What to do with RSUs

What To Do With RSUs

Recently, I spoke to a group of up-and-coming employees of Amazon, Cisco, Google, Facebook and Apple. They all had vested restricted stock units (RSUs), and no one knew what to do with them.

One person mentioned she felt uncomfortable selling RSUs because she thought it would make her look “disloyal” to the company. This belief is a common one; however, realize that holding onto vested RSUs is a continued investment in the company where you work.

My advice is to treat this type of compensation as a cash bonus. Then ask yourself, “Would I re-invest in the company or use the money for other purposes?”

To help answer that question, look to your financial plan. Also, understanding how to value RSUs and their tax treatment helps to complete your financial picture.

How do I value RSUs?

For both public and private tech companies, RSUs are a popular way to augment employee salaries. The companies don’t have to pay payroll taxes, and the units encourage employees to perform well and work for the company longer. And for start-ups with less cash on hand, RSUs are a way to offer higher compensation to employees, particularly executives.

RSUs can benefit employees as well. If the company successfully grows, the payout could be substantial. Consider Facebook. When it went public in 2012, its shares were valued at $23.23.If you had 100 shares that vested at that time, you’d get a $2,323 bonus. Today, Facebook shares are worth approximately $200. So if you held all those shares for the last seven years, you’d now have nearly $20,000. Of course, if the company doesn’t do well, you could end up with much less.

When you are issued RSUs, the company will put them on a vesting schedule, which means you can’t do anything with them until the vesting date. If the company is currently public, you can estimate what they’re worth today. At private companies, the value will be determined at the latest round of funding. However, RSUs at private companies commonly vest only upon satisfaction of both a service condition and a performance condition. The service condition requires an employee to work at the company for a certain amount of time, like four years. The performance condition is tied to a liquidity event — its IPO or acquisition by another company.

So it’s important to remember that the real value of an RSU is the price of the stock on the day it vests. If you hold the units after vesting, the value increases or decreases depending on the share price.

But if you leave the company beforehand, you’ll get nothing. That’s why, for financial planning purposes, it’s best to not even consider your RSUs as income until they vest — or proverbially, don’t count your chickens before they hatch.

How are RSUs taxed?

The year your RSUs vest, the IRS views the value as supplemental wages taxed as ordinary income. You’ll be taxed federal income tax (depending on your tax bracket), Social Security tax (on $132,900 of the wages), Medicare tax (1.45%), additional Medicare tax (0.9% if wages exceed $200,000 in a calendar year), state income tax (in California, 10.23%) and state disability tax (in California, 1% on the first $118,371).

Commonly, a portion of those RSUs are held by the company to pay taxes, and the employee receives the net amount, which can be sold.

If you hold them more than a year, the increased value will be taxed as long-term capital gains, or as a loss if the share price should fall.

Depending on your total income, you may owe additional taxes and pay estimated taxes. Consult with a tax professional to determine how much you’ll owe.

Taxes, however, should only be part of your decision on what to do with vested RSUs.

Follow your financial plan

Let your goals determine your strategy to sell or hold, along with the amount of units to hold. Are you looking to buy a home? Pay off student debt? Plan a family vacation? Finance your children’s or grandchildren’s educations? Retire in the near future?

Perhaps you want to give generously to your favorite charity. Donating vested RSUs is one way to meet that goal and reduce income taxes.

If you already completed a financial plan and have a high degree of confidence that you’ll meet your short- and long-term goals without selling or donating your vested RSUs, then it might make sense to hold on to some shares.

But you also need to keep in mind the risk of concentrated wealth. If the RSUs comprise the majority of your investment portfolio, then a decline in share value could hurt your net worth and ability to meet your goals. And, if the company should need to lay people off, or fail completely, you’ll lose your paycheck on top of the value of your units. Unfortunately, some Uber workers likely learned this lesson the hard way recently.

Therefore, having a plan, perhaps even a 10b5-1 Plan, to regularly sell vested shares and invest in other assets helps to diversify your holdings and maintain your wealth.

Thinking of RSUs as a cash bonus allows you to make the best decision on what to do with them once they vest. A wealth manager partnering with a tax accountant can help you formulate a sensible financial plan to help you make the most of this special form of compensation and achieve your goals.