Financial Planning With Restricted Stock Units: 3 Key Questions

If you own restricted stock units (RSUs) that are settled in company shares, you need to plan for what you will do when the RSUs vest. Understanding the strategy you'll use—and then implementing it—may be critical to making the right moves for your situation. Whether you retain your company shares or sell them when they vest, being prepared will help you be proactive instead of reactive and make the most of the opportunity RSU grants provide.

1. What Will You Receive When Your RSUs Vest?

When your RSUs vest, depending on your company’s equity plan terms, you may receive the vested value of your RSUs in shares of company stock. Unless your company’s equity plan has a feature that allows you to make an election to defer delivery of the shares until a later date and you properly made that election (or it was mandatory), federal (and possibly state or local) income taxes will be owed soon after vesting, when the company shares are delivered. Note, however, that elections to defer delivery are subject to a number of restrictions under the Internal Revenue Code and applicable regulations.

To cover the income tax liability triggered when the RSUs are settled and shares are delivered, typically either your company may withhold shares, or you could sell shares immediately. Your company’s ability to withhold a portion of the shares will depend on the terms of the company’s equity plan. The remaining company shares are often deposited into a brokerage account. In that account, the company shares are generally held as any company shares you can buy on the open market.

2. Was Enough Withheld At Vesting?

The fair market value of vested RSUs is typically taxed at ordinary income rates, subject to federal income tax, Social Security, and Medicare. State and local taxes may also apply. To cover the federal income tax liability, many companies will withhold cash or an applicable number of shares at a flat, supplemental wage withholding rate. However, depending on your gross income and thus your tax bracket, there's no guarantee that this supplemental wage withholding rate will be enough to cover all of the federal income tax liability you owe. You will not know the total federal (and possibly state and local) income taxes you owe until you complete your federal and state income tax returns.

Example: You have vested RSUs with a value of $100,000 and your applicable supplemental wage federal income tax withholding rate is 22%. If your marginal federal income tax rate is 32%, you may owe additional federal income tax of approximately $10,000 when you file your tax return.

If you prefer not to owe tax when you file or want to avoid penalties for underpayment, you may consider making an estimated federal or state income tax payment. On the other hand, if your marginal federal income tax rate is less than the 22% withholding, you may be entitled to a refund after filing your federal income tax return. For advice on your personal financial situation, please consult a tax advisor.

3. What Will You Do With Your Remaining Shares?

When your shares are delivered after vesting, you generally have full stock-ownership rights. That means you are entitled to keep the shares, receive dividends (if any), vote on company-related matters, etc.

Your ownership right also means that you can sell, gift, or donate the shares if you want. Receiving company stock as part of your compensation does not mean you have to keep the shares unless the terms of your company’s equity plan have stock ownership and retention requirements.

Should You Hold Or Sell?

You can keep the company shares or you can sell them to help meet a financial goal—for example, to buy a diversified investment portfolio, pay down debt, save (or pay) for college, buy a house, add to retirement savings, or increase your cash reserves.

If you keep your company shares, you may be subject to the risk/reward tradeoff of a single stock position, which could be more volatile than a diversified portfolio of stocks.

If you choose to keep the company shares, you may want to evaluate how much of your net worth is already allocated to this single stock position.

Consider A Rolling Strategy

One strategy that may balance the decision to immediately retain 100% of the company shares or sell 100% is to implement a plan that suggests selling a certain number or percentage of shares over a set period.

Example: You have 1,000 vested RSUs that are settled as company shares owned outright. A rolling sell strategy could be implemented by planning to sell 25% of the 1,000 company shares each period for the next 4 periods (250 shares per period). At the conclusion of the 4-year period, you will retain 0 company shares from this RSU grant.

Establish A Sell Schedule

Setting a sell schedule allows you to intentionally reduce your company stock according to a formula. That removes some of the emotional decision-making from the process. You don't need to guess what the stock price will do next or decide you will sell when the price reaches X per share or change your plans once the price does hit that point.

A sell schedule is a deliberate and systematic process to manage your stock position in a way that allows you to participate in the upside and manage the downside. Executives and key employees that are privy to material inside information and want to implement a sell schedule should properly set up a trading plan intended to comply with Rule 10b5-1 that would allow them to do so.

So, What Now With Your RSUs?

Vested RSUs may be easier to understand and evaluate than other types of equity compensation. But despite their relative simplicity, RSUs warrant planning before each vesting date.

Depending on your financial situation, retaining your company shares or selling them and directing the proceeds to fund your goals are options to be considered. Whichever options you choose, you should know how federal (and possibly state and local) income tax will be withheld, what federal, state, and possibly local income tax liabilities will apply, if the number of shares or cash withheld at settlement will cover the income tax liability, and what to do next with your company shares. Talk to your tax professional or financial advisor to get a better understanding of what actions are best for you.