Alex and Maria: ISOs, RSUs, and Building Optionality by 55

Financial Snapshot

• Household income near $720,000: Alex's $290,000 salary plus roughly $190,000 in annual RSU vesting, and Maria's $240,000 salary
• Investable assets of roughly $2.6M: $1.2M in pretax 401(k)s, $900,000 in taxable brokerage, $300,000 in cash, and $200,000 in Roth accounts
• Maria holds 40,000 ISOs at a $2.10 strike against a recent 409A valuation near $9.00 per share
• Two children, ages 8 and 11, with 529 accounts behind the couple's college funding goals
• Current spending near $220,000 per year; a work-optional target of $180,000 per year in today's dollars
• No coordination between the two equity plans before they engaged us

The Challenge

The hardest decision in this household is Maria's. Exercise all 40,000 ISOs now and she pays real cash, the exercise cost plus a likely alternative minimum tax bill, for shares she cannot sell. Wait for an IPO and she may forfeit years of the QSBS holding period, or end up selling in the same year she exercises and paying ordinary rates on the whole spread. Meanwhile Alex's vested RSUs accumulate as a growing single-stock position, and a high income has let the couple save well without saving deliberately. Every one of these decisions is a tax decision before it is an investment decision.

Our Approach

We modeled Maria's AMT exposure before she exercised anything. Each fall we calculate her AMT crossover: the number of ISOs she can exercise that year before tentative minimum tax overtakes her regular tax. The result is a staged, multi-year exercise schedule instead of one large taxable event. We also said the uncomfortable part plainly. Exercise cost and any AMT are real cash paid for paper value, and the company could still fail. We sized each exercise so a total loss would hurt the plan without breaking it. This approach is not for every household.

We put the holding clocks to work. A portion of Maria's grant is unvested with an early exercise provision, so exercising those options while the spread is small, and filing an 83(b) election within 30 days, is designed to start her holding periods early at low tax cost. That window is unforgiving; miss the 30 days and there is no second chance. We also asked company counsel to confirm whether her shares could qualify as qualified small business stock under Section 1202, which can exclude up to $10M of gain, or 10 times basis if greater, after a five-year holding period, if the company and the shares meet the requirements.

We raised their savings velocity. Both 401(k) plans permit after-tax contributions with in-plan Roth conversions, so both spouses max their deferrals and layer after-tax dollars on top. Alex's high-deductible health plan funds an HSA that stays invested rather than spent, and both 529s now receive automatic monthly funding. Together the structure is designed to move an estimated $110,000 to $130,000 per year into tax-advantaged accounts. This is the Compound Cultivator methodology applied to a high-earning household: fix the order of operations, automate it, and let the years do the work.

We put Alex's RSUs on the same discipline we would give any concentrated position: sell at vest, redeploy into a diversified taxable portfolio with deliberate tax location. Then we modeled the target itself. Under conservative return assumptions, the plan is designed to potentially support an estimated $180,000 of annual spending by Maria's 55th birthday without assigning any value to the pre-IPO shares. If the IPO pays, it accelerates the timeline. It is upside, not a requirement.

Projected Outcomes

AMT mapped before money moved: A staged, multi-year exercise schedule designed to avoid an estimated $70,000 to $90,000 of AMT that a single-year exercise of all 40,000 ISOs could potentially have triggered.

QSBS clock started: Early exercises and an 83(b) election are designed to start Maria's five-year Section 1202 holding period an estimated three years earlier than waiting for an IPO, preserving a potential exclusion of up to $10M of gain if the shares qualify.

Savings velocity raised: After-tax 401(k) conversions in both plans, an invested HSA, and automated 529 funding, designed to move an estimated $110,000 to $130,000 per year into tax-advantaged accounts.

Optionality by 55, IPO not required: Under conservative assumptions, the plan is designed to potentially support an estimated $180,000 of annual spending by Maria's 55th birthday, with any pre-IPO outcome treated as upside rather than a requirement.

Methodology

We re-run the AMT model every fall before any year-end exercise, review vest schedules and 409A updates quarterly, and revisit the full plan at each funding round or material valuation change. Alex and Maria are a hypothetical composite illustration. All figures are estimates under conservative assumptions, not actual results, and no outcome is guaranteed.

Related Reading

• The $50 Million Exit You've Never Heard About
• Compound Interest for Your Family: The Compound Cultivator Approach
• What's a Financial Plan and Why Should You Care?

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