Tax planning

Executive transition year tax planning: the gap-year playbook.

Most executives spend the transition year focused on the job search, severance terms, and equity deadlines. Tax planning falls to the bottom of the list — which is a mistake, because the period between executive roles often creates a narrow window of lower taxable income that may not repeat for years. The strategies available in a low-income year — Roth conversions, capital gains harvesting, NQSO exercise timing — can compound into six-figure lifetime benefits when modeled carefully and executed at the right time.

This guide explains what those strategies are, which 2026 thresholds govern them, and how an advisor helps you execute before the window closes.

First question: is your transition year actually a low-income year? The answer depends entirely on your severance structure. A lump-sum severance paid in December of your termination year could land on top of ten months of salary, pushing total income well above your normal rate. Salary continuation spread over two calendar years produces lower income in each individual year. Before planning any strategies, model your expected taxable income for each affected tax year. Tax optimization only works if you know the income targets you're aiming at.

The 2026 thresholds that create the opportunity

Several tax strategies hinge on keeping income below specific thresholds. In 2026, the key milestones for a single filer are:

Threshold	Single filer	Married filing jointly	What it unlocks
12% / 22% bracket boundary	~$48,475 taxable income¹	~$96,950 taxable income	Roth conversions filling the 12% bracket; the standard deduction alone shelters the first $16,100/$32,200
0% long-term capital gains	$49,450 taxable income²	$98,900 taxable income	Sell appreciated stock and pay no federal tax on the gain — if ordinary income stays under this threshold
22% / 24% bracket boundary	$103,350 taxable income¹	$206,700 taxable income	Roth conversions filling the 22% bracket cost at most 22% federal — far below your working-years marginal rate
Roth IRA MAGI phase-out	$153,000–$168,000 MAGI³	$242,000–$252,000 MAGI	Direct Roth IRA contribution eligible below $153K/$242K MAGI

During working years, most executives are solidly in the 32–37% federal bracket. A transition year with no employment income changes that entirely — provided the severance, consulting, or investment income doesn't fill the brackets back up. The question is how much room you have and which strategies to stack first.

Strategy 1: Roth conversion in the low-bracket window

A Roth conversion moves pre-tax retirement assets (traditional IRA, 401(k) rollover IRA) into a Roth account. You pay ordinary income tax on the converted amount in the year of conversion; after that, the money grows and is eventually withdrawn tax-free. The lifetime benefit of a Roth conversion is the difference between the rate you pay today and the rate you would have paid on those assets later.

If you expect to be in the 35–37% bracket once you return to an executive role, converting assets at 22% or 24% during the transition year represents a 10–15 percentage point savings on each dollar converted — and that advantage compounds for every year the Roth assets grow. On a $500,000 conversion, the present-value benefit can exceed $100,000 depending on investment horizon and assumed future rates.

Example: An executive with a $1.2M rollover IRA takes a nine-month transition. Taxable income in the gap year is $45,000 (consulting retainer). The 22% bracket accepts another $58,350 of income before hitting the 24% threshold ($103,350 − $45,000). Converting $58,350 of the IRA costs ~$12,800 in federal tax — at a rate 15 points below what conversion would cost during full employment. Executed annually across a two-year transition, the strategy shifts well over $100,000 into tax-free Roth status before the next W-2 income arrives.

Planning notes for Roth conversions

MAGI impact: Converted amounts increase your MAGI, which can phase out Roth IRA contributions, affect ACA premium subsidies (if applicable), and affect other MAGI-sensitive provisions. Stack conversions with other strategies and model the MAGI implications before executing.
State taxes: Most states tax Roth conversions as ordinary income, and a few states exempt IRA distributions or conversions. Check your state's treatment — it changes the math materially in high-tax states like California and New York.
5-year rule: Converted amounts (not earnings on those amounts) can be withdrawn tax- and penalty-free after the 5-year holding period expires, or if you're 59½ or older. For executives under 59½ who may need liquidity, plan accordingly.
Timing: Conversions must be completed by December 31 of the tax year you want them to count. Don't wait until Q4 to model — by then, other income events (consulting fees, capital gains, option exercises) may have already consumed the bracket room you were relying on.

Strategy 2: Capital gains harvesting at the 0% rate

Long-term capital gains (assets held more than 12 months) are taxed at a separate, lower rate schedule — 0%, 15%, or 20% depending on your total taxable income. For 2026, the 0% rate applies to taxable income up to $49,450 (single) or $98,900 (married filing jointly).²

In practice, this means: if your ordinary income in the transition year (wages, severance, consulting, interest) is low enough that your total taxable income after the standard deduction stays under these thresholds, you can sell appreciated stock and owe zero federal tax on the gain.

Example: An executive with no employment income in the transition year has $35,000 in consulting income. After the $16,100 standard deduction, taxable income is $18,900. They hold $400,000 in taxable account stock that was purchased years ago at $120,000 — a $280,000 unrealized gain. They can harvest gains up to the 0% threshold: $49,450 − $18,900 = $30,550 of additional taxable income can land at 0%. Selling shares representing $30,550 of gain costs $0 in federal capital gains tax. They can also immediately repurchase if they want to maintain the position, resetting the cost basis higher — no wash-sale rule applies to gains (the wash-sale rule only applies to losses).

Interaction between ordinary income and gains rates

Ordinary income and capital gains occupy the same taxable income stack — ordinary income fills from the bottom, and the LTCG rate is determined by where the gains land in that stack. If your consulting income already fills taxable income to $45,000, gains that push total income from $45,000 to $49,450 are still taxed at 0%. Gains above $49,450 cross into the 15% rate. Running this calculation carefully — using projections, not estimates — is where an advisor earns back their fee many times over.

Strategy 3: NQSO exercise timing in a lower-bracket year

Nonqualified stock option (NQSO) exercise triggers ordinary income equal to the spread between the exercise price and fair market value at exercise. That income is then subject to whatever marginal rate applies in the year of exercise. There is no favorable holding period treatment for NQSOs — the spread is always ordinary income at exercise, regardless of how long you've held the options.

If your transition year has materially lower ordinary income than a typical working year, exercising NQSOs in the transition year may be more tax-efficient than waiting until you've returned to a full executive salary. The math is straightforward: exercising a $500,000 spread at a 24% marginal rate saves $65,000 compared to exercising the same spread at a 37% rate.

Coordination required: NQSO exercise adds significant ordinary income to your taxable income, which affects bracket room available for Roth conversions and gains harvesting in the same year. These strategies compete for bracket space and must be sequenced — typically exercise options only after determining how much room the Roth conversion and gains harvesting strategies need. Running the analysis in a vacuum for each strategy will overestimate what's available. A coordinated plan is required.

Options with expiration pressure

Not all NQSO exercise decisions can be deferred to optimize income year. Many executive option grants expire 90 days after separation (or within the option's remaining term if shorter). If you have options expiring during the transition year, the timing of exercise isn't optional — but understanding the tax cost before exercising, and managing other income around it, still matters. See the stock options after severance guide for the full post-termination exercise framework.

Strategy 4: HSA contributions (if eligible)

If you've elected a qualifying high-deductible health plan during the transition — COBRA or marketplace — you remain eligible to contribute to a Health Savings Account. For 2026, the HSA contribution limit is $4,400 for individual coverage and $8,750 for family coverage, plus a $1,000 catch-up for account holders 55 and older.⁴

HSA contributions are tax-deductible (above-the-line, reducing MAGI) and grow tax-free. When used for qualified medical expenses, distributions are also tax-free — making the HSA a triple-tax-advantaged account. During a gap year, HSA contributions are one of the few levers that simultaneously reduce MAGI (relevant for ACA subsidy eligibility) and provide tax-free health expense coverage. Unused HSA balances roll over indefinitely and can supplement retirement healthcare costs after 65.

Strategy 5: IRA and Roth IRA contributions (requires earned income)

Contributions to a traditional IRA or Roth IRA require earned income — wages, consulting fees, self-employment income, alimony (pre-2019 divorce decrees), or similar. Severance pay is typically classified as wage income and qualifies as earned income for IRA contribution purposes. Consulting income and 1099 income also qualifies. Investment income, capital gains distributions, and severance paid as "damages" rather than wages generally do not.

For 2026, the IRA contribution limit is $7,500, or $8,600 for individuals 50 and older (the $1,000 catch-up is now inflation-indexed under SECURE 2.0).³ Roth IRA contributions phase out between $153,000–$168,000 MAGI (single) and $242,000–$252,000 MAGI (married filing jointly).³ If severance income pushes MAGI above the direct Roth contribution phase-out, a backdoor Roth remains available — but the pro-rata rule applies if you have pre-tax IRA assets, so model it with an advisor first.

Strategy 6: IRMAA look-back warning for near-retirement executives

Medicare Part B premiums are not flat — they're subject to Income-Related Monthly Adjustment Amounts (IRMAA) based on MAGI from two years prior. An executive who transitions at age 61 and has a high-income gap year in 2026 may see elevated Medicare premiums starting in 2028, when that 2026 income appears in the IRMAA look-back window.

This is often overlooked in gap-year planning because the impact is deferred two years. But for executives who retire into Medicare eligibility shortly after the transition, an aggressive Roth conversion or NQSO exercise year that pushes MAGI well above IRMAA thresholds can create hundreds of dollars per month in extra premiums. An advisor managing a near-retirement executive's gap year should include a forward-looking IRMAA projection in the plan, not just a single-year tax optimization.

Putting the strategies together: a framework

Because each strategy competes for the same taxable income space, the correct sequence matters:

Step 1: Establish the income baseline

Project all inescapable income for the transition year: severance structure, consulting fees under contract, interest, dividends, distributions from plans. This is the floor you're working with.

Step 2: Lock in must-do option exercises

Option exercises with hard deadlines (90-day ISO window, NQSO expiration) come first — their timing isn't fully discretionary. Calculate the spread income and bracket impact.

Step 3: Maximize 0% gains harvesting

Determine how much taxable income room remains below the 0% LTCG threshold after Steps 1 and 2. Harvest gains in that space — selling appreciated taxable account positions and repurchasing if desired to reset basis.

Step 4: Stack Roth conversions

After gains harvesting, determine how much space remains in the 22% or 24% bracket. Convert traditional IRA / rollover IRA amounts to fill that space without crossing into the next bracket. MAGI implications apply — model them.

Step 5: Maximize deductible contributions

Contribute to HSA (if eligible), Roth IRA or traditional IRA (if income allows), and Solo 401(k) (if consulting income justifies it). These reduce MAGI and may improve subsidy eligibility.

Step 6: Review for IRMAA and ACA implications

If Medicare eligibility is within 3 years, stress-test the plan against IRMAA. If you're receiving ACA marketplace coverage, review MAGI against subsidy cliffs. Adjust if the Medicare or ACA impact outweighs the gains harvesting / conversion benefit.

Model the gap-year opportunity before it closes

Every strategy in this guide is time-sensitive. Roth conversions must be completed by December 31. Gains harvesting and NQSO exercises affect the same bracket space and must be sequenced. IRMAA look-back impacts land two years later with no way to reverse the 2026 income that drove them. Getting the plan right requires a coordinated model — not a series of one-off decisions made in isolation.

We match executives in transition with fee-only financial advisors experienced in executive compensation, equity decisions, and retirement planning. The match is free, with no obligation.

Best fit: executives in a transition year who have a rollover IRA, taxable account with embedded gains, or unexercised NQSOs — and want to model the full set of tax planning moves before the calendar year closes.

Fee-only focus | Free match | No obligation

Executive Severance Advisor Match is a matching service. We connect executives with fee-only advisors who can coordinate gap-year tax strategies with your severance terms, equity deadlines, and longer-term financial plan. Nothing on this page is legal, tax, or investment advice.

Sources

IRS 2026 Tax Inflation Adjustments (IRS.gov) — Official IRS release of 2026 tax brackets, standard deduction, and other inflation-adjusted parameters. 2026 ordinary income brackets: 12% bracket top at ~$48,475 (single); 22% bracket runs $48,476–$103,350 (single); 24%/32% boundary at $201,775 (single). Standard deduction: $16,100 (single) / $32,200 (MFJ).
2026 Tax Brackets (Tax Foundation) — Cross-reference for 2026 long-term capital gains rate thresholds. 0% LTCG bracket applies to taxable income up to $49,450 (single) / $98,900 (MFJ). Values verified against IRS Rev. Proc. 2025-67 as adjusted for OBBBA.
IRS 2026 Retirement Plan Limits (IRS.gov) — IRA contribution limit: $7,500 ($8,600 for age 50+, reflecting SECURE 2.0 §108 inflation indexing of the $1,000 IRA catch-up starting 2024). Roth IRA MAGI phase-out: $153,000–$168,000 (single) / $242,000–$252,000 (MFJ) per IRS Rev. Proc. 2025-67.
IRS Publication 969 — Health Savings Accounts (IRS.gov) — HSA contribution limits and eligibility rules. 2026 HSA limits: $4,400 (individual HDHP coverage) / $8,750 (family coverage) / $1,000 additional catch-up for age 55+ per IRC §223(b)(3)(B). HDHP minimum deductibles and out-of-pocket maximums per IRS Rev. Proc. 2025-67.
IRS Publication 590-A — Contributions to Individual Retirement Arrangements (IRS.gov) — Earned income requirement for IRA contributions (IRC §219(b)(1)); pro-rata rule for backdoor Roth conversions (IRC §408(d)(2)); Roth conversion rules including no income limit, 5-year holding period, and state tax treatment variation.

2026 tax brackets, LTCG thresholds, IRA limits, and HSA limits verified against IRS.gov and Tax Foundation as of June 2026. Tax strategies depend on individual circumstances — consult a tax advisor before executing any conversion, harvest, or option exercise. Not legal, tax, or investment advice.