All About RSUs

RSUs

All About RSUs

You get a grant notice from your employer explaining that you have been or will soon be awarded RSUs. “This is great!” you think. “Free stock. The chance for some upside if the company does well.” But … 

Now you have to wrap your head around what exactly you own and what you can do with these RSUs.

The jargon, perceptions, and financial planning strategies surrounding RSUs can be confusing. In this article, I’ll bring clarity to how you can handle your RSUs.

What Are RSUs?

Restricted stock units (RSUs) are a commitment a company makes to give you shares of its stock in the future. 

Do You Have Another Type of Equity Compensation?

What Makes RSUs unique?

The S in RSU stands for stock but the share of stock represented by an RSU doesn’t actually exist when the RSU is granted. Since the shares don’t even exist yet, you don’t have voting rights or receive dividend payments (although some companies will pay you dividend equivalents). This also means, effectively, nothing … 

At the time of the grant, there are no taxes to pay, no special elections to make — e.g., no Section 83(b) election for an RSU — and no nifty trading strategies to contemplate.

In order for these shares to actually come into existence and for you to receive them, you must wait until your RSUs vest. Companies impose different restrictions and requirements on the vesting of RSUs, and your grant agreement will communicate the terms associated with yours. 

These awards exist as a way to promote loyalty and encourage commitment to the overall success of the business. Although they’re more commonly awarded to employees, RSUs are granted to non-employees in some cases as well.

 Many grants will require that you remain employed or associated through a specific date or dates — sometimes several years — in the future. Other grants will also require you to achieve specific milestones before awarding the actual stock. These specific types of grants are sometimes referred to as performance stock units (PSUs).

Where to Get Information About Your RSUs

The main document(s) to help you understand your RSUs are your stock plan, grant agreement, grant notice, or the like. This document typically looks like a legal document with provisions, restrictions, and other detailed language.

Pro Tip: It’s important to know there’s generally not one universal document if you have multiple types of equity compensation. If you have multiple RSU awards, you’ll likely have a separate grant agreement for each of your awards, and your employer may implement different features for different equity comp plans. We ask clients to share each separate grant agreement, stock option plan, and other informational documents about their equity compensation plan(s).

▶︎ Vesting Terms

The single most important part of an RSU grant notice is the vesting terms. You gain control of actual stock once you meet these terms. When you receive actual stock, you are then able to make decisions on whether to hold and/or sell the shares. You are also taxed for the first time once the RSUs vest and you receive actual stock.

▶︎ Time-Based Vesting

For time-based vesting, you will find graded or cliff vesting schedules. Graded vesting means that you receive the stock in installments. Cliff vesting means that you receive the stock all at once.

Vesting Schedule

▶︎ Performance-Based Vesting 

To incentivize employees to make the company more profitable, some RSU grants tie the vesting of the awards to measurable metrics of performance. The plan document will show the milestones and formulas that the company considers.

▶︎ Double-trigger vesting 

Pre-IPO companies that use RSUs will typically have what’s called double-trigger vesting. The first trigger is the more common time- or performance-based vesting with the second being a liquidity event. This solves the issue of illiquid stock being taxable without a means of selling shares to raise cash and/or pay the taxes.

▶︎ Trading Restrictions 

If the RSU involves stock in a publicly traded company, you may be limited to specific timeframes during which you can sell your shares. If these restrictions apply to you, your company will typically share an insider trading policy and may reiterate it in the grant notice.

What to Do with RSUs

Taxes

RSUs are taxable to you on two occasions:

When the RSU vests and you receive actual stock …

— The fair-market value of the stock is taxed to you as if you were paid cold hard cash by the company. If you’re an employee, that means it’s taxable like regular wages.

When you sell the stock you received…

— If you’re able to sell the stock immediately (some plans make this an option), there will be no additional tax beyond the tax you pay when the RSU vests.

— If you hold the stock and sell it later, you will have a capital gain or loss, depending on how the stock’s price changes while you own it.

– Hold the stock for a year or less, and the gain/loss is short-term and subject to ordinary income tax rates.

– Hold the stock for more than a year, and the gain/loss is long-term and subject to more favorable long-term capital gains rates.

Pro-tip: When an RSU vests, ask yourself this question: “If this were cash, would I use it to buy this company’s stock?”

If your answer is “no,” consider selling the shares immediately and deploying the cash as you otherwise would in your financial plan. This will limit both your avoidable tax and your investment exposure.

Planning Considerations

How do these positions work in your financial plan? The first thing to do is to reframe what RSUs actually are. RSUs are deferred compensation. This means that RSUs are future inflow, but not an asset. When an RSU is granted to you, it’s a promise to give you something of value in the future. And when it vests, it’s taxed to you as if you received cash. When you decide to hold the vested stock, then and only then does it become an asset on your financial net worth statement.

Even without RSUs, we see many clients begin to get top-heavy with their financial net worth tied to their employer’s stock. This is where you should start to contemplate your employer’s role in your financial well being. It’s important to recognize that you can wield complete control over very few parts of that situation, but the amount of your employer’s stock that you own is something you can, for the most part, control completely.

In either case, the part of your financial plan where RSUs play the most underrated role is likely your cash-flow or budget plan. When you have the right frame around RSUs, you can start to see when and where they’ll represent an opportunity to deploy cash into the places you want it, whether that’s a tax-preferenced account, a long-term savings goal, or just a lifestyle comfort level.

Got RSUs?

Let us show you how your RSUs fit into your cash-flow plan so that you can make the most of your equity compensation. Our comprehensive services include cash-flow planning.

Timing Your Sales 

▶︎ Option 1: Sell Immediately 

Some RSU plans allow you to make an immediate and automatic sale after vesting by selecting this strategy ahead of the vesting date. If this option isn’t available, you may have to wait a few days after vesting for the actual stock to post and settle in an account where you can sell it.

In either case, because you’ve already been taxed on the vesting of the RSUs, selling immediately doesn’t change your tax outcome very much, if at all.

▶︎ Option 2: Hold For More Than a Year

If you have no better alternatives or needs for the stock you receive from an RSU — or you just think the stock is going to kick butt — a consideration would be to hold the stock for at least a year and a day.

When you do this, you’ll receive the benefit of more preferential tax rates at the federal level on any growth in the price of the stock over that year or longer. Since you’ve already been taxed on the vesting of the RSUs, remember that you’ll only owe additional tax on the difference between what you sell the stock for and its value when the RSU vested.

2021 LTCG Tax Rates

▶︎ Option 3: Indecision(?) aka Hold for a Year or Less

This probably happens more often without planning but can certainly happen with it as well. If you’ve decided to let your stock ride, you may run into a scenario where you need to sell it sooner (as in one year or less after it vested) than later.

If you do sell it within a year, you’ll be subject to additional ordinary income taxes on any growth between the date it vested and the date you sell it. Sometimes, however, it’s important to remember to not let the tax tail wag the dog. If you need the cash and this is the place it makes the most sense to get it from — it is what it is.

▶︎ No Matter Which Option You Choose, Keep Track and Keep Planning

Overall, keep detailed track of your RSU positions. We do this for yous so that you can visualize your equity compensation in one place, foresee future vesting events, and identify when it makes the most sense to sell your vested positions.

Some strategies to consider with your RSUs:

You can track upcoming vesting schedules for times to replenish your checking account so you can commit more of each paycheck to your 401(k) contributions.

Instead of generating savings for future financial goals (like a home purchase or college funding), you can coordinate future vesting events with these financial goals. This way, you don’t have to keep too much money in cash, thus exposing your savings to purchasing power risk (aka inflation).

Remember, if your company gave you the option to receive the value of these shares in cash, would you go and purchase your company’s stock with that money? If the answer is “no,” you may consider selling your positions to diversify your financial net worth.

Ready to schedule your next meeting?

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Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



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Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
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