You are starting a new position and your company has offered you Restricted Stock Units. More and more public companies are in favor of granting their employees this type of stock-based compensation. RSUs hypothetically keep employee retention high, align employees with shareholders, and allow recipients the ability to participate in company success.
What are they?
RSUs can most easily be thought as a stock-based bonus. Vesting occurs when a company reaches a milestone or more commonly when a certain time period has passed. Restricted Stock Units have no value (restricted) until they vest based on the vesting schedule. Upon vesting, they are considered income, and a portion of the shares is withheld to pay income taxes (your company will withhold a number of shares required to cover the tax cost). At that time your RSUs become common stock and are able to be sold on the public market.
Let’s say ABC company has given you 1000 stock units at a 25% year vesting schedule and each year the stock price rise by $5.
At the end of year 1, the stock price is at $70. You would receive 250 of ABC stock at $70 giving you income of $17,500, at year 2 the stock price is $75 giving you income $18,750 (250 x $75), year 3 income of $20,000 (250 x $80, and year 4, income of $21,250 (250 x $85). Total RSU compensation – $77,500.
In most cases you must continue working at the employer for them to vest – they are often called the golden handcuffs. One advantage of RSUs over other stock plan compensation is that they do not go “underwater.” Each RSU is worth the market price, even if it goes below the gifted price. In other words, the restricted stock units will always have value, as long as the share price is above $0.
But, wait when should I sell them?
Typically, when they vest. Why?
As said before, the beauty of RSUs is in the simplicity of the way they get taxed. They are taxed the same way as your income. RSUs are taxed as W-2 income subject to federal and employment tax (Social Security and Medicare) and any state and local tax.
Waiting to sell would trigger a second taxable event or the perceived RSU double tax. The difference between the vested and sold price is your capital gain. This capital gain will trigger an additional tax.
Furthermore, this is stock-based compensation, unlike your salary and bonus, which cannot be controlled. Your income will follow the market swings of the company share price.
Lastly, if your portfolio is weighted over 10% in company stock (and probably is), you are likely taking on much more risk than you are comfortable with.
RSUs are simply a double-sided promise. You stay with the company until they vest and the company turns your RSUs into company shares. This can sound simple, however, as with every question in financial planning, there’s no one-size-fits-all answer. Make sure you fully evaluate your personal situation, your goals and objectives, and your willingness to take investment risk prior to implementing any decision to buy or sell shares of company stock you acquired after your RSUs vested.
Disclaimer: This article is for informational purposes only and is not a recommendation of WealthU Advisors, Michael Uehlein. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.