Restricted Stock Units (RSUs – if you want to sound cool around your friends)

investments

Restricted stock units have become a common employee benefit, especially in the tech and startup industries. Let’s face it, you’re awesome and competition amongst firms for talented employees has made retention a top priority. RSUs are a way for employees to earn additional compensation in the form of company equity. They are typically tied to both individual and organizational performance goals, or tied to length of employment. The performance milestones and distribution schedule can be found in the employers vesting plan.

While RSUs can be a great benefit for employees, most people don’t find sifting through their employers grant summary a fun weekend activity. There is often confusion around how they work, the tax consequences surrounding certain actions, and the options available to employees if and when they leave the issuing company or want to sell some or all of their shares.

Unlike Restricted Stocks, RSUs are not an actual transfer of the stock, but a commitment on behalf of the company to transfer either stock or cash once their specific vesting criteria have been met. Unlike stock options, RSUs always have some underlying value, even if the stock price has gone down. Here is a quick example to help contextualize how a vesting schedule works:

Maria is granted 10,000 RSUs over a 5-year period. This means that she will receives 2,000 shares of company stock every year she stays with the company during that 5-year window. She will continue to receive the 2,000 shares each year on the anniversary of her grant date, until year 5 when the full 10,000 shares have been delivered. Maria becomes a millionaire in a matter of a few weeks and can sail off into the sunset without having to spend another minute worrying about finances (we wish). Companies can also opt for a cliff vesting schedule, where the employee receives all of the shares on a future date, instead of gradually over a number of years.

Taxation of RSUs

Taxes, everyone’s favorite topic! Like most of the tax code, the rules surrounding RSUs could not be more straightforward and need no additional explanation. Kidding, but I have taken it upon myself to uncover the cryptic meaning behind the tax rules and regulations when it comes to RSUs. Not all heroes wear capes.

There are three important events that determine if and when there are tax consequences to consider with your RSUs.

  1. Grant Date
    The granting of the RSUs in and of itself is not a taxable event. Nothing to see here!
  2. Vesting Date
    The price of the stock is considered income upon vesting and is subject to Federal Income taxes, Employment taxes, Social Security and Medicaid taxes. It is also subject to any state and local taxes that may be applicable. Often times, the additional income from the vested stocks will be displayed on your pay stub or W2. RSU income is subject to mandatory withholding to cover these taxes, and your employer may offer a few different options to cover the withholding. A few common options include selling part of your shares and using the proceeds to cover the withholding or surrendering the shares back to the company and allowing company funds to cover the taxes. Vesting date also initiates your capital gains holding period, and can impact your taxes if/when you sell the shares.
  3. Date Sold
    A capital gain or loss is recognized when shares are sold.  There are preferential long term capital gains tax rates for shares that are held for at least one year and one day since the vest date. Current capital gains tax rates are 0%, 10% 15% or 20%, depending on your taxable income and filing status. If shares are sold before the one-year mark, the gain is taxed at the employee’s ordinary income rate.Shares sold at a loss can be used to offset any other realized investment gains from the same year, or can be used to offset income of up to $3,000 if there are no investment gains. If RSUs are delivered in cash, it is counted as income in the taxable year that it is received. You should also keep in mind that some companies have “trading windows”, which are set periods of time when you are allowed to sell your shares. Trading outside of the windows is not allowed.

Should I Hold or Sell my Vested Stock

This question pops up frequently given the current nature of the job market, and the fact that us millennials do a fair bit of job hopping.

There are a few things to consider when deciding whether to hold or sell your vested stock.

  1. Can you see the future and what does it look like for the stock?
  2. Option 1 is not possible unfortunately. A better alternative; how you feel about the company’s prospects in the future.
  3. Are your other investments properly diversified?
  4. How the stocks fit into the rest of your financial plan, including your current tax situation.

 

Whether or not you are still with the company, your vested shares are yours to do what you please with. If you feel great about the company’s management team, product or service, and its future prospects, holding onto the stock could prove very profitable. If you feel strongly about holding onto it at the price you received the stocks at, that is your right!

Your other investments also play a critical role in determining whether or not you are comfortable holding on to some or all of the stock. If you are still working for the company and the stock is the only investment you own, you are looking at a considerable amount of concentration risk. Not only do you have all of your eggs in one basket when it comes to your investments, your income security is also tied to the stability of the company! In this situation it is worth discussing selling off some or all of the position to fund other individual or retirement accounts. This can help diversify your holdings across a number of  securities types and geographical markets. It is impossible to predict short term movements and fluctuations. A diversified long term strategic asset allocation can help reduce the risk associated with a concentrated position.

It is also important to take your other financial goals into consideration. Are you looking to purchase a house soon? Have children? Fund college accounts for your kids? Looking to start your own business? Did you just make a trillion dollars off of GameStop? What is your current tax situation and how will any additional gains or losses affect your tax bill? Your financial planner will understand of what your goals are and how your company stock fits into your situation.

Disclaimer: The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. This content is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Hereford Financial disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

Share with your friends!

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
0
Would love to hear your thoughts! Leave a comment.x
()
x