Making the Most of Your Restricted Stock Units (RSUs)

RSUs are a valuable form of employee compensation, offering a way to share in your company's success. However, they come with tax complexities and investment risks that require careful management. Here's what you need to know to maximize their value.

What are RSUs

RSUs are a promise from your employer to deliver company shares—or their cash equivalent—once specific conditions are met, such as working a certain number of years or achieving performance goals. Unlike stock options, RSUs always have some value as long as the company stock retains worth, though their value is tied to stock performance.

Tax Considerations You Can’t Ignore

Receiving RSUs is not a taxable event, but when they vest (become yours to own), their fair market value (FMV) is considered taxable income. This amount is reported as ordinary compensation and subject to federal, state, and local income taxes, along with Social Security and Medicare (FICA) taxes.

Some plans allow deferral of income tax under Internal Revenue Code (IRC) §83(i) for up to five years. This can lower taxes if you expect to be in a lower bracket later, but deferring carries risks—stock value could drop during the deferral period. When you sell RSU shares, any difference between the sale price and the FMV at vesting becomes a capital gain or loss. Holding shares for over a year after vesting qualifies for long-term capital gains tax rates.

Portfolio Implications

RSUs can lead to concentrated positions in company stock, increasing financial risk. If your company’s stock exceeds 10% of your portfolio, diversification is crucial. Selling shares after vesting can rebalance your portfolio, but be mindful of blackout periods or trading restrictions. If you’re concerned about stock losses, hedging strategies like put options or diversifying into unrelated investments can help protect your finances.

Navigating Vesting and Liquidity

The vesting schedule dictates when RSUs become yours. Schedules may be "cliff-based," vesting all at once, or "graded," vesting incrementally. Some plans tie vesting to performance goals or corporate events like an IPO.

RSUs may be settled in stock, cash, or a combination. If your plan includes dividend equivalents, they can boost cash flow, though these are taxed as income. If your employment ends before vesting, unvested RSUs are usually forfeited unless the plan specifies otherwise.

Aligning RSUs with Your Financial Plan

RSUs can help you meet significant goals like saving for retirement, buying a home, or paying for education. Properly timing the vesting and sale of RSUs can reduce taxes. Strategies like maximizing 401(k) contributions or bunching deductible expenses can offset income from vested RSUs.

RSUs also affect estate and divorce planning. For estate purposes, ensure beneficiaries are named if your plan allows. In divorce, RSUs are often treated as marital property and may need to be divided or valued.

Managing Risk and Staying Strategic

Relying too heavily on your employer’s stock for both income and investments can be risky. Regularly evaluate your company’s financial health, especially if RSUs comprise a large share of your net worth. Mergers or acquisitions could accelerate vesting but may also affect the stock price.

Proactively managing RSU taxes is equally important. Consider using a donor-advised fund to offset taxable income and keep accurate records of your cost basis—the FMV of shares at vesting—for proper tax reporting when selling.

The Bottom Line

RSUs are a valuable financial asset but require careful attention to their tax, investment, and planning implications. By understanding your vesting schedule, tax responsibilities, and portfolio risks, you can strategically manage RSUs to align with your broader financial goals. Consulting with a financial advisor can help tailor strategies to maximize this benefit while avoiding common pitfalls.

WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen. 

Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.