1. Build a Cash Flow Model for the Year

• Review Your Goals: Determine what is important to you during the year and build your plan around it. Begin with what you find is important: Private school for the kids? Big Family vacation? Build it into the cash flow model for your family?  Plan for the big adventures you want. Helping family members?  Consider the gift limits as part of your plan. Planning to start a business?  Build towards financial independence during the startup years.
• Base Compensation & Bonuses: Build a cash flow model for your family beginning with base salary and bonus estimates. Note that bonuses have taxes withheld as supplementary income (22% Federal if less than $1 million and 37% if more than $1 million) and taxes withheld may not be sufficient.
• Stock Compensation Understand when your stock options and RSUs vest and the tax consequences (taxes on RSUs are withheld as supplementary income).  Prepare for upside and downside volatility throughout the year.
• Expenditures: Plan for an outflow of federal, state, and local taxes. Regular living expenses, vacations, college fees, loan repayment, vacations, etc. Exceptional items – vacation house, business startup, weddings should all be part of your plan.

2. Stock Options & RSUs (Restricted Stock Units)

• Stock Options: Review vesting schedules, expirations, and potential tax implications (ISO vs. NSO). ISOs (Incentive Stock Options): Consider Exercising and holding to qualify for favorable long-term capital gains tax treatment (1 year post-exercise, 2 years post-grant). NSOs (Non-Qualified Stock Options): Expect taxation at exercise, so plan exercises strategically and coordinate with other tax reduction strategies.
• RSUs: Taxation occurs at vesting as W-2 income. To manage taxes, consider selling immediately to avoid stock price volatility. If stock prices drop post-vesting, explore tax-loss harvesting to offset gains elsewhere.

3. Maximize 401(k) Contributions,  Backdoor & Mega Backdoor Roth

• 2025 Limits: $23,500 (under 50), $31,000 (50-59, 64+), $34,250 (60-63). Contribute to the max to reduce taxable income.
• Mega Backdoor Roth: If your plan allows: Contribute after-tax dollars to your 401(k). Roll those funds into a Roth IRA or Roth 401(k). This accelerates tax-free growth for high earners who may otherwise be excluded from direct Roth contributions.
• Backdoor Roth: If you aren’t affected by the Pro-rata rule, you may be able to indirectly contribute to a Roth account when you would be limited by income otherwise.

4. Deferred Compensation Plans

• For executives or highly compensated employees, non-qualified deferred compensation plans (NQDCs) allow you to defer income into future years.
• Benefits: Reduces taxable income in high-earning years. Provides tax-deferred growth until distributions begin, often in retirement when income (and taxes) may be lower.
• Key Considerations: Align payout schedules with your retirement cash flow needs. Be aware of company credit risk since these plans are unsecured liabilities.

5. Diversification of Equity Holdings

• Over-Concentration Risk: Many tech workers accumulate significant wealth in company stock, which can expose you to volatility.
• Steps to Diversify: Setup a multi-year diversification plan based on your risk tolerance. Reinvest proceeds into diversified portfolios (stocks, bonds, real estate). Explore exchange funds to swap concentrated positions for a diversified basket of stocks without selling. Consider a Section 351 exchange to exchange pieces of a concentrated position into a diversified ETF holding.
• Tax Considerations: Plan sales to take advantage of long-term capital gains rates. Use charitable donations of appreciated stock to offset tax exposure.

6. Review of Employee Benefits

• Tech companies offer lucrative benefits that often go underutilized: Employee Stock Purchase Plans (ESPPs): Contribute to ESPPs for discounted stock purchases (up to 15% off market price) and immediate gains. Wellness Benefits: Take advantage of mental health services, fitness reimbursements, or health stipends. Executive Benefits: Review offerings like supplemental life insurance, financial planning services, and long-term disability insurance.

Additional Tax Reduction Strategies to consider

1. Tax-Loss Harvesting: Offset capital gains by selling underperforming assets to realize losses while staying invested in similar assets.
2. Charitable Giving: Use Donor-Advised Funds (DAFs) for upfront tax deductions while spreading donations over time. Donate appreciated stock to charities to avoid capital gains taxes.
3. Roth Conversions in Low-Income Years: Convert portions of your traditional IRA to a Roth IRA during years of lower income to lock in a lower tax rate.
4. 83(b) Election (for Restricted Stock): If you receive restricted stock, filing an 83(b) election allows you to pay taxes upfront at grant, potentially saving on taxes if the stock appreciates significantly.
5. Qualified Opportunity Zones (QOZs): Defer capital gains taxes by investing in designated QOZ funds, which also provide long-term tax-free appreciation.
6. Maximize HSAs: Contribute to an HSA for triple tax benefits (pre-tax contributions, tax-free growth, and tax-free withdrawals for medical expenses).

Set Calendar Reminders for Yourself

1. Be Proactive in your planning: Set reminders at key dates to review items like: 401(k) contributions, deferred compensation enrollment, ESPP contribution review and other key dates. Set a calendar event to remind you to enroll RSU & Stock Option vesting dates to execute your long term company stock plan.
2. Charitable Giving: Consider Donor-Advised Funds (DAFs) for upfront tax deductions while spreading donations over time. Donate appreciated stock to charities to avoid capital gains taxes.

Looking forward to sharing more opportunities with you in the next year.

Happy New Year!