WHAT You Need to Know About RESTRICTED STOCK UNITS EXPLAINED!

Restricted stock units (RSUs) are a common form of compensation offered by employers, especially publicly traded companies. If you’re receiving RSUs as part of your compensation, understanding how they work and how they affect your financial plan is crucial. From taxation to vesting schedules, RSUs come with a unique set of considerations that can influence both your income and investment strategy.
This article breaks down everything you need to know about RSUs, including key terms, tax implications, and strategies for managing this type of compensation effectively.
What Are Restricted Stock Units (RSUs)?
RSUs are shares of stock awarded by an employer that vest over time. Unlike stock options, you don’t have to purchase the stock—you simply need to meet the vesting requirements outlined by your company.
However, RSUs often come with conditions like a substantial risk of forfeiture (e.g., leaving the company before the shares vest), which delays your full ownership of the shares.
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Key Terms to Know About RSUs
- Cost Basis: The value of the shares at the time they vest. For example, if your stock is worth $10 per share when it vests, your cost basis is $10 per share.
- Holding Period: The time you hold onto the stock after vesting, which determines whether gains are taxed as short-term or long-term capital gains.
- Substantial Risk of Forfeiture: The possibility of losing your RSUs if you don’t meet vesting conditions, such as staying with the company for a specific period.
- Vesting Schedule: The timeline over which your RSUs become yours. A common schedule is graded vesting over three years, where one-third of the shares vest each year.
How Are RSUs Taxed?
When your RSUs vest, their full value is treated as ordinary income and reported on your W-2. For example, if you receive 10,000 shares valued at $10 each, $100,000 will be added to your taxable income for the year.
Your employer typically withholds a percentage of the shares to cover taxes , with federal withholding set at a mandatory 22% for income up to $1 million and 37% for amounts over $1 million, leaving you with net vested shares. However, if you’re in a higher tax bracket, the withholding may not be sufficient, and you might owe additional taxes.
Common Strategies for Managing RSUs
- Sell Shares at Vesting
Many financial advisors recommend selling your net vested shares as soon as they vest. Why? Selling immediately avoids the risk of the stock price dropping and ensures you aren’t left with a tax liability for income you never fully realized. - Avoid Over-Concentration
If you keep holding RSUs over time, you may build a concentrated position in your company’s stock. While this might feel rewarding during periods of strong performance, it also exposes you to significant risk if the company’s stock declines. A good rule of thumb is to avoid having more than 10% of your net worth tied to a single stock. - Plan for Tax Withholding
If your employer’s tax withholding on RSUs is too low for your tax bracket, you can:- Request a higher withholding rate.
- Adjust your W-4 to increase payroll tax withholding.
- Make quarterly estimated tax payments.
- Be Mindful of Blackout Periods
If you’re a company insider or subject to blackout periods, you may face restrictions on when you can sell your shares. In such cases, setting up a 10b5-1 trading plan can allow you to sell shares automatically during permissible windows.
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What Happens If You Hold RSUs After Vesting?
Holding onto your RSUs after they vest resets your cost basis to their fair market value on the vesting date and starts a new holding period. Any gains or losses after vesting are taxed as capital gains.
- If the stock price increases, you’ll owe taxes on the gain (short-term if sold within a year, long-term after a year).
- If the stock price decreases, you might end up paying taxes on a higher valuation than what you ultimately receive.
Should You Hold or Sell Your RSUs?
The decision to hold or sell your RSUs depends on your financial goals:
- Sell if: You want to avoid over-concentration, need liquidity, or prefer to diversify your investments.
- Hold if: You believe in the company’s growth potential and are comfortable with the risks of a concentrated position.
Final Thoughts
RSUs can be a valuable form of compensation, but they require thoughtful planning to integrate effectively into your financial strategy. Understanding the tax implications, managing risks, and considering your financial objectives will help you make informed decisions about whether to sell or hold your shares.
If you have questions about managing your RSUs or incorporating them into your financial plan, reach out to Paces Ferry Wealth Advisors. We’re here to help you navigate your options and make decisions that align with your goals.
