Equity compensation
Your Separation Date Is Set. Four Decisions Come With It.
Unvested equity, vested shares, options and the 401(k) all land at once, and they are not on the same clock. Two of them close permanently on a date written into your plan document.
The four arrive together and get treated as one problem. They are not one problem. One of them is already decided, two of them are yours to time, and exactly one disappears if you miss a date nobody will remind you about.
Which is why the order matters more than any single decision does, and why the item most people handle first is the one that could have waited.
Four things, four clocks
Only One of These Disappears If You Miss a Date
The separation date in the paperwork is what every row below hangs on, and it is not always the last day worked.
| What you hold | What separation does to it | Does a deadline close? |
|---|---|---|
| Unvested RSUs and unvested options | Forfeited at the separation date under the plan document. Some agreements carry acceleration tied to a change in control or a reduction in force, but that is the exception rather than the default. | No, because there is no decision left. It is already settled. |
| Vested shares you already own | Nothing. They are yours, the tax was paid at vest at ordinary rates, and your basis is the vest-date value. From there they behave like any other holding. | No. Leaving does not force a sale. |
| Vested but unexercised options | A post-termination exercise window opens, and it closes on a date set by your plan document rather than by any general rule. Exercising costs cash in the year income just dropped. | YES, and when it closes, unexercised options are gone. No reinstatement, no late filing. |
| The 401(k) | Leave it, roll it to an IRA, or cash it out. Cashing out is the expensive door: mandatory 20% federal withholding, 60 days to replace the full original amount, and an additional 10% tax under age 59½ unless an exception applies. | Mostly no, but a plan can move a small balance out on its own timetable, and the threshold sits in the plan document. |
If you hold options
Incentive Stock Options Carry a Second Clock, and It Rarely Lines Up
Exercising costs cash in the year your income just dropped. You pay the strike price, and on a nonqualified option you also owe ordinary income tax on the spread between the strike and the value at exercise, generally withheld at exercise.
Incentive stock options add a second issue. The spread at exercise is an alternative minimum tax adjustment even though nothing was sold, so an exercise can produce a tax bill on a gain that exists only on paper. And exercising an ISO more than three months after separation means it is treated as a nonqualified option for tax purposes, so the ISO clock and the plan's window are two different dates. The mechanics of that AMT adjustment, with the IRS sources, are worked through in the ISO post.
The sequence
Most People Take These in the Wrong Order
Not because any one decision is hard, but because the one with a deadline is the one that looks least urgent.
Step 1: Find the date the option window closes, and write it down
It is the only item on the list that disappears if it is missed, and it is set by your plan document rather than by a general rule. It sits in the grant agreement, not in the offboarding packet.
Step 2: Add up what is already landing in this tax year, before selling anything
Severance, the final paycheck, any accrued time paid out, and anything that vested before the separation date set the bracket a share sale would stack on top of.
Step 3: Take the 401(k) last
It is the only one of the four with no hard deadline, and it is the one most people handle in the first week because it is the one they have heard of. Taking it first tends to spend the attention the option window needed.
The Date You Need Is Not in the Offboarding Packet
The post-termination exercise window is set in the grant agreement or the plan document, and the offboarding paperwork rarely repeats it. That is the one piece of this worth finding in the first week rather than the last, because it is the only one of the four that passes without anything prompting you. Everything else on this page can be decided calmly once that date is written down.
A fair objection
“I Already Have a CPA”
Most people in this position do, and a good one will file the return correctly. But a CPA is generally working after the year has closed, which means the AMT from an ISO exercise and the bracket effect of a share sale arrive as reported facts rather than as choices.
The decisions on this page get made between the separation date and the option expiry, which is before any of it reaches a return. Working alongside a CPA is the usual arrangement rather than the exception. There is a page describing how that works, written for the accountant rather than for you.
The Separation Decision Guide
One section per decision, unvested equity, vested shares, the option window and the 401(k), with the option window first, because it is the one with a date on it. Written to be read in the week you get your separation date, not filed for later.
Request the complimentary Separation Decision Guide and it arrives by email.
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What People Ask After the Separation Date Is Set
I was given my last day. Do I lose my unvested RSUs?
Generally yes. Unvested RSUs and unvested options are typically forfeited at the separation date under the plan document, which is why it is worth taking off your list early rather than late. Some agreements carry acceleration terms tied to a change in control or a reduction in force, so the grant agreement is the place to confirm it. The date that governs is the separation date in the paperwork, which is not always the last day worked.
How long do I have to exercise my options after I leave?
Your plan document sets it, and the windows vary. Once that date passes the unexercised options are gone, with no reinstatement. If the options are incentive stock options there is a second date to track, because exercising an ISO more than three months after separation means it is treated as a nonqualified option for tax purposes, so the ISO clock and the plan's window are two different dates that rarely line up.
Do I have to sell my vested shares when I leave?
No. Vested shares are yours, the tax on them was paid at vest, and your basis is the vest-date value. What changes at separation is the tax picture around them, because severance and anything that vested this year already occupy part of the bracket a sale would land in. That makes it a concentration question and a timing question, not a loyalty question.
Is it better to roll my 401(k) to an IRA or leave it where it is?
It depends on what the plan gives you and how old you are at separation. Separating in or after the year you turn 55 preserves an exception to the additional 10% tax on distributions from that employer plan, and that exception does not carry into an IRA. Rolling to an IRA can widen the investment menu and consolidate balances left at several former employers. Weigh fees, expenses, investment options, services, withdrawal provisions and creditor protections on both sides.
Does my severance change the tax on any of this?
It changes the bracket the rest of it sits in. Severance, the final paycheck, any time paid out, and anything that vested before the separation date are generally taxed as ordinary income in that year, and an option exercise or a share sale stacks on top. That is the reason the sequence matters more than any single decision does.
Related
If the Retirement Account Is the Bigger Question
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