What Issues Should I Consider Regarding My Restricted Stock Units?

Restricted Stock Units (RSUs) are a type of equity compensation granted by employers to employees. When an employee is granted RSUs, they typically receive a promise from the employer that they will receive a certain number of shares of company stock after a specified vesting period. Once the vesting period is complete, the employee can either take delivery of the shares or receive a cash payment equal to the value of the shares at the time of vesting.

One of the main benefits of RSUs is that they provide a source of income that is tied to the success of the company. This can be a significant financial advantage for employees, particularly those who work for high-growth companies or companies with a strong stock performance. However, RSUs also come with a number of tax considerations that require careful planning.

At the time of vesting, RSUs are generally considered taxable income. This means that the employee must pay ordinary income taxes on the value of the shares or cash payment received. The tax rate for this income will depend on the employee's income tax bracket at the time of vesting. In addition, RSUs are subject to Social Security and Medicare taxes, which are typically withheld from the employee's paycheck.

Once the RSUs have vested, the employee has several options. They can choose to hold onto the shares of company stock, sell the shares immediately, or hold onto the shares for a period of time before selling them. Each of these options has different tax implications that should be carefully considered.

If the employee decides to sell the shares immediately after vesting, they will typically pay capital gains taxes on any profit they make from the sale. The capital gains tax rate will depend on how long the employee held the shares before selling them. If the shares are held for less than one year, they are subject to short-term capital gains taxes, which are taxed at the employee's ordinary income tax rate. If the shares are held for more than one year, they are subject to long-term capital gains taxes, which are taxed at a lower rate.

If the employee decides to hold onto the shares of company stock, they will need to consider the risks associated with concentrated stock ownership. If the employee has a significant portion of their net worth tied up in company stock, they may be at risk of losing a substantial amount of money if the company experiences financial difficulties.

Finally, it is important for employees to consider the overall impact of RSUs on their investment portfolio. RSUs represent a significant allocation to one company's stock, which can increase the level of risk in the portfolio. It is important for employees to carefully consider their investment goals and risk tolerance when deciding how to manage their RSUs.

Overall, RSUs can be a valuable form of equity compensation for employees. However, they come with a number of tax and investment considerations that require careful planning. By working with a financial advisor, employees can develop a strategy for managing their RSUs that takes into account their individual financial goals and risk tolerance.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.