis when it was transferred, or maybe you’ve just held it for an extremely long time.
I have a client with some industrial stock positions that have been held for 40 years. The cost basis in these positions is under a dollar per share. Under a dollar.
Now, these particular stocks have actually underperformed the market over time. They’re not technology-related, so they haven’t seen the same kind of growth we’ve seen in tech. But even though they’ve underperformed, they still have massive embedded capital gains.
So you’ve got this situation where you’re sitting on a position that’s not performing particularly well, but you still have all this tax liability if you sell. That’s frustrating.
The Common Thread
In all three of these scenarios, the challenge is the same. You have a concentrated position. You understand the risk. And you have significant capital gains taxes standing between where you are now and where you want to be: properly diversified.
The question is: how do you get from here to there in the most tax-efficient way possible?
That’s what we’re going to walk through.
Why concentration risk matters (and why people often stay concentrated anyway)
If you’re holding a concentrated stock position, you’re taking on significantly more risk than you would with a diversified portfolio.
When you own a single stock, you’re exposed to what we call non-systematic risk. This is risk that’s specific to that one company. A leadership change. A lawsuit. A product failure. A competitor that comes out of nowhere. Regulatory changes. Any number of things that can impact that specific business.
A single stock position also has much more volatility than a diversified portfolio. The swings are bigger. Your net worth can fluctuate dramatically based on factors that are often outside your control.
Even with these clear risks, smart, successful people often stay concentrated. I’ve seen the same patterns.
First, there’s the tax issue. When you’re looking at a massive capital gains bill, the pain feels immediate and real. The risk of staying concentrated feels theoretical and distant. That’s human nature.
Second, if you’re an executive, there’s often a sense of company loyalty. You believe in the business. You’re part of building it. Selling can feel like you’re betting against your own team.
Third, there’s emotional attachment. This stock has done well for you. It’s part of your success story. There’s a reluctance to let go of something that’s been so good to you.
And fourth, there’s recency bias. The stock has performed well recently, so it feels like it will continue to perform well. We tend to project recent performance into the future, even though we know intellectually that’s not how markets work.
I get all of this. These are real psychological hurdles.
But I tell clients, we’re not trying to time the market. We’re not saying the stock is going to tank tomorrow. What we’re saying is that the cost of staying concentrated can be much higher than the cost of diversifying and paying the taxes.
We can’t predict what direction any individual stock will move. But we can manage risk. And that’s really what this is about.
Tax-efficient diversification strategies
Strategy 1a: Direct Indexing and Building Your “Tax Loss Bank”
This is the foundation of what we do.
With direct indexing, instead of buying an S&P 500 index fund, we build a separately managed account that owns individual stocks. We’re essentially replicating the index at the individual stock level. So you still get broad market exposure, but you own the actual stocks.
The advantage here is significant. When you own individual stocks, you can harvest losses at the individual stock level.
Here’s a simple example. Let’s say you have a $100,000 concentrated stock position that you want to diversify out of. If you just sell it outright, you’re going to trigger capital gains taxes on that entire gain. But if we build a direct indexing portfolio, we can start harvesting losses from the individual stocks in that portfolio when they decline.
We call this building a “tax loss bank.” You’re accumulating capital losses that you can use to offset gains.
So we might harvest $20,000 in losses in year one from the direct indexing portfolio. Now we can sell $20,000 of your concentrated position, and those losses offset those gains. You’ve just diversified $20,000 without paying taxes on it.
We do this systematically, year after year. We model that we can harvest, on average, about 2-5% of portfolio value annually in losses*. Some years it’s more, some years it’s less. It depends on market conditions. But over time, this strategy allows us to transition from a concentrated position to a diversified portfolio in a very tax-efficient way.
*This loss harvesting approach is designed to generate meaningful tax benefits over time. Invesco’s Enhanced Tax-Optimized Large Cap Equity SMA, which employs systematic tax optimization techniques including long/short extensions, demonstrates the potential value of sophisticated tax management. Their strategy targets tax alpha of 3-4% annualized over the life of the account and has achieved tax alpha of 8.59% for the year ending December 31, 2025, and 8.41% annualized over three years (Source: Invesco Enhanced Tax-Optimized Large Cap Equity SMA – Update, December 2025). Tax alpha represents the performance enhancement from tax management strategies.
We also build what we call a “capital budget.” We might say, okay, based on what we’re harvesting and your overall tax situation, we can sell $100,000 of your concentrated stock this year. Then we do the same thing next year. And the year after that.
This isn’t a one-year process. We’re typically looking at something like 7 to 10 years for a full transition. But that’s actually a good thing, because we’re being systematic and disciplined. We’re not trying to time anything.
One more important point: when we build your direct indexing portfolio, we can exclude stocks and sectors where you’re already overweight.
Let’s say you work in technology and you have a concentrated position in a tech stock. We don’t want to buy more tech stocks in your diversified portfolio. That would just be reconcentrating. So we can exclude the entire technology sector from your index, or we can exclude specific companies. We’re building the portfolio around your existing holdings.
Strategy 1b: The 130/30 Strategy (For Enhanced Loss Harvesting)
Now, there’s an enhanced version of direct indexing that we use for some clients. It’s called a 130/30 strategy.
In a standard direct indexing portfolio, you’re 100% long in stocks. You own stocks, that’s it. With a 130/30, we’re using some leverage. We go 130% long and 30% short, which nets out to 100% equity exposure. You’re not increasing your market risk, you’re just using leverage to create additional opportunities.
This approach solves two important problems.
First, it prevents what I call “portfolio perfection.” With a long-only direct indexing strategy, over time, you harvest all the losses and you’re left with a portfolio that’s entirely capital gains. After 10 years, every stock is sitting on a gain. You have nothing left to harvest. With a 130/30, you’re constantly creating new positions that can generate losses. You always have tools available.
Second, a 130/30 can harvest losses in any market environment. In a long-only portfolio, you need stocks to go down to harvest losses. With a 130/30, you can harvest losses when stocks go up (from the short side) and when stocks go down (from the long side).
We use a 130/30 specifically. Some firms are getting more aggressive with 150/50 strategies or even 2-to-1 leverage. We don’t usually do that.
The reason comes down to costs and risk management. There’s a cost to leverage, and when markets get really volatile, sometimes the algorithms that run these strategies can start to break down. You can end up with tracking error. Things don’t work the way they’re supposed to.
We want to be prudent with leverage. A 130/30 can give us the benefits I just described, but it keeps the leverage manageable. We’re being thoughtful about the trade-offs.
Strategy 2: Donor-Advised Funds (A Strategy We Use A Lot)
If you have any charitable inclinations at all, donor-advised funds can be incredibly powerful. We use this strategy a lot with our clients.
Let’s say you normally give $10,000 a year to charity. Instead of giving $10,000 this year, $10,000 next year, and so on, you give $50,000 all at once to a donor-advised fund. That’s five years’ worth of giving, all in one year.
The benefit is substantial. You get a big tax deduction in the year you make that contribution.
If you contribute cash, you can deduct up to 60% of your adjusted gross income.* If you contribute appreciated stock, you can deduct up to 30% of your AGI.* If it’s a combination of cash and stock, you can deduct up to 50%.*
*Source: IRS Publication 526 and Fidelity Wealth Management, “5 Ways to Diversify Concentrated Positions” – https://www.fidelity.com/learning-center/wealth-management-insights/diversify-concentrated-positions
We call this a “bundling strategy.” You’re bundling multiple years of charitable giving into one year to maximize your tax reduction.
The beauty of a donor-advised fund is you don’t have to decide immediately where that money goes. You make the contribution, you get the tax deduction right away, but then you can recommend grants to charities over time. This year, next year, five years from now. There are very minimal requirements for how much you have to distribute each year (usually something like $50 depending on which custodian you use).
Most of our clients use their custodian’s donor-advised fund. That could be Schwab, Fidelity, whoever you’re working with. You can name the fund whatever you want, and you have complete flexibility in terms of when and where the grants go.
This is particularly valuable if you have a high-income year. Maybe you just sold a business, or you had an unusually large bonus. That’s a perfect time to make a large contribution to a donor-advised fund and offset some of that income.
And if you contribute appreciated stock instead of cash, you avoid paying capital gains on that stock. So you’re reducing your concentrated position, getting a tax deduction, and avoiding capital gains tax. That’s a triple benefit.
If you have significant charitable intent and you want an income stream, a charitable remainder trust might make sense.
This is more complex than a donor-advised fund, so it’s not for everyone. But here’s how it works.
You make an irrevocable donation of your appreciated stock to a charitable trust. The trust then sells the stock tax-free and reinvests the proceeds. You receive an income stream from the trust for the rest of your life (or for a set period of years). When you pass away, whatever’s left in the trust goes to the charities you’ve designated.
You get an immediate charitable tax deduction when you set up the trust. The trust avoids capital gains when it sells the stock. And you get income for life.
An important consideration: once you set up a charitable remainder trust, it’s irrevocable. You can’t change your mind. And the remainder goes to charity, so this is more than just leaving assets to your heirs. You are combining charitable giving with income generation and tax efficiency.
Why True Diversification Requires Private Markets
When we’re helping a client diversify out of a concentrated position, we’re definitely thinking about reducing risk. But we’re also thinking about where to reallocate those assets. That’s where private markets come into the picture.
Private investments aren’t a direct strategy for managing concentrated stock positions. But they are tangentially related.
Our Investment Philosophy
At EverPar Advisors, we believe that public markets are efficient for the most part. It’s hard to consistently beat the market through stock picking or market timing. We’re not trying to do that.
But we also believe there’s still a lot of inefficiency on the private side. Private investments are an integral part of any well-constructed investment portfolio. They’re not an add-on or a nice-to-have. They’re fundamental to true diversification.
So when we’re diversifying you out of a concentrated public stock position, part of our allocation strategy includes exposure to private markets. We want to give you equity-like returns, but we want those returns to come from different sources that aren’t correlated one-to-one with the public stock market.
The Problem with Traditional 60/40 Portfolios
For decades, the traditional diversification strategy was a 60/40 portfolio: 60% stocks and 40% bonds. The idea was that when stocks went down, bonds would go up (or at least hold steady), providing balance.
That relationship has changed. The correlation between stocks and bonds has increased significantly in recent years.* We’ve seen periods where both stocks and bonds declined at the same time. The traditional diversification benefit has weakened.
There’s also another issue. The S&P 500 has become increasingly concentrated in mega-cap technology stocks. If you’re diversifying from a tech stock by buying an S&P 500 index fund, you may still have significant technology exposure. You haven’t really diversified as much as you think you have.
What Private Markets Offer
A statistic to consider: approximately 87% of companies with revenues exceeding $100 million are privately held.* When you limit yourself to public markets, you’re only accessing about 13% of the available opportunity set.
Private markets offer several benefits that are particularly relevant when you’re diversifying away from concentrated positions.
First, private investments have different return drivers. Returns come from operational improvements, strategic growth initiatives, and value creation at the company level. They’re not driven by daily market sentiment or what’s happening with interest rates this week. That gives you true diversification in how your returns are generated.
Second, private investments historically have shown low correlation to public equity markets. When public markets go through tough periods, private investments often demonstrate more muted responses. We saw this during the Great Financial Crisis and again during the COVID-19 pandemic.* Private equity showed much smaller declines than public equities.
Institutional Investor, “Private Equity’s Resilience During Major Crises: a 25-Year Analysis”
Third, private investments are valued infrequently. That creates a smoothing effect. You’re not seeing daily price fluctuations. For long-term investors, this can actually reduce the emotional volatility of watching your portfolio.
The Additional Tax Benefit of Using Private Investments
Here’s something that often gets overlooked in these conversations: there’s an additional tax benefit to combining direct indexing with private investments.
We can’t control when an underlying manager in a private equity fund buys and sells companies or makes distributions. Those managers are making decisions based on their strategy, not your tax situation. Sometimes those sales generate taxable long-term capital gains.
The “tax loss bank” we’re building with the direct indexing strategy can be used to offset not just the gains from selling your concentrated stock, but also the gains generated by your private investment managers.
That’s additional value. You’re getting more benefit from the tax-loss harvesting than you would if you were only investing in public markets.
The EverPar Difference: A Team-Based Approach
When I think about how we handle concentrated stock positions at EverPar, what really differentiates us is our team-based approach. It’s fundamental to how we operate.
The reality is that managing a concentrated stock position effectively requires expertise in multiple areas. You need investment expertise to build the right portfolio. You need tax and financial planning expertise to optimize the strategy and coordinate with your overall financial picture. And you need responsiveness to adjust as circumstances change.
When you work with EverPar, you’re working with a team. I focus on the overall relationship and investment strategy. Courtney, our director of planning, brings tax expertise and financial planning depth. She’s been a CFO of a private company, so she understands complex financial situations. David leads our investment team and brings deep expertise in portfolio construction and private markets.
We’re bringing the best of planning and investment together to craft strategies that work for your specific situation.
A Hypothetical Example
Let me give you a hypothetical scenario to show how this comes together.
Imagine an executive with an $8 million position in company stock. That’s 60% of their net worth. They have approximately $7 million in embedded gains. They’re 52 years old, still working at the company, and they have strong charitable intentions.
Here’s how we might structure a strategy:
Years 1-2: We establish a systematic selling plan. Because they’re still at the company, we’re working within trading windows. We’re not trying to time anything. We might do quarterly sales during open windows. We begin funding a direct indexing account with the proceeds, and we exclude the technology sector since they’re already concentrated there. They make a $50,000 contribution to a donor-advised fund using the bundling strategy, which provides a meaningful tax deduction.
Years 3-5: As we build the tax loss bank through the direct indexing portfolio, we use those harvested losses to offset gains from selling more of the concentrated stock. We’re allocating the proceeds across multiple buckets: 45% stays in public equities through the direct indexing strategy, 30% goes into private equity and private credit for true diversification and non-correlated returns, and 25% goes into fixed income for stability.
Years 6-10: We continue the systematic approach. By the end of this period, the concentrated position has been reduced to about 15% of the portfolio. That’s still meaningful exposure to the company if they want to maintain that, but the risk level is completely different. The portfolio is now truly diversified across different asset classes, different return drivers, and different time horizons.
Throughout this entire process, we’re evaluating annually. We assess what tools we have available this year, how much we can harvest in losses, what the optimal amount to sell is, and whether there are any changes in the client’s situation that we need to account for.
That’s the team-based approach in action. It’s about sustained, coordinated effort over multiple years.
Your next steps: from concentration to confidence:
If there’s one thing I want you to take away from this article, it’s this: concentration may have built your wealth, but diversification protects it.
The three scenarios I described at the beginning (executive compensation, positions that have taken off, and inherited stock) all share the same fundamental challenge. You have significant wealth tied to a single stock, and you have significant tax consequences if you try to diversify. That tension keeps a lot of people stuck.
But you don’t have to stay stuck.
The systematic approach we’ve walked through here provides a path forward. Build your tax loss bank through direct indexing. Allocate into truly different investments, including private markets. Leverage charitable strategies if you’re philanthropically inclined. And work with a team that brings expertise in both planning and investments.
The key is that we’re not trying to time the market. We’re putting a plan in place and sticking to it. We’re making consistent progress year after year, regardless of what’s happening in the markets in any given month or quarter.
I’ve worked with enough clients through this process to know that it works. You go from having 60% or 70% of your net worth concentrated in a single stock to having a properly diversified portfolio with exposure across public equities, private investments, and fixed income. Your risk profile changes dramatically. Your sleep at night improves.
And you’ve done it in a tax-efficient way that minimizes the pain of the transition.
One final thought. The best time to put a diversification plan in place was probably yesterday. The second-best time is today. Markets are unpredictable. Company-specific events are unpredictable. What we can control is having a plan and executing on it systematically.
If you’re in one of these three situations (executive compensation, a position that’s appreciated significantly, or inherited stock), I’d welcome a conversation. We can evaluate your specific circumstances, look at what tools are available, and put together a systematic plan that makes sense for you.
That’s what we do. And we’ve been doing it for decades.
EverPar Advisors LLC (“EverPar”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where EverPar and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance shown is not indicative of future results, which could differ substantially.
Diversification does not ensure a profit or guarantee against loss.
Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.
An investment in the Private investments involves significant risks and is suitable only for those persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the Partnership will achieve its investment objective. An investment in the Partnership carries with it the inherent risks associated with the underlying investments. Each prospective Limited Partner should carefully review the Confidential Offering Memorandum and Limited Partnership Agreements before investing.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
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