Tax strategies can be powerful, but only when they still fit your current situation. One of the most common mistakes we see is holding onto yesterday’s tax logic long after the facts have changed. The result is missed opportunities and unnecessary risk.
In many cases, it is not just about taxes. It is also about behavior, especially when emotions and past expectations start driving decisions.
Here are three real-world examples where it can be helpful to reassess.
1. ESPP Shares: When the Tax Benefit Disappears
Employee Stock Purchase Plans (ESPPs) often come with favorable tax treatment if shares are held long enough. That leads many investors to think, “I should hold this for the tax benefit.”
But that logic can break down quickly.
If the stock has declined below your purchase price:
- The original tax advantage may no longer matter
- You may be sitting on a loss instead of a gain
- The decision becomes less about taxes and more about risk and opportunity cost
At that point, continuing to hold is often tied to something else. Many investors become anchored to what they believe the stock “should” be worth or where it used to trade.
We often see this with company stock. Someone remembers a higher price and decides to wait for it to come back, even if their broader financial plan would benefit from diversifying.
The challenge is that markets do not know your purchase price or your expectations.
A more effective approach is to step back and evaluate the position based on today’s reality, not yesterday’s.
2. RSUs: When Holding Becomes an Unintended Bet
Restricted Stock Units (RSUs) can create a different kind of decision point.
In some cases, investors may feel hesitant to sell due to taxes or may prefer to wait for the stock to recover.
However, in many situations, the primary tax event has already occurred.
When RSUs vest:
- Their value is typically taxed as ordinary income
- That income is generally reported and taxed whether the shares are sold or held
After that point, holding the shares becomes an investment decision.
This is where anchoring and familiarity can influence decisions:
- You may be closely tied to the company through your career
- You may have confidence in the company’s long-term prospects
- You may be waiting for the stock to return to a prior level
Over time, this can result in a larger concentration in a single stock than intended.
A helpful question to consider is:
“If I didn’t already own this, would I choose to invest in it today?”
If the answer is no, it may be worth evaluating how that position fits within your overall plan.
A more intentional approach may include:
- Reviewing how much of your net worth is tied to one company
- Assessing whether that level of exposure aligns with your goals
- Exploring opportunities to diversify over time
In many cases, the primary consideration is not taxes, but overall risk exposure.
3. Roth vs. Pre-Tax: A Decision That Should Not Stay on Autopilot
Early in a career, Roth 401(k) contributions often make sense. Income is lower, tax rates are relatively modest, and paying taxes now can be attractive.
However, that decision may need to evolve as income changes.
With higher salaries, RSUs, and bonuses:
- You may move into a higher tax bracket
- Each Roth contribution is taxed at that higher rate
- Pre-tax contributions may become more beneficial depending on your situation
A common situation is:
- An individual starts with Roth contributions early on
- Income increases significantly over time
- The contribution strategy is not revisited
This can result in paying more in taxes today than may be necessary.
A more thoughtful approach may include periodically reviewing:
- Your current tax bracket
- Expected future income
- The balance between tax-deferred and tax-free savings
Adjustments over time can help improve overall tax efficiency.
Key Takeaway: Good Tax Planning Requires Letting Go of Old Assumptions
Tax planning is not a one-time decision. It is an ongoing process.
The most effective strategies:
- Adjust as your income and investments change
- Separate tax considerations from investment decisions
- Avoid anchoring to past prices or outdated assumptions
In many cases, the greater risk is not the tax bill, but making decisions based on outdated assumptions.
If you are considering situations like these, it can be helpful to evaluate how each decision fits within your broader financial plan.
Disclosure: This content is for informational purposes only and should not be considered investment or tax advice. Individual situations vary and decisions should be made in consultation with a qualified advisor.
