How ESOP Participants Should Use Their Next Dollar

Every year around tax season, many people naturally begin reviewing their finances. Tax returns are filed, compensation adjustments from annual reviews are finalized, and raises or bonuses may start appearing in paychecks.

This moment creates a valuable opportunity to step back and ask an important financial planning question:

Where should your next dollar go?

For many households, the challenge isn’t earning money — it’s prioritizing where those dollars should be directed. When multiple financial goals compete for attention, making intentional decisions becomes critical.

A simple way to think about your financial priorities—where each dollar you earn is intentionally directed toward saving, investing, and building long-term security.

Whether you're building wealth, preparing for retirement, or already retired, a thoughtful approach can help ensure each dollar works harder for your financial future.

Step 1: Strengthen Your Financial Foundation

Before increasing investments or savings, it's important to make sure the basics of your financial plan are in place.

For most households, that means evaluating:

• Do you have an adequate emergency fund (typically 3–6 months of expenses)?

• Have high-interest debts been addressed?

• Are your insurance protections appropriate (health, disability, life, and liability)?

These foundational elements provide stability and flexibility. Without them, unexpected events can derail even the best investment strategy.

If you're unsure how these pieces fit together, working with a professional through comprehensive financial planning for employee-owners can help identify priorities and build a clear strategy.

Step 2: Take Advantage of Employer Benefits

One of the most overlooked opportunities in financial planning involves employer-sponsored benefits.

Many companies offer programs that can significantly improve long-term financial outcomes, including:

• 401(k) or retirement plan matching contributions

• Employee Stock Ownership Plans (ESOPs)

• Employee stock purchase plans (ESPPs)

• Health Savings Accounts (HSAs)

These benefits often provide tax advantages or employer contributions that effectively increase your compensation.

For participants in an ESOP, another important milestone to consider is diversification. In many plans, participants age 55 or older with sufficient participation years may have the opportunity to diversify a portion of their company stock into other investments. Evaluating this option can be an important step in managing concentration risk.

👉 To better understand this process, explore this guide to diversifying ESOP shares.

Special Consideration for ESOP Participants

If you participate in an Employee Stock Ownership Plan (ESOP), deciding where your next dollar goes may also involve evaluating your exposure to company stock.

ESOPs can be an excellent wealth-building tool, particularly when a company performs well over many years. However, they can also create concentration risk if a large portion of your net worth is tied to a single company.

Many ESOP plans allow participants to begin diversifying a portion of their ESOP shares starting at age 55, provided certain participation requirements have been met. This diversification opportunity can allow participants to gradually shift part of their ESOP holdings into other investments.

Evaluating how ESOP assets fit within your broader financial plan can be an important step in managing long-term risk while still benefiting from the value the ESOP provides.

Working with a professional who specializes in ESOP diversification decisions can help you navigate these choices with clarity.

You can also explore additional financial planning resources for ESOP participants to better understand how these decisions fit into your long-term strategy.

Step 3: Align Your Next Dollar With Your Financial Goal

Once the basics are covered, the next step is determining what you want your next dollar to accomplish.

Retirement Savings

For many people, additional dollars are best directed toward retirement accounts such as:

• 401(k) plans

• Traditional IRAs

• Roth IRAs

These accounts provide tax advantages that can significantly improve long-term wealth accumulation.

For ESOP participants, it’s also important to understand how different income sources work together. This includes integrating ESOP distributions with Social Security and other income sources to create a sustainable retirement plan.

Saving for Specific Goals

Sometimes the next dollar is best allocated toward a specific upcoming expense, such as:

• Education funding

• Purchasing a home

• Travel or major life events

• Starting a business

Depending on the goal and time horizon, flexible savings or investment accounts may be appropriate.

Broader Financial Planning Strategies

In other cases, the next dollar may support broader planning priorities such as:

• Tax planning strategies

• Estate and legacy planning

• Paying down remaining debt

• Increasing investment diversification

For retirees, another meaningful use of additional resources may involve supporting adult children or grandchildren.

Many families begin thinking more intentionally about building a retirement legacy plan aligned with their values, especially as wealth transitions across generations.

A Real-Life Example: Why We Increased Our HSA and Roth Contributions

We recently went through this exercise in our own household.

As we think about retirement and future healthcare costs, we decided to increase our Health Savings Account (HSA) contributions and direct additional savings into Roth accounts this year.

HSAs are often described as one of the most tax-efficient savings tools available because they offer a triple tax advantage:

• Contributions are tax-deductible

• Investments grow tax-free

• Withdrawals for qualified medical expenses are tax-free

At the same time, adding to Roth accounts can help create tax diversification in retirement, giving us more flexibility to manage taxes when we eventually begin drawing income.

For our situation, directing additional savings toward both of these accounts made the most sense.

Your answer may look completely different — and that’s exactly the point.

This decision framework helps individuals—especially ESOP participants—prioritize where each dollar should go, beginning with financial stability, then maximizing employer benefits, and finally aligning savings with long-term goals and retirement planning strategies.

If you’re unsure where you fall in this framework, that’s often where a structured financial plan can help.

Make Your Next Financial Decision Intentionally

Without a clear plan, additional income often ends up drifting into everyday spending or sitting idle in a checking account.

Taking a few minutes to intentionally decide where your next dollar should go can meaningfully improve long-term financial outcomes.

Advisor Perspective

Many of the clients we work with are employees of employee-owned companies, which often creates unique planning opportunities and challenges.

ESOP participants frequently experience significant wealth accumulation tied to their company stock. Because of this, decisions around diversification, retirement planning, tax strategy, and long-term financial independence often require careful coordination.

If you’d like to learn more about our approach and experience helping employee-owners, you can learn more about our ESOP planning philosophy.

Here are a few of the most common questions we hear when clients are deciding where their next dollar should go.

Frequently Asked Questions

What should I do with extra money from a raise?

Start by strengthening your financial foundation—emergency savings and debt reduction—then evaluate employer benefits like 401(k) matches or ESOP opportunities. From there, align additional savings with your long-term goals.

Should I increase my HSA contributions?

If you’re eligible, HSAs are one of the most tax-efficient tools available. For many individuals, especially those planning for retirement healthcare costs, increasing HSA contributions can be a valuable long-term strategy.

When should ESOP participants consider diversifying?

Many ESOP plans allow diversification beginning at age 55 with sufficient years of participation. Because ESOPs often create concentrated stock exposure, evaluating diversification at this stage is an important step in managing long-term risk.

How do ESOP distributions fit into retirement income?

ESOP distributions should be coordinated with other income sources like Social Security, IRAs, and taxable investments to create a sustainable retirement income plan. Timing and tax strategy play a critical role in this process.

Final Thought

Every financial decision competes with others for your next dollar. Taking the time to evaluate where that dollar can make the greatest impact on your financial plan can help you move closer to your long-term goals with confidence.

As you think about your next step, consider this: Are you comfortable with your progress towards retirement? And just as importantly, are you positioned to support the next generation in reaching their financial goals? 

If you have more than $2 million saved and would benefit from working with a wealth manager, the Peak Wealth Planning team can help you bring clarity, structure, and confidence to your financial decisions. 

Schedule a call to learn more today.