What You Need to Know About RSUs: A Guide to Smarter Financial Planning
RSUs can be an excellent tool for building wealth, but to maximize their value, it’s essential to understand how they function and how they fit into your financial plan.
If you are a professional in the corporate world or a company’s equity compensation plan participant, you have likely encountered Restricted Stock Units (RSUs). RSUs are generally provided as compensation to employees at publicly traded companies, but private companies may also offer them to attract talent in place of higher cash salaries.
Here are four key things you should know about RSUs
1. What are RSUs?
RSUs are a type of equity compensation offered by your employer, instead of receiving shares immediately, you are granted the right to receive company stock at a future date, typically tied to a vesting schedule. Once the RSUs vest, they become yours, and you can choose to hold or sell them.
Why does this matter?
RSUs align your interests with the company’s performance, giving you a stake in its success.
2. What does Vesting Mean for RSUs?
Vesting refers to the process by which you earn the right to own your RSUs over time. When a company grants RSUs, they don’t belong to you immediately. Instead, they follow a vesting schedule- often based on time (e.g., 25% per year over four years) or performance milestones. Once vested, the shares are yours to keep.
3. Tax Implications at Vesting
When your RSUs vest, the value of the shares is treated as ordinary income and subject to federal, state, and FICA taxes.
Tax at Vesting: When RSUs vest, they are considered compensation and are taxed at ordinary income, just like a salary/bonus. The taxable amount is the fair market value of the shares on the vesting date, which is added to your W-2 income for the year. Most employers withhold the tax on your behalf.
You will likely owe:
Federal income tax (based on your tax bracket)
State income tax (if applicable)
Social Security tax (up to the annual wage cap)
Medicare tax
Tax at Sale: Capital Gains Tax. Once your RSUs vest, they become your shares. If you sell them at a higher price than their value at vesting, you will owe capital gains tax on the profit.
Here’s a tip!
Be proactive about estimating your tax liability. Consider consulting with a tax professional to avoid surprises during tax season and ensure you are withholding enough tax throughout the year. Many companies automatically withhold 22% federal tax at vesting, but if you are in a higher tax bracket, this may not be enough, leaving you with a tax shortfall at filing.
4. What to do when your RSUs vest; Buy, Hold, or Sell?
Once your RSUs vest, you must decide whether to hold or sell the stock. Holding could mean benefiting from future growth, but it also comes with risk if the stock’s value declines. Selling gives you liquidity, which can be reinvested elsewhere or used for other financial goals.
Ask Yourself:
Is your investment portfolio overly concentrated in one company stock?
How does this fit into your overall financial plan?
Balancing diversification and loyalty to your employer is critical.
Planning for the Future
RSUs are just one piece of your financial puzzle. To maximize their value: understand your vesting schedule, and know when your RSUs will vest to plan for potential tax liabilities and investment opportunities. When managed wisely, RSUs can help you achieve your goals, whether you are saving for retirement, buying a home, or managing wealth-building. Strategically timing your sales to align with current market conditions can help optimize your gains or losses.
RSUs offer tremendous potential, but like any financial asset, they require thoughtful planning. If you are unsure how RSUs fit into your broader financial strategy, let’s discuss your goals and create a tailored plan to help you maximize their impact.