RSUs (Restricted Stock Units) are a common part of tech employees’ compensation packages. I have helped many clients and their spouses understand how to utilize their RSU benefits to their advantage with planning.
In this post, I want to focus on providing you with an RSU strategy guide.
New resource: RSU Tax Calculator
Watch / Listen: De-Coding RSUs (Restricted Stock Units)
YouTube version: De-Coding RSUs
How RSUs Work
- Grant Date — The date you were awarded RSUs
- Vesting Schedule — The rate and timing that your RSUs will vest
- Vested — When shares vest, you become the owner of the equivalent units that vested
- How Taxes Work — You are taxed at the time your RSUs vest at ordinary income tax rates. If you hold onto the shares, future growth or loss will be treated as capital gains/losses
- Termination — At termination, you lose unvested RSUs unless your vesting schedule is accelerated (common with workforce reduction packages)
Stock compensation can be very valuable to both employees and the employer. Having an owner’s interest in the company you work for can increase productivity and job satisfaction. It also acts as a built-in investment plan that lets employees realize the potential of having assets that work for them.
Have Non-Qualified Stock Options?
See how they compare to your RSUs.
RSUs Risk
One threat that most employees often ignore is the real possibility that the stock may go down. A company’s stock can drop for many reasons, including:
- A general market decline
- Loss of competitive advantage
- Product recalls
- Products fading from relevancy
This threat starts small when you are new to the company. Over multiple years, however, it is easy to build up a significant amount of employer stock. That creates a lot of non-diversified risk. What if you woke up the next day and the stock dropped to only 25% of the previous day’s value? Hopefully this is just a dramatization, but think about how sick you would feel.
I always explain to my clients: “We have a plan that does not require us to hit home runs.” The key is to stick to the plan and not allow the fear of missing out to lure you into taking more risk than is necessary to achieve your goals. The best way to reduce the risk of employer stock is through diversification.
This doesn’t mean you can’t own any employer stock, but I have seen new clients with a net worth of $2 million and $1.5 million in employer stock—that’s clearly too much. A maximum limit I recommend is staying within 10% of liquid net worth, and only if the client has a high risk tolerance.
Are you a tech employee in your 20s, 30s, or 40s?
Check out the Techie Personal Finance Bootcamp Podcast.
Strategies for New RSUs
Low Expectations for RSUs
Do you expect the value of your company to perform better than the overall stock market (a diversified investment)? If not, there is no reason to take more risk by holding an undiversified investment you expect to underperform.
Action: Sell RSUs that vest as soon as allowable. Your shares are already taxed at vesting. If you sell before any major price movements, tax consequences should be negligible.
High Expectations for RSUs
Do you expect your company to outperform the overall stock market? Then you may be more inclined to hold onto your RSUs as they vest. This is a risky stance.
Action: Review your exposure to employer stock at least annually.
Unsure What to Expect
Most people do not have strong feelings one way or the other.
Action: Decide in advance how much you will sell at vesting and how much you plan to hold for future years. Define this strategy and stick to it regardless of what the stock is doing. This gives you some upside exposure while systematically reducing downside risk.
Strategies for Old (Already Vested) RSUs
The market has been pretty hot across the board, so it’s likely that your accumulated employer stock has gone up in value. When RSUs grow after vesting, that growth is taxed at capital gains rates. Depending on your threshold for paying taxes, you may sell all of it or create a systematic plan to gradually reduce your exposure.
Charitably inclined?
Donor-advised funds can be a useful tax-planning tool for appreciated employer stock.
Tax-Loss Offset
You may have some shares that have fallen in value while others have risen. You can use the shares with losses to offset gains from a tax perspective.
RSU Tax Rate Arbitrage
Capital gains are taxed at lower rates than ordinary income for most people (0%, 15%, or 20%, plus possible 3.8% NIIT). When your ordinary income tax bracket is higher than the capital gains rate, you have a tax-rate arbitrage opportunity.
Use proceeds from the sale of stock to defer income into one of the following (if eligible):
- Traditional IRA
- Traditional 401(k)
- HSA
These accounts have their own rules (especially withdrawal penalties before age 59½ or for non-qualified HSA expenses). They become more appealing the closer you are to retirement age.
Because of the arbitrage effect, you do not need to move over all of the proceeds to offset your taxes. Much of your proceeds are not taxable because you already paid tax on the basis when the RSUs first vested.
Buy Put Options
If you are unable (or unwilling) to sell all of your shares, you can buy put options on your employer stock to protect against catastrophic losses. A put gives you the right to sell your stock at an agreed-upon price before a particular date. This limits downside, but the cost of the put reduces your upside.
Gifting to Family
Do you have a child who is old enough to avoid kiddie-tax rates but whose income is low enough to stay in the 0% long-term capital gains bracket? Instead of gifting cash, consider transferring appreciated stock so they can sell it with little or no capital gains tax. If those funds were going to be gifted anyway, you just saved on taxes.
Gifting to Charity
Gifting cash to charitable organizations is usually a mistake if you have appreciated employer stock. Many organizations accept stock transfers and can sell the shares tax-free.
Want to supercharge your charitable giving and potentially navigate SALT caps?
Read: Should I Use a Donor-Advised Fund?
Related video: Understand Your Taxes – Employer Stock & Charitable Giving
RSU Summary
RSUs are an extremely valuable part of your overall compensation. If they are not managed as part of a strategic plan, they can become extremely stressful to navigate. Establishing a clear RSU strategy lets you separate emotion from decision-making and make clearer choices that align with your overall goals and risk tolerance.
Ready to build a personalized RSU strategy that fits your specific situation, tax picture, and goals?
I offer a complimentary video call to see if we’d make a good team—no pressure and no sales pitch. → Schedule your complimentary strategy call here
You May Also Be Interested In
- The Value of Financial Planning
- Understand Your Employee Stock Purchase Plan (with Calculator)
- Stock Options vs. RSUs
- RSU Tax Calculator
- Techie Personal Finance Bootcamp Podcast
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