The central premise of qualified retirement plans and the various flavors of executive deferred compensation plans is that the taxpayer will be in a lower tax bracket in the future, perhaps a much lower bracket. For some, especially the highly compensated, that won't necessarily be so. One consideration is the potential for stacking sources of income, which can increase income and push the taxpayer into a higher tax bracket. A secondary matter is that tax rates during retirement are not so simple to predict, given the potential for taxation of Social Security benefits, the Income-Related Monthly Adjustment Amount (IRMAA) for Medicare, and the Net Investment Income Tax.
Another concern for executives in publicly traded companies is being able to sell shares of company stock without running afoul of the insider trading rules. This may be accomplished with a 10b5-1 plan, a written plan in advance with trading instructions.
Some items are within the executive's control, so that timing the exercise of options or cashing out deferred compensation may help to smooth the income stream. Flexibility goes down dramatically once a taxpayer reaches age 73 and the Required Minimum Distributions (RMDs) from 401(k) accounts and IRAs must begin. A long-term focus is essential for optimal tax results.
How is executive compensation taxed?
Beyond salary, executive pay packages may include a variety of equity-based compensation, each with its own tax considerations.
Restricted Stock Units (RSUs) and Performance Stock Units (PSUs)
This stock is awarded upon reaching certain defined milestones or timelines. It is treated as ordinary income upon vesting. Value upon vesting sets the tax basis and holding period, so the gains or losses afterward will affect the capital gains and associated taxes for those years when shares are sold.
Incentive Stock Options (ISOs)
Unlike the stock awards, there is no tax liability when an ISO is granted, and there is no income tax when the shares are purchased; however, the spread (the difference between the strike price and fair market price) is included in determining any liability for the Alternative Minimum Tax (AMT). The lower phaseout amounts set by the One Big Beautiful Bill Act mean it’s likely that more high-income earners in 2026 exercising ISOs will be subject to the additional taxes.
More significantly, if the shares are held for two years after the grant was given and a year after the shares were purchased, a sale will be subject to capital gains tax instead of ordinary income tax.
Non-Qualified Stock Unit Options (NQSO)
These options are also not taxable based on when they are first granted, but they are not qualified for the special tax treatment that would allow them to be taxed at a capital gains rate. Instead, upon exercise, the spread (the difference between the strike price and fair market value) is taxed as ordinary income. Price changes thereafter are taxed as capital gains or losses upon sale, as though it were another stock, similarly to the RSUs or PSUs.
It may be risky to pay more taxes upfront by exercising these options at ordinary income levels, since the stock may go down. However, if a large increase in the stock is expected, exercising an option early could convert what might be taxed at ordinary income rates to a long-term capital gain.
Set a retirement date
In the case of early retirement, perhaps at age 60, there may be a period of time without a large salary. This could be the optimal time to exercise options that create immediate taxable income. It may also be an opportunity to diversify the investment portfolio and address any concentrated holdings that have developed from one’s stock awards.
Years in which ordinary income does not fill the lower tax brackets may present an opportunity for converting a portion of a traditional IRA or 401(k) account to a Roth IRA. This move will reduce future RMDs while leaving the assets available to meet retirement needs as they arise.
After age 73, taxable income may be reduced by making a Qualified Charitable Distribution (QCD) from an IRA. The QCD satisfies the RMD mandate without boosting the floor for taxation of other retirement income.
The full portfolio looks
Given the unique nature of most executive compensation packages and individual family circumstances, generalizations are at best a starting point for a conversation with a financial planning professional. Meet with an Arvest Wealth Management client advisor to review your portfolio. It is important to look at the whole picture instead of just one piece of the wealth-building puzzle and align your goals accordingly. Additionally, our advisors offer access to our Advanced Planning Team, providing tailored financial and estate planning guidance for high-net-worth individuals and families.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
© 2026 M.A. Co. All rights reserved.
Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.
