Restricted Stock Units (RSUs)
Restricted stock units (RSUs) play a big role in compensation packages, especially for high-tech companies. Thanks to the tech industry, RSUs have become increasingly popular as many employers offer them as part of their compensation package. It’s important to understand what RSUs are and how they work, to ensure you’re not leaving any money on the table when negotiating your salary, and to help you determine when/how to sell them for cash needs or diversifying your investments.
RSUs are issued by an employer to an employee in the form of company stock. They’re restricted because you can’t sell them until they vest, meaning you don’t really own them yet. Vesting typically occurs after you’ve been with your company for a pre-determined length of time or have hit pre-determined performance goals. The shares either vest in stages (grading) or all at once (cliff). When your RSUs vest, they’re considered income and are taxed as such. Your employer will hold back a certain amount of your shares to pay your income taxes, and you’ll receive the rest. Your taxable income is the market value of the shares at vesting. Once your shares vest, you can sell them.
We always recommend that folks sell their RSUs once they vest to better diversify their risk. You already rely on your company for your paycheck and many other benefits that it’s best to limit how much of your wealth is dependent on your company. It’s also best to diversify your investments and avoid concentrated positions in any one stock regardless. If you do choose to hold your RSUs when they vest rather than selling them, any future gains will be taxed at current capital gains rates.
If RSUs are a part of your compensation package and you’d like help to better understand how to make them work for your needs, please reach out to us.
Written by: Hannah Ahmed, CFP®, CDFA®