RSUs are a topic my clients and I typically discuss every year when they vest or when they’re thinking of changing companies. They seem simple since they’re automatically granted and vest on a predetermined schedule but there are important decisions to be made.
RSU vest – Sell or Hold?
Once your RSUs vest and taxes are withheld, you’re left with the remaining shares. What to do next? Consider this: If your company paid you in cash instead of stock, would you immediately use that money to buy company stock? Probably not.
Individual stocks lack the diversification found in other investments, exposing you to concentration risk. Holding stock in your employer’s company amplifies this risk. If your company performs poorly, putting your job and future income at risk, the last thing you want is to have your savings tied up in a declining stock at the exact time you need it most.
Tax on RSUs?
Another reason clients consider selling shares upon vesting is to avoid future capital gains tax. The price on the vesting date establishes the cost basis for the remaining shares. If you need to access these funds later, or you want to eventually diversify your position, you may face capital gains taxes on any price appreciation. This often leads individuals to sell their shares immediately after vesting, as taxes on the vested income have already been paid, avoiding additional taxes.
Tax Withholding Challenges
One more consideration, often frustrating for my clients, is that, unlike regular paychecks, you cannot choose the amount of federal income tax to withhold from RSUs. The default rate is typically 22%. As of 2024, the income limits for the 22% tax bracket are $100,000 for single filers and $201,000 for married couples. Many people receiving RSUs are in higher brackets, leading to unexpected tax bills when filing their returns. This is why mid-year tax projections are so important.
Conclusion
When your RSUs vest, it’s crucial to manage investment risk and understand the potential tax implications. Comprehensive financial planning can help you navigate these decisions and maximize the benefits of your RSUs.
This material is intended for informational/educational purposes only and should not be construed as investment, tax, or legal advice, a solicitation, or a recommendation to buy or sell any security or investment product. Hypothetical examples contained herein are for illustrative purposes only and do not reflect, nor attempt to predict, actual results of any investment. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
