Where They Stand
His Income
$450,000
Senior executive, 15-year tenure
Her Income
$120,000
Account executive, remote
His 401(k)
$500,000
Maxed every year since day one
Her 401(k)
$500,000
Maxed every year since day one
Company Stock
$1,500,000
⚠ Over 50% of net worth in a single position
Liabilities
$650,000
Mortgage + two car payments
Family
3 Kids — Ages 13, 10 & 8
College planning horizon: 5–10 years
The Problem
This couple has done almost everything right. Both maxed their 401(k)s for years. Income is strong. Fixed obligations are manageable. If you looked at a summary of their finances, you’d say they’re in great shape.
But there’s a problem hiding in plain sight.
His company stock has been swinging 15% month over month — and $1.5M of it sits in a single position. That’s more than 50% of their total net worth tied to the performance of one company. He knows he should diversify. Every time he thinks about selling, though, the tax bill stops him cold.
Meanwhile, his 401(k) is capped at the standard $23,500 limit — well below what he could actually be saving given his income and his employer’s plan features.
The concentration risk here isn’t a minor issue — it’s the defining financial risk for this family. A single bad quarter could erase years of wealth. And doing nothing about it is a choice.
The good news: there are proven strategies to protect the position, defer the tax, and systematically diversify over time — without triggering a massive bill today.
The Playbook
Step 01
Maximize His 401(k) with After-Tax Contributions
- His plan allows after-tax contributions beyond the standard $23,500 limit — up to the IRS maximum of $70,000/year (2025)
- Max the pre-tax bucket, then layer in after-tax contributions on top
- Those after-tax dollars can then be rolled into a Roth IRA via an in-plan conversion — aka the Mega Backdoor Roth
- Result: substantially more tax-advantaged savings each year, with Roth flexibility for the future
Step 02
Optimize Her Retirement Strategy
- Her employer doesn’t offer after-tax contributions, so the Mega Backdoor Roth isn’t available on her side
- Contribute up to her employer match — no reason to leave free money on the table
- Open a Backdoor Roth IRA ($7,500 contribution) to start building a tax-free bucket in her name
- If the priority right now is maximizing his after-tax contributions, it’s okay to deprioritize her Roth temporarily — but not indefinitely
Step 03
Implement a Collar on the Concentrated Position
- First, we want to protect the position. A collar uses options to create a floor on the downside while capping upside participation — basically a seatbelt for the stock
- He still participates in appreciation up to a defined ceiling, but a significant drop no longer puts the family’s financial plan at risk
- No immediate tax event — the position isn’t sold, so no capital gains are triggered
- This buys us time to execute a more systematic diversification plan without anyone panic-selling
Step 04
Enter a Prepaid Variable Forward on 80% of the Position
- Since we hedged against losses with the collar, we can now monetize the position. A Prepaid Variable Forward (PVF) allows him to receive a lump-sum cash payment today — based on the current stock value — while deferring the actual sale and the tax bill to a future settlement date, typically 3–5 years out
- He gets cash now without triggering a taxable event immediately
- The settlement can be structured to spread recognition across multiple tax years, minimizing the hit
- This applies to roughly 80% of the position — leaving 20% unencumbered for collar protection and upside exposure
Step 05
Deploy PVF Proceeds into a Tax-Aware Long/Short SMA
- We take the cash from the PVF and invest it in a separately managed account designed to generate tax losses
- Basically, the account value goes up over time, but we’re creating paper losses along the way by strategically selling and replacing positions
- Those harvested losses can be used to offset the capital gains when the stock is eventually sold at settlement
- The goal: accumulate enough losses over 3–5 years to liquidate the remaining position with minimal net tax liability. This is the long game — a disciplined, structured path out of a concentrated position without a tax emergency
Step 06
Start 529 Plans for All Three Kids
- With kids at 13, 10, and 8, the college window is 5–10 years out — meaningful time for tax-free growth, but not unlimited
- At their income level, they’re not qualifying for most financial aid, so building a dedicated savings pool now reduces the risk of cash-flowing tuition at the worst possible time
- A reasonable target: $500–$1,000/month split across three 529 accounts, scaled by each child’s timeline
- The 13-year-old’s account should be more conservative given the shorter horizon; the 8-year-old can still carry more growth exposure
- If they want to jumpstart it, the 529 superfunding provision allows a lump-sum of up to $90,000 per child (5-year gift tax averaging)
Step 07
Enroll in an HSA at Next Open Enrollment
- If either employer offers a High Deductible Health Plan, switching at next open enrollment unlocks the Health Savings Account — the only triple tax-advantaged account in the tax code
- Contributions are deductible, growth is tax-free, withdrawals for qualified medical expenses are tax-free. No other account can do all three.
- 2025 family limit: $8,550 — max it out and invest the balance
- The play: pay medical costs out of pocket now, let the HSA compound untouched, reimburse yourself years later. Stealth retirement account.
- After 65, funds can be withdrawn for any purpose, making it a strong addition to the overall stack
This case study is a fictional example created for illustrative purposes only. It does not constitute investment advice, financial planning advice, tax advice, or a recommendation of any specific strategy or product. Every individual’s financial situation is unique. Please consult a qualified financial advisor before making any financial decisions.