Fundamentals of RSU’s, Tax Ramifications & Strategies for Maximizing their Value

A&I Wealth Management > Blog > Investment Advice > Concentrated Equity > Fundamentals of RSU’s, Tax Ramifications & Strategies for Maximizing their Value

Restricted stock units (RSUs) and performance-based restricted stock units (PSUs) are a sort of equity compensation that is frequently given to employees of technology companies. They’re utilized as additional compensation in addition to a normal salary in the form of stock ownership. RSU’s may be a valuable type of compensation and provide several planning options. However, if you don’t know how they work or what these possibilities are, you’re probably left wondering what to do with your RSUs. This article will look at the fundamentals of RSU’s, tax ramifications, and strategies for maximizing their value!

What are RSU’s or Restricted Stock Units?

RSU stands for restricted stock units. These units represent a promise from your employer to pay you in the future with stock in your company, based on a certain formula. RSUs typically have restrictions placed on them while they’re still “outstanding” which means that you can’t sell them quite yet. In exchange, their value is discounted compared to what they would be worth if there were no restrictions.

In order to give employees an incentive to work hard and stay at their company for the long term without forcing employers to increase cash compensation every year, companies started using restricted stock units as equity compensation instead of just giving out additional shares of common stock. The main difference is that RSUs are taxed upon vesting, not when they are exercised.

What to do with RSU’s?

Once you are awarded RSUs, the next step is to determine when to exercise them. This decision will be based on your personal situation and what makes sense for you! For example, if you think that your company’s stock price will increase around the time of vesting, then this might be a good time to sell. You can also choose to hold onto them potentially for years in order to take advantage of potential long term capital gains rates if the stock price increases over time. If this sounds complicated, don’t worry! We have some resources below with more information.

You should consider all of the risks before selling your RSU’s so that there are no surprises down the line. RSUs are inherently risky as you don’t actually own them until they vest. If anything were to happen to your company before then, you could be left empty-handed.

You should especially keep in mind that if there is bad news about your company or the stock price drops before the vest date, it may be better for you not to sell at all and let them fully vest so that you have ownership over more units!  It can be difficult to predict what will occur with your company’s stock price between now and then. This is one reason to consult a financial professional before making any decisions on when to exercise your RSUs. The most important thing here is just doing your research and understanding the potential risks.

Takeaway: When you receive RSUs, they will typically have a set number of restrictions. This means that you can’t yet sell the units, but they will vest over time. When it comes to deciding whether or not to exercise your RSUs, it’s important to consider both the potential risks and tax consequences.

Learn more about concentrated equity positions

What taxes do I have to pay on my restricted stock units?

The taxes you have to pay depend on the restrictions placed on your RSU’s. You’ll need to determine what type of restrictions they have, how many years it will take before your RSUs are “vested” or yours to keep, and if there are any tax withholding requirements set by the company. Once you know this information, you can consult with a qualified tax professional about your specific situation and determine what taxes you owe for the RSUs that were vested. In most cases, you have an immediate tax bill upon the day your RSU vests. Your company usually sells 22% of the shares to pay those taxes. If you have shares over $1 million, then your employer with-holds 37% for taxes. But you can control that! If you would rather pay the taxes out of pocket, make sure to tell your company before the vesting date!

Your tax withholding requirements for RSUs are different than they would be if you exercised them and sold shares of stock instead. If you do not withhold the tax yourself, the company will withhold it for you when paying out RSUs. Additionally, most companies deduct any applicable taxes before actually giving you your RSU payout. This may make it feel like your employer makes you pay taxes before giving you your paycheck. On the other hand, it means you are less likely to have a (huge) tax surprise at the end of the year. If you are not in either a 24% marginal tax bracket or the 37% marginal tax bracket, your company’s withholding will always be wrong! This is one good reason to work with an experienced CFP professional to make sure you have a plan in place for your estimated tax payments! For the tax rates, see 2024 Tax Update.

What are the tax consequences if I leave the company?

If you leave your company, whether it be by quitting or being fired, your RSUs are considered “forfeited” by the employer. You do not have to pay federal taxes, but neither will your receive any unvested RSU.  Even though you no longer work for the company, you still owe capital gains taxes on the RSUs exercised in your last year of employment. The only difference is now it’s up to you to pay the taxes, with no help from your former employer. Vested RSUs are now shares of your former employer, and if you sell that stock then you have either a gain or a loss on that stock. The gain is a long-term gain, subject to lower tax rates, if you held the stock more than a year after exercise. It is a short-term gain if you held it for less than 365 days. For the tax rates, see 2024 Tax Update.

Learn more about concentrated equity positions

What are some tax planning opportunities?

If you have a long-term view on your investments, one great opportunity is to exercise your vested RSUs early so that you can avoid higher taxes in the future. For example, let’s look at a common vesting plan. Assume you have an RSU plan with a 3 year vest. Every year you are given new RSUs. This means that after working there for three years or more you have a series of RSUs that will vest each and every year. Upon vesting, the RSU becomes a share of the company. At that point, any gains are capital-gains, either long-term or short-term, as explained above.

Try to sell some of your RSUs before leaving the company. That way, you can reduce the amount of your assets tied to your company. Plus, you can use the proceeds to pay for the taxes owed on other RSUs as they vest. Additionally, set aside money for quarterly estimate tax payments. If you are in a situation where the vesting RSUs are substantial, then the IRS is going to want you to pay estimated taxes during the calendar year when they vest. Otherwise, you face a penalty tax on top of the income tax! Finally, consider other forms of equity compensation from your employer. If you have an Employee Stock Purchase Plan (ESPP) or stock options, then you may want to speak to a CFP professional about which of these is best for you to hold, sell or give away for your unique situation. See more here: Concentrated Equity Strategies.

What if I leave my company early?

If you leave your company before your RSUs reach 100% vesting and there is still a restriction period, any unvested RSUs will be forfeited and no longer available to you. However, if there were vesting requirements such as achieving a certain seniority or staying at the company for 3 years or more, your company may waive the vesting requirements. Then you would still have to pay taxes on those RSUs. For example, if you had 5 years left until 100% restricted stock units (RSU’s) were yours to keep then you left the company after only 1 year, you would forfeit them.

Download a white paper

Learn more about concentrated equity positions

What are ways I can save tax dollars?

There are several ways you can use your RSUs to help save you some money when it comes time to pay the IRS!

If you would like more information on how RSUs work and ways to maximize your benefits before you leave your company, connect with one of our financial advisors near you or give us a call at +1 303-690-5070!

Also read about Concentrated Stock Strategies.

The tax information contained in this blogpost is general in nature.  Always consult an attorney or tax professional regarding your specific legal situation.

Learn more about RSUs

Resources to help you with a large amount of money in the equity of a single company

How can we help?

Chat in-person during regular business hours or fill out the form!