How RSUs Can Help You Reach Your Financial Goals - Financial Staples
 

Financial PlanningHow RSUs Can Help You Reach Your Financial Goals

November 10, 2020by Chloé A. Moore
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You just received a job offer from a tech company. In addition to your salary (and maybe a sign on bonus if you’re lucky) you receive Restricted Stock Units (RSUs). Maybe you’ve received RSUs annually as part of your bonus compensation. Meanwhile, you’re staring at this student loan debt that seems to never go away. Or you have other financial goals, such as buying your first home or taking a sabbatical. How can you use your RSUs to help you reach your financial goals?

RSU Basics

To start, let’s explain what RSUs are and how they work. I briefly covered the basics when I discussed the difference between RSUs and stock options. An RSU is your company’s promise to give you shares of company stock as soon as you meet certain conditions. The most common condition is time with the company, but certain performance metrics could also be a factor. To keep things simple, I will only discuss the condition of time with the company and RSUs in public companies.

Once you meet the company’s condition of time, the shares become yours to keep or sell. This is called vesting. While there are different types of vesting schedules, the most common is over a four-year period: 25% after the first year, then monthly or quarterly for the next three years.

Example: Your company promises to give you 1,200 shares of stock. To receive the shares of stock currently valued at $120,000 ($100 per share), you must stay with the company for four years. 300 shares of stock vest after the first year, then 75 shares vest each quarter for the next three years.

RSUs are taxable as ordinary income on the day the vest, just like your salary or a cash bonus. Typically, your company will withhold taxes (Federal, state, Social Security, and Medicare) on your behalf by withholding some of the vested shares, and they deposit the remaining shares in your account.

Example: Let’s say you receive 300 shares of stock after the first year (as in our previous example). If the value of the stock is $100 per share, $30,000 is taxed as ordinary income. Your company withholds 120 shares for taxes and you receive 180 shares in your account.

In some cases, the amount of taxes withheld by your company are not enough, and you may owe additional Federal and state taxes on April 15th. If you receive RSUs, I recommend consulting with a financial planner and tax professional annually to determine how much you may owe and if you should make estimated tax payments.

Your Options After Vesting

Once your shares are vested, you can decide to sell or keep the shares. When you sell the stock, the difference between the value on the date you sell and the value on the date of vesting is taxable as a capital gain or loss. An important thing to note here is: if you sell the stock immediately after vesting, there is no gain or loss and you shouldn’t owe additional capital gains taxes. As I mentioned previously, RSUs are taxed as ordinary income when they vest, just like a cash bonus, but you receive it in the form of company stock. When deciding whether to keep or sell, consider the following:

  • If you received a cash bonus in the same amount as the shares of stock you received, would you use that cash to buy company stock?
  • Could this amount fund financial goals that you might have?

For most of my clients, the answer to the first question is no, and the answer to the second question is yes. If this is the case for you, it makes sense to sell the stock immediately after vesting. Let’s say you want to buy a house, and your savings goal for a down payment and closing costs is $50,000. In addition to saving cash from each paycheck or your cash bonuses, you can also use cash from the sale of company stock to accelerate your timeline.

You may be thinking, “I believe that my company stock will increase, and I could have more money in the future to fund my goals.” Maybe you want to buy a house in two years, and you believe that your company stock will be worth even more by then. Can’t you just wait two years, then sell the stock at a higher price? While your company stock may grow over this time, you also run the risk of the stock price going down. Also, if you continue to receive RSU grants or have additional shares that vest in the future, you will still benefit from the stock’s growth even if you sell your vested shares now.

Do you have shares from RSUs that vested in the past? What if you’ve held the shares for a long time and they have large gains? Consider how much of your total investments is in your company stock. Having a large portion of your net worth tied to a single stock is very risky, and the risk increases when that single stock is the company that pays your salary. You may also have other types of equity compensation such as stock options or the ability to participate in an Employee Stock Purchase Plan (ESPP). Generally, I recommend having no more than 5-10% of your total investments in a single stock. Remember, don’t put all your eggs in one basket! If you’re in this situation and want to reduce your company stock exposure, start selling newly-vested RSU shares immediately. Then work with a financial planner and tax professional to develop a comprehensive strategy for the rest.

Other Considerations

Now that we’ve covered the basics and your options, let’s talk about other considerations. You should always read your plan documents so you understand the terms of your RSU agreement. There are rules around what happens to your RSUs if you leave the company, become disabled, or die. You may also be subject to blackout periods, which are periods throughout the year when you are not allowed to sell your company stock. Depending on the timing of the blackout periods and your vesting dates, selling your company stock can be a little tricky. Understanding these considerations is crucial in developing a plan to reach your financial goals. One final thought – I encourage you to live off your base salary and not depend on cash bonuses or equity compensation to fund basic living expenses. Think of this “extra money” as a way to either fund short-term financial goals or boost your long-term retirement savings.

If you receive RSUs, you have an excellent opportunity to accelerate your financial goals. Make sure you understand the basics of how they work, the options available to you, and other considerations before you develop a strategy. It also helps to have qualified professionals on your side who can help you understand how your RSUs impact your situation.

Would you like help figuring out a plan to reach your financial goals using your RSUs? Let’s chat!

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Chloe Moore, and all rights are reserved. Read the full disclaimer here.

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Chloé A. Moore

My mission is to make financial education and guidance accessible to the busy young professional. I’m dedicated to helping clients align their finances with their values and purpose so they can live their greatest lives.

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