Restricted Stock Units (RSUs) [video]
/RSUs, or restricted stock units, are a type of stock-based compensation.
They're "restricted" because you typically cannot sell them right away. There is some sort of vesting schedule that will depend on the company. But when the shares do vest, you have 2 options - to keep the shares or sell them.
Now, the default setting for the most part seems to be sell just enough shares to pay the tax due and keep the rest. But what happens is people find themselves with a lot of in their company's stock, and many times there's people that have never sold any shares. When I ask why, they say they're not clear on the tax consequences of doing so, so they tend to do nothing.
Let's go through all the details.
If you received a cash bonus, would you take the entire thing and buy your company stock with it?
That's what you're doing when you are keeping the vested RSU shares in your company stock. Here's the tax piece. And really, there are 2 pieces.
The first is the vested amount is taxed at ordinary rates on the vesting date. There's nothing you can do about that. That is happening regardless of whether you keep or sell the shares after vest.
The second piece is the same as if you sold a stock from your brokerage account. Before you do that, you need to be clear on the cost basis, the market value, the holding period. These are the important pieces that are going to help you understand the tax consequences of making that sale.
With RSUs, the acquisition date is the date of vest and the cost basis is the vested amount on that day.
Decide if you want to change the default setting for the RSUs.
Something you may consider is changing that default setting from selling just enough shares to pay the tax to selling all. That way you're taking your bonus, turning it to cash, and you're diversifying it as you want to.
Organize the previously vested shares and document a sale strategy.
You also want to start organizing the shares you already have a spreadsheet, in a software, so you're clear on the cost basis, the gain, the loss, the holding period. Holding period is important, of course, because if we held it for less than a year, it's going to be taxed at ordinary rates versus more than a year capital rates.
Start thinking through important questions such as how much of your company stock do you actually want to hold?
How else could you maybe reduce that over-concentration in the meantime, as you come up with a strategy?
How best can you start unloading these shares in a tax efficient way?
All questions you want answers to before you start making trades. My name is Linda Rogers, Owner of Planning Within Reach.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.