Restricted Stock Units

Understanding How Your RSUs Fit into Your Financial Future

Restricted Stock Units (RSUs) are one of the most popular forms of equity compensation today. The easiest way to think about RSUs is that instead of your company giving you a cash bonus, they instead grant you shares of company stock, that come with some strings attached.

At first glance, RSUs may seem straightforward, you work for your company, and, over time, you accumulate stock as it vests. While everyone hopes the stock value will rise, RSUs bring their own complexity and uncertainties. People often overlook how RSUs impact their finances and taxes, leading to questions about how to fit this benefit into their overall financial picture.

When it comes to RSUs, it’s important to consider:

• Tax implications – How will vesting and selling affect your tax situation?
• Sell strategies – When is the right time to sell?
• Alignment with financial goals – How do RSUs fit with your short- and long-term objectives?

At TCI, we guide and educate you through the decisions surrounding your RSUs. As your objective financial partner, our goal is to help you make informed choices that align with your long-term goals and create a positive impact on your financial future.

For a more in-depth dive on RSUs, check out our RSU blog post.

Vesting Schedules and Forfeiture

Knowing your company’s vesting schedule is essential to effectively managing your RSUs. Every company can take a different approach to how they want the shares to vest. The vesting schedule determines when you earn your stock, so leaving the company before shares fully vest could mean losing unvested RSUs. By tracking your vesting timeline, you can make more informed decisions about your career and long-term financial goals.

Tax Planning and RSUs

Tax planning is essential with RSUs to avoid unexpected tax liabilities. When your RSUs vest, they are treated as taxable income based on the stock’s fair market value and the number of shares that are vesting. This income is reported on your W-2 with withholding applied. However, RSU withholding may not fully cover your tax liability, especially if vesting happens during a high-income year and you are pushed into a higher tax bracket. Planning for potential tax shortfalls now can help prevent surprises.

After vesting, you own the shares and can choose to hold or sell them. If you sell immediately, any gain between the price at vesting and sale price is treated as short-term capital gains (taxed at your ordinary income rate). If you hold the shares for over a year, any gain qualifies for long-term capital gains treatment, which is generally more favorable. Aligning your sell strategy with your financial goals and risk tolerance can help you make the most of your RSUs.

Sell-to-Cover and Withholding Strategies

Many companies use a “sell-to-cover” strategy to manage RSU tax withholding, automatically selling a portion of your vested shares to cover the taxes due. This approach helps prevent you from needing to pay out of pocket for tax obligations. However, it’s important to understand that the sell-to-cover strategy might not fully cover your tax liability, especially if your total income pushes you into a higher tax bracket.

Planning for Market Volatility and Financial Goals

Since RSUs are tied to your company’s stock, their value can fluctuate with market changes. Holding a large amount of any company stock may increase your financial risk, especially if the stock experiences significant volatility. Furthermore, if you are subject to trading windows and can only sell at certain points during the year and the stock can move dramatically based on how the company’s earnings go. Due to this, you must have a strategy in place before your company’s trading window opens because you want to go into your trading period with a strategy in place so you aren’t making decisions on whim.

Integrating RSUs into Your Financial Plan

RSUs can play a key role in your financial picture, but they shouldn’t stand alone. Understanding how RSUs interact with other assets is essential for achieving balanced growth. Incorporating RSUs thoughtfully into a diversified portfolio can help manage risk, while aligning with retirement goals keeps your overall financial strategy on track.