A 10b5-1 plan for employees at Kestrel Bay Retirement Advisors

An even quarterly grid can turn ISO shares into ordinary income

A broker at a company’s preferred brokerage fills in a default grid that sells 25% of every vested lot each quarter. That grid sweeps in ISO shares Jonah exercised last spring, even though their qualifying dates have not arrived. The grid is easy to administer. It can also create a tax result nobody meant to create.

A sale less than one year after an ISO exercise, or less than two years after the grant date, is a disqualifying disposition. The spread at exercise is then taxed as ordinary W-2 income at federal rates up to 37%. It loses long-term capital gain treatment. For Jonah, the preset sale comes too soon on $80,000 of ISO spread.

Jonah's ISO lots were less than a year past exercise when the quarterly 25% grid reached them. Selling them that early taxed $80,000 of spread as ordinary W-2 income, so it lost long-term capital gain treatment. Someone could have caught this before signing by checking each lot's exercise date against the planned sale dates.

Ask the stock plan administrator to list every lot with its grant date, exercise date, share basis, and planned sale date. Strike any ISO lot whose qualifying date falls after its scheduled sale. Kestrel Bay Retirement Advisors runs a tax projection on the draft grid before anyone adopts it. A plan can satisfy the trading rules and still cost you more tax than it should.

The dates that make an ISO sale qualifying

How long does each selling route make you wait?

Your choice is not simply “plan” or “no plan.” An open-window sale gives you flexibility but can disappear when the company has undisclosed news; a single-trade plan fits one known cash need; and a multi-sale plan can reserve room for income across tax years. For an employee 10 to 15 years from retirement, we lean toward the multi-sale route when option expiration and concentration risk make waiting costly.

The SEC’s Rule 10b5-1 cooling-off rules distinguish most employees from directors and officers. Employees who are not directors or officers generally wait 30 days between adopting a plan and the first trade. Board directors and Section 16 officers wait until the later of 90 days or two business days after the company files its financial results for that quarter, subject to a 120-day cap.

A single-trade plan is generally limited to one such plan in a 12-month period. A multi-sale plan can schedule several trades, but changing the amount, price, or timing ordinarily ends the existing arrangement and means the cooling-off period begins again under a new plan. That lost flexibility is real, so set a schedule you can live with.

The cost of waiting for an open window

Which income does a planned sale create?

The account table separates the holdings that belong in Jonah’s schedule from those that need their own analysis. The NSO row deserves the closest attention because exercise-and-sell income can fill the remaining space under a chosen tax threshold much faster than a sale of vested RSU shares.

An NSO cashless exercise-and-sell creates ordinary income equal to the spread, generally reported on the W-2. Employer withholding on supplemental wages may not cover the final tax bill. For a household filing jointly, the 2026 37% federal rate begins above $768,700 of taxable income; the IRS publishes that threshold for 2026.

ISO shares sold before the qualifying dates also produce ordinary income. ISO shares held through both dates can receive long-term capital gain treatment, while exercising and holding ISOs can create alternative minimum tax preference income that a 10b5-1 plan does not solve. Vested RSUs generally have a basis equal to their value when they vested, so a later sale produces gain or loss only above or below that value.

Kestrel Bay Retirement Advisors looks at salary, RSU vesting, option exercises, deductions, and planned sales on the same projection before assigning a dollar amount to any year. Form 8949 and Schedule D then report the capital-gain side of applicable stock sales, while the W-2 generally carries option compensation. Equity compensation planning is useful here when grants, exercise choices, and a sale plan need to be read together.

The threshold that deserves a line on the projection

Twelve years out: selling now, in two years, or in five?

Jonah and Mei, hypothetical ages 46 and 44, expect $450,000 of taxable income each year from salary and RSUs. Jonah is a product director at a chip maker with NSOs carrying $400,000 of spread that expire in about six years; he also holds ISOs. Mei left a startup with early-exercised shares, and they have two middle-school children. Assume the company stock stays flat for illustration.

Starting now, the plan sells $100,000 of NSO spread in each of four years. Each year’s projected taxable income is $450,000 + $100,000 = $550,000, which stays below the $768,700 threshold where the 37% rate begins. Waiting two years still leaves time for four sales before expiry, but one blackout, missed limit price, or delayed tranche removes all slack.

Waiting five years forces the full $400,000 into the expiration year. The arithmetic becomes $450,000 + $400,000 = $850,000 of taxable income. That is $850,000 − $768,700 = $81,300 in the 37% bracket, or $30,081 of federal tax on that slice alone before considering the lower brackets, state rules, or other tax effects. Our calculator can help you model the same spread-across-years math with your own amounts.

Selling at 46 also puts after-tax proceeds into a diversified portfolio with 12 years before a planned retirement at 58; selling at 51 leaves seven years. More years do not guarantee a better outcome. Investments can lose value, and you may receive back less than you invested.

The proceeds may also support spending while Jonah directs more of his paycheck to his 401(k). The IRS employee deferral limit for 2026 is $24,500, rising to $32,500 at age 50 with the $8,000 catch-up, and to $35,750 at ages 60 through 63 with the $11,250 catch-up. Yes, that means paying some tax earlier to reduce a concentrated position and make room for catch-up years.

Four smaller sales leave room to adjust

The catch-up years change the value of liquidity

Setting sale amounts by tax year, in order

A usable plan begins with dates and dollar amounts, not a generic percentage of shares. Set the annual amount as a dollar amount of expected spread where possible, then test each tranche against grant dates, expiration dates, and tax projections. If the sales needed before expiration cannot fit into remaining open windows while keeping each year under your chosen bracket line, adopt a multi-year plan now.

Kestrel Bay Retirement Advisors treats the draft plan as a tax document as well as a trading instruction. The aim is not to eliminate tax. It is to avoid allowing a blackout calendar to force income into a year that was already full.

Use dollar amounts, not a share-count grid

• 1. Pull the lot list and vest calendar from the stock plan portal.
• 2. Project the next four tax years using salary, RSU vesting, planned ISO exercises, and other expected income. Mark the room remaining under $768,700 if that is your selected federal bracket line.
• 3. Set sale amounts in dollars of spread for each tax year, add limit prices, and exclude ISO lots until qualifying dates pass.
• 4. Send the draft to the company’s legal or compliance group for review against the insider-trading policy.
• 5. Sign during an open trading window. Directors and officers also certify that they lack material nonpublic information and are adopting the plan in good faith.
• 6. Let the cooling-off period run: 30 days for most employees and up to 120 days for covered officers.
• 7. Allow sales to execute. Section 16 insiders file SEC Form 4 within two business days and mark the 10b5-1-plan box.
• 8. Each January, review a short tax note showing the income produced and decide whether the April estimated payment needs more funding. Change amounts only for a real need, because a change restarts cooling-off.

What can go wrong after the plan is signed?

A limit price can protect you from a sale at a price you dislike, but it can also leave a tranche unfilled for months. If the stock stays below the limit, the planned income piles into a later year or never occurs before an option expires. Pick a floor price with the understanding that it may push income across a December 31 line.

Job loss and health events can also make a slow schedule impractical. Leaving an employer often triggers a short post-termination exercise window for options, commonly about 90 days, though the plan document controls. Private startup shares, including Mei’s, may have transfer restrictions or separate tax questions that a public-company 10b5-1 plan cannot fix.

Tax law can change during a multi-year schedule. We would rather keep early tranches modest and review the schedule each year, because a revision has a real cost: it resets cooling-off. Keep six to 12 months of spending plus estimated tax on planned sales in cash or in the $300,000 brokerage account, so an unfilled tranche does not force a rushed open-window sale.

A 10b5-1 plan is not worth the waiting period and reduced flexibility if sales fit easily into open windows or you hold mostly RSUs with little gain above vest value. It also does nothing for AMT created by exercising and holding ISOs. For early-exercised startup shares, ask about an 83(b) election and the holding period separately.

A missed limit price can become next year’s income

Keep a reserve outside company stock

Questions for the people who administer the plan

Bring direct questions to the people who hold different pieces of the answer. The stock plan administrator knows the lots and dates. The broker knows whether the trading instructions can reflect the tax schedule. Your CPA can test estimated payments and AMT, while the company’s legal group decides which internal policy and officer rules apply.

Do not assume the broker’s form captures all of this. The broker may be executing a plan, not preparing your tax return or interpreting the company’s insider-trading policy.

• Ask the stock plan administrator: Which lots are ISOs, and when do their qualifying dates arrive? What is the option expiration date and post-termination exercise window?
• Ask the broker: Can the plan use dollars of spread per calendar year rather than shares per quarter? What happens to an unfilled tranche when the stock remains below its limit price?
• Ask your CPA: How much estimated tax should we pay on NSO sales when withholding is based on supplemental wages? Does this year’s ISO exercise plus planned sales create AMT?
• Ask the company’s legal team: Am I a Section 16 officer, and does my cooling-off period last 30 days or up to 120 days?

Bring your grant list to Kestrel Bay Retirement Advisors before the next open window

Talk with Kestrel Bay Retirement Advisors a few weeks before an open window, while there is still time to project taxes and prepare a draft before adoption. Bring grant and vest statements, the insider-trading policy and window calendar, last year's return, and a recent pay stub. We explain the fee when we first talk and put it in writing before any work starts.

If the timing is close, use the request form so we can see whether a tax-year sale schedule is worth the cooling-off period for your situation.