The Three-Year Plan to Diversify Your RSUs: A Walkthrough

You're a VP of Engineering at a publicly traded tech company. Seven years in. Your salary is good, your bonus is better, but the real story is the RSUs. Grant after grant, vest after vest, and what started as a nice bonus each quarter has quietly become $3.2 million of one stock. One ticker. One company.

You know you need to diversify. You also know that selling $3.2 million in stock creates a tax bill north of $700,000 in California. So the question is not whether to diversify. It's how to do it without the tax bill undoing the whole point.

A multi-year RSU diversification plan is a strategy to sell concentrated company stock across several tax years, managing the tax bill at each step instead of taking it all at once. This is the difference between a plan and a hope.

We wrote recently about how a senior director's RSUs quietly became $2.8 million of one stock, and why that's a bigger bet than most people realize. This post is the follow-up: what the actual plan looks like.

The problem with selling everything at once

Let's say you sell the whole position tomorrow. Here is what happens.

The RSU spread — the difference between the grant price and the market price at vesting — was already taxed as ordinary income when each grant vested. That part is done. But any appreciation since vesting is a capital gain. If you have held shares for more than a year after vesting, it is a long-term gain: taxed at 20 percent federally, plus 3.8 percent Net Investment Income Tax above $250,000, plus up to 13.3 percent in California. If you sell within a year of vesting, it is a short-term gain, taxed as ordinary income at up to 37 percent federal plus California's rate.

Sell everything in one year, and you push yourself into the highest brackets on every dollar of gain. The NIIT kicks in above $250,000 of combined income. California takes its full share. You have just handed more than a third of your gain to the tax collector.

A one-shot sale is also a market timing bet. You sell everything on one day, at one price, based on one decision. That is not a plan. That is a gamble.

Year one: build the foundation

The first year of a multi-year diversification plan is about setting up the infrastructure, not selling everything.

Start with a 10b5-1 plan. This is a pre-arranged trading plan that lets you sell shares on a fixed schedule, even during blackout periods. It removes the emotional decision making and the compliance risk. Your company's legal team can help set it up, but a tax strategist should help design the sell schedule based on your tax situation, not just a calendar.

In year one, sell enough to cover two things: the tax bill on the sales themselves, and your living expenses for the year. Aim to sell shares that have been held for more than a year (long-term) to get the lower capital gains rate. Keep the total gain in year one low enough that you stay under the NIIT threshold, or at least minimize the amount that triggers it.

The goal of year one is to establish the pattern. You are proving to yourself that the plan works, that the tax bill is manageable, and that the market is not going to punish you for selling methodically.

Year two: the bulk of the unwind

Year two is where the real work happens. Now that the 10b5-1 is running and you have seen how the mechanics work, you can sell the largest chunk of the position.

The strategy is to use the full 20 percent long-term capital gains bracket, and the 23.8 percent rate including NIIT for the portion above $250,000 of combined income. You stage the sales across the year using the 10b5-1 schedule, so the average price smooths out the market volatility.

This is also the year to start deploying the proceeds. As the RSU shares are sold and the cash comes in, you move it into a diversified portfolio: broad market index funds, some international exposure, maybe a municipal bond position for the California portion (the interest is state-tax-free). The goal is to have the new portfolio generating its own returns while you are still selling down the old position.

The key number to watch in year two is the total gain. You want to stay within the 20 percent bracket as much as possible. If the position is large enough that you cannot avoid the 23.8 percent NIIT rate on some of it, that is fine. The NIIT only applies to the amount above the threshold, not the whole gain.

Year three: mop-up and optimization

By year three, the concentrated position should be down to a manageable level — maybe 20 to 30 percent of your net worth instead of 80 percent. The remaining shares can be sold more gradually, at a pace that fits your tax situation.

This is also the year to use tax-loss harvesting. If the diversified portfolio you built in year two has any positions that are down, you can sell them to realize losses, then use those losses to offset the remaining gains from the RSU sales. This is a mechanical strategy that every investor should be using, but it is especially powerful when you still have concentrated stock gains to manage.

At the end of year three, you should be left with a diversified portfolio, a clean tax situation, and the freedom to make decisions about your career and your life without the weight of a single-stock position.

Why your preparer doesn't design this

The CPA who files your return in April sees the sales after they have happened. They report the gain, calculate the tax, and that is the end of it. They are not looking at your RSU vesting schedule in January and asking whether you should sell 20 percent this quarter or 30 percent. They are not coordinating a 10b5-1 plan with the tax brackets.

That is the difference between compliance and strategy. A preparer files the history. A strategist designs the future. For a senior tech executive in San Diego, or anywhere in California, this distinction matters most when the RSUs are the biggest thing on the balance sheet and nobody is looking at them until after the trades are done.

Ready to build your plan?

A free 15-minute discovery call is the first step. We will talk about where you are, what you are holding, and whether a multi-year diversification plan makes sense for you. From there, a paid strategy session produces a specific deliverable with your numbers. Call (619) 280-2700 or email info@RoadmapTax.com.

FAQ

What is a multi-year RSU diversification plan?

A multi-year RSU diversification plan is a strategy to sell concentrated company stock over several tax years to manage the tax bill, avoid pushing yourself into higher brackets, and reduce the risk of holding a single stock position.

How does a 10b5-1 plan help with RSU diversification?

A 10b5-1 plan lets you schedule RSU sales on a fixed calendar, even during company blackout periods. It removes emotional decision making, ensures compliance with insider trading rules, and allows a tax strategist to design the sell schedule around your tax situation.

What tax rate applies when I sell RSU shares?

Shares held more than a year after vesting are taxed at long-term capital gains rates (up to 20 percent federally, plus 3.8 percent NIIT above $250,000, plus California state tax up to 13.3 percent). Shares held less than a year are taxed as ordinary income at your marginal rate (up to 37 percent federally).

How much of my RSU sale goes to taxes in California?

In a representative situation, a California tech executive selling concentrated stock could see combined federal and state taxes on the gain of roughly 33 to 37 percent, depending on the size of the gain and the tax year. The exact number depends on your specific situation.

Can I diversify RSUs without paying capital gains tax?

Not entirely. The capital gains tax is triggered when you sell shares that have appreciated. But a multi-year plan can stage the sales across lower tax brackets, use tax-loss harvesting to offset gains, and keep more of the proceeds in your pocket than a single lump-sum sale.

What is the difference between a tax preparer and a tax strategist for RSUs?

A tax preparer files your return after the year is over, reporting the sales and calculating the tax due. A tax strategist helps design the sell schedule before the sales happen, coordinating with your 10b5-1 plan, tax brackets, and long-term financial goals.