The Two-Birds-One-Stone Strategy: Pairing Your Deferred Compensation Plan with a Concentrated Stock Sell-Down
If you're a senior employee at a company like Microsoft, there's a decent chance you're sitting on two "problems" that most people would love to have: an income so high that taxes take a painful bite every year, and a brokerage account stuffed with company stock that has grown into an uncomfortably large share of your net worth.
Most people treat these as two separate issues. Reduce taxes over here. Figure out the concentrated stock over there. But if you have access to a Deferred Compensation Plan (DCP), these two problems can actually solve each other — and the math is more compelling than you might expect.
If you're not yet familiar with how deferred compensation works (such as at Microsoft), we'd recommend starting with our primer article: Everything You Need to Know About Microsoft Deferred Compensation Plans. It covers the mechanics, the enrollment windows, and the risks. This blog builds on that foundation with a specific strategy for one particular type of employee.
Who This Strategy Is For
This approach applies if you check two boxes. First, you need to be eligible for a deferred compensation plan. For example, this is available for employees at Microsoft that are Level 67 and above. These employees have the ability to defer up to 75% of base salary and up to 100% of cash bonus. Second, you hold a large, concentrated stock position in a taxable brokerage account (often your own company's stock, accumulated from years of vesting RSUs) that you've been reluctant to sell because of the tax bill.
If that's you, keep reading.
The Core Idea: Swap Expensive Income for Cheap Income
Here's the tension most high earners feel: every dollar of salary and bonus you receive is taxed at ordinary income rates. Your marginal tax can reach as high as 32%, 35%, or 37% federally. Meanwhile, that concentrated stock position keeps growing, and every year you don't diversify, you're taking on more single-stock risk.
The strategy is a swap. You heavily increase your DCP contributions, which pulls a large chunk of your salary and bonus out of a year's taxable income entirely (generally the following tax year if at Microsoft based on enrollment windows). That creates a cash flow gap because you still need money to live on. You fill that gap by selling shares from your concentrated position that you've held for more than a year.
Why can this work so well? Two reasons.
First, long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) instead of ordinary income rates. For many households, long-term capital gains may be taxed at the 15% federal rate, depending on taxable income, filing status, and other individual circumstances.
Second, and this is the part people miss: when you sell stock, you're only taxed on the gain, not the full sale amount. Your cost basis comes back to you tax-free. When you receive a paycheck, every single dollar is taxable. So you're not just swapping a 32% rate for a 15% rate, you're swapping fully-taxed dollars for partially-taxed dollars.
And as a bonus, every share you sell chips away at your concentration risk. You're getting paid (in tax savings) to do the diversification you should be doing anyway.
A Real-World Example at 2026 Tax Rates
Let's walk through the numbers for a married couple filing jointly.
Meet Alex and Jordan. Alex works at Microsoft and earns $250,000 in base salary, $150,000 cash bonus, plus $100,000 in stock compensation (via Restricted Stock Units). This comes out to $500,000 in total cash compensation. Over the years, Alex has accumulated $1.5 million of Microsoft stock in a taxable brokerage account, all held longer than one year, and it now represents the majority of their net worth. They've wanted to diversify for a while but keep flinching at the tax bill.
Without the strategy: Taking the 2026 standard deduction of $32,200, their taxable income is $467,800. That puts their last dollars of income in the 32% federal bracket (which for joint filers covers taxable income from $403,550 to $512,450 in 2026). The concentrated stock just sits there, untouched, for another year.
With the strategy: During the enrollment window, Alex elects to defer $200,000 of next year's compensation into the DCP. Their compensation drops to $300,000, and their taxable income falls to $267,800. This lands them in the 24% marginal tax bracket instead.
What did that deferral just save them? The $200,000 they deferred would have been taxed partly at 24% and partly at 32%. Run the math and the deferral wipes out roughly $53,000 in federal income tax for the year (about $32,600 saved in the 24% bracket and $20,600 saved in the 32% bracket).
Of course, Alex and Jordan still need that $200,000 to live on. So, they sell $200,000 worth of Microsoft shares from the brokerage account. Let's say those shares have a cost basis of $80,000, meaning the sale generates a $120,000 long-term capital gain.
Here's where the 2026 brackets do the heavy lifting. For married couples filing jointly in 2026, the 15% long-term capital gains rate applies to taxable income between $98,900 and $613,700. Because Alex and Jordan's ordinary taxable income is now just $267,800, the entire $120,000 gain stacks on top and stays comfortably within the 15% bracket. Their modified adjusted gross income over $250,000 (which is $17,800 in this example) is also taxed at 3.8% for net investment income tax. Therefore, the federal tax on the sale: $18,676
Compare the two ways of putting $200,000 in their pocket:
| Take it as salary/bonus | Defer it, sell stock instead | |
|---|---|---|
| Amount received | $200,000 | $200,000 |
| Taxable portion | $200,000 (all of it) | $120,000 (the gain only) |
| Federal rate applied | 24%–32% (ordinary) | 15% (long-term capital gains) + 3.8% NIIT tax on MAGI above $250k |
| Federal tax owed | ~$53,000 | $18,676 |
Under the assumptions used in this hypothetical example, the strategy results in approximately $34,324 of estimated federal tax savings for the illustrated year. That's also before counting the fact that Alex just reduced the concentrated position by $200,000 and now has a diversified portfolio working for them instead. The deferred $200,000, meanwhile, is invested inside the DCP growing tax-deferred, to be paid out in future years when Alex and Jordan will ideally be in a lower bracket (say, early retirement).
The Fine Print (Because There's Always Fine Print)
Before you max out your deferral election, a few important cautions.
Your DCP is an unsecured promise. Deferred compensation isn't protected the way a 401(k) is. If your employer ever went bankrupt, you'd stand in line with other creditors. For a company like Microsoft that risk is remote, but it's not zero. This is exactly why pairing the DCP with diversification of your stock position can be such a natural fit. You don't want your paycheck, your deferred comp, and your portfolio all riding on one company.
Watch your cash flow and your other benefits. A large deferral shrinks your regular paycheck. Make sure you can still max your 401(k) (and capture the full match) and fund your ESPP before the deferral squeezes them out. Selling stock to backfill living expenses works, but you'll want to map it out month by month.
Distribution elections are sticky. When you defer, you choose when the money comes back to you (and those elections are difficult to change). Think carefully about whether you want payouts in specific years or at separation, and how those payouts will stack against your other income down the road. A big lump sum in a high-income year can undo the benefit.
Mind your lots. Which shares you sell matters. Selling long-term & higher-basis lots first minimizes the gain (and the tax) on each dollar raised. This is where working with an advisor or being meticulous with your brokerage's lot selection really pays off.
State taxes and the wash of details. This example covers federal tax only. Your state's treatment of wages, capital gains, and deferred compensation payouts can shift the math: sometimes in your favor, sometimes not.
The Bottom Line
If you're a DCP-eligible employee sitting on a concentrated stock position, you have a lever most investors don't: the ability to choose which kind of income you live on this year. Deferring heavily taxed wages and replacing them with lightly taxed long-term gains lets you cut your current tax bill, de-risk your portfolio, and build a tax-deferred bucket for the future. This is all completed in one coordinated move.
The enrollment windows come around only once or twice a year (noted in the aforementioned article), so this is a strategy that rewards planning ahead. Run your own numbers, or better yet, run them with someone who does this every day. Curious to learn more about implementation of this strategy but don’t know how to execute? Feel free to book a call with a team member from Consilio Wealth Advisors.
DISCLOSURES:
Investment advisory services offered through Consilio Wealth Advisors a registered investment adviser. The views expressed represent the opinion of Consilio Wealth Advisors. Information does not constitute investment, tax, or legal advice.
Consilio Wealth Advisors does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action. Before investing, consider investment objectives, risks, fees, and expenses. Investments in securities involve the risk of loss, including loss of principal. Past performance is no guarantee of future returns. The views and opinions reflected in the content are subject to change at any time without notice. The content speaks only as of the date indicated. Some information was obtained from external sources. The information is believed to be accurate, but there is no guarantee that it is.
The performance example is hypothetical and provided for illustrative purposes only. It is based on the assumptions stated and does not reflect the tax circumstances of any actual client. Actual results will vary based on filing status, taxable income, deductions, investment activity, state and local taxes, future distributions, changes in tax law, and other individual circumstances. The example should not be interpreted as a projection or guarantee of tax results."
