How optimizing your RSUs will make a big difference to your success

Questions

Let’s start with the basics, what are RSUs or Restricted Stock Units?

How do Restricted Stock Units work?

When can I sell Restricted Stock Units?

How are Restricted Stock Units taxed?

How do I pay the taxes on RSUs and when are the taxes paid?

How much company stock should I own and when is it too much?

What options do I have for diversifying RSU stock?

What happens to my Restricted Stock Units if I die?

What happens to my Restricted Stock Units when I retire and still have unvested RSU’s?

How will optimizing my RSUs make a big difference to my success?

Restricted stock units are a popular form of compensation for many professionals in tech and other high-growth sectors in WestStar’s neighborhood. In some cases, the RSU portion of an employee’s compensation can make up over half of their total annual pay.

Because it’s so important to them, it’s really important to us, and although every professional we speak with knows that optimizing their RSU earnings and minimizing taxes will make a big difference to their success, many don’t know how to go about it.

Understanding how RSUs work, and how (and when) taxes are paid can be essential in optimizing this employee benefit and potentially reducing your tax bill.

How do RSUs work?

A restricted stock unit is not an actual transfer of stock on the grant date, it’s a pledge by your employer to transfer stock to you at a later date (often referred to as the vesting date), providing you and/or the company hit certain metrics.

Your RSU vests and is converted to shares over time. Once this happens, you own the shares and you can sell or transfer them.  You don’t pay for them!

Because RSUs and other stock-based compensation can exist as part of your overall compensation package, they can be a way to build significant wealth.

When can I sell?

In most cases when your RSUs vest you can sell them immediately.

How are RSUs taxed?

Two events trigger the taxation of your RSUs.  The first occurs when your RSU vests.  When a tranche – a portion of stock – vests, it’s as though you received a cash bonus, and the value of the stock at the time it vests is taxed as ordinary income.

Typically, your employer immediately sells some of the vested RSUs to cover federal taxes, though the amount sold and withheld is not always the correct amount to cover your tax liability.  Most companies automatically withhold the statutory 22% federal income tax. If your tax rate is above 22%, you’ll owe more tax.

It becomes very important to keep your eyes on each tranche as it vests and to work with your financial planner and CPA to calculate what the tax liability is, so there are no surprises come tax time each year.

The second event that triggers your RSUs taxation has to do with the stock you own after a tranche vests.  If you choose to sell the stock immediately, then little to no more tax is due.  If you choose to hold onto the stock in the hope that it appreciates, and then down the road decide to sell some or all of the stock, you’ll then owe taxes on the gain.  The gain will either be taxed as ordinary income (if the stock is held for less than 12 months) or taxed as a capital gain (or loss) if it is held for over 12 months.

How do I pay the taxes and when are the taxes paid?

When the RSUs vest, ordinary taxes are due on the value of the vesting tranche. If, however, the stock is held onto after the RSUs vest, then either additional ordinary income tax or capital gains tax will be due at the time the stock is finally sold.

Usually, this additional tax is not withheld by your employer but becomes due from you through estimated quarterly payments or at the tax filing deadline each year.  Your financial planner and CPA will likely be involved in helping you calculate taxes, developing a strategy for paying and managing your tax liability, and avoiding surprises.

When we work with clients, we always ask if they have a CPA who helps them file their taxes. If someone already has a CPA, then that’s great, but if not, we have relationships with many CPAs to whom we can introduce people and make sure they’ve got the right fit for their needs.

For a deeper dive into how RSUs are taxed and how to report RSU tax on your tax return, read this article.

How much company stock should I own and when is it too much?

Any concentrated stock holding is risky, but when it’s your own company’s stock, you run a higher risk if the company stock loses value: often such an event can cause layoffs, and you could simultaneously lose your job and significant value in any stock you hold.

Ultimately, your strategy for how much company stock you choose to own will depend greatly on your risk tolerance and your family’s financial planning goals.

Our experience is that often an employee will accumulate enough of their company stock to begin feeling anxious about it.  At this point, they become interested in protecting what they already have, and diversification becomes part of the conversation.

Planning is about understanding the elements of the entire compensation package and exploring the possible outcomes of different stock ownership strategies.  How comfortable are you with each outcome?  The best course of action for you will present itself through education and careful consideration.

For more on how to incorporate RSUs into your investment strategy and avoid concentrated stock risk, read this great article.

What options do I have for diversifying the stock?

It’s really important to be working with a financial planner who can help you manage your family’s financial goals.  The planning process will help identify the rate of return on your assets that your family needs to combat inflation and ensure you don’t outlive your money.

Diversification involves selling some of the company’s stock and buying a mix of stock in other companies of different sizes and in different industries. Depending on your time horizon, this can include investing a portion of the proceeds in a bond portfolio to help mitigate volatility.

Every individual or family has a unique rate of return needed to support their unique financial plan and this should be taken into account.

What happens to my RSUs if I die?

This is a question we feel everyone should be asking, especially since the longer you’ve been tenured with a company, the greater the amount you could have invested in RSUs.

While there may be certain exceptions for performance-based RSUs, if you die while holding unvested RSUs, they will immediately vest and be paid out in cash or shares at the company’s discretion.

What happens when I retire and still have unvested RSUs?

What happens to your unvested RSUs at retirement will depend on the plan and the company’s policies. If you’re considering retirement, but stand to lose RSUs with significant value, it may benefit you to continue working until your RSUs vest.

If your employment terminates before the scheduled vesting date – due to death or disability – your RSUs will immediately vest, unless the award is subject to performance-based vesting.

You’ll find the specifics in your company’s Summary Plan Description, which will stipulate exactly what happens in the case of unfortunate or unexpected events.

Conclusion

At WestStar Prosperity Partners, we’ve helped professionals make the most of their equity compensation for years, giving them a clear view on how to optimize their stock positions and manage their tax obligations with confidence and clarity.

If you would like to discuss the benefits of having your equity compensation incorporated into a 360˚ financial plan, please don’t hesitate to get in touch.

We wish you every success in the future and hope to hear from you soon.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. 

Securities and advisory services are offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker-dealer and registered investment adviser. Cetera is under separate ownership from any other named entity.

Diversification Disclosure: A diversified portfolio does not assure a profit or protect against loss in a declining market.