RSUs or Restricted Stock Units have come to become a standard feature of your total compensation if you happen to work for any of the public companies, especially the tech ones.
So when you sign an offer to join one of these companies, along with the cash component (base salary and bonus), you would get a stock component in the form of RSUs. The stocks usually come with a 4-year vesting schedule which means 1/4th of the initial grant vests every year for the next 4 years.
So say you join one of these companies and you are given 1,000 shares of RSUs and say the stock price on the day of the grant is $100. The total value of your stock grant then is $100,000 (1,000 shares x $100 per share).
And say in a year, 1/4th (250 shares) of your grant vests and the stock price on the vesting date is now $150. Your income from that vesting process is $37,500 (250 shares x $150 per share) and that income directly hits your W2. There is no way to avoid the taxes you’d owe.
And what usually happens is that about 100 shares of the 250 total shares that have vested are sold and that money is withheld as taxes to be paid to the IRS. The remaining 150 shares get deposited into your brokerage account as net after-tax income.
So you already paid most of your taxes when your RSUs vested. No additional tax is due if you then turn around and sell the remaining 150 shares that sit in your brokerage account.
But if you decide to hold on to those post-tax vested shares, you are making a few active decisions. Think of it like taking your cash from your bank account, moving it to your brokerage account and buying those 150 shares.
Another way to look at it is to assume there was no such thing as RSUs and instead you were given cash in the same amount as the value of the post-tax vested RSUs. Would you then go out and buy your employer stock with that money? If the answer is yes, you can choose to hold on to your vested shares.
Now if the stock price appreciates from that point on, taxes will be due on the difference between whatever the new price is and the price on the vesting date. If you sell within a year of the vest, you’d owe a short-term capital gains tax. If you hold on to the vested shares for more than a year, you’d owe a much more favorable long-term capital gains tax. That process is just like any other stock you’d buy.
I try to be an unemotional, data-dependent investor and the data is not on the side of holding too much or any of your employer stock. But if you must, I’d keep the total amount under 10% of your net worth.
I hear from people working at say Meta and it has been a fantastic investment. Why sell?
But what we don’t realize is that all along the way since the IPO, the share price of Meta reflected its true value. Because the all-knowing market, made up of some of the smartest, most informed participants that also include the company insiders, did all the number-crunching to arrive at the price you see quoted on your screens everyday. It is prudent to assume that all the good and the bad stuff about a business from the past and from far into the future is already reflected in the price.
The only reason the stock did what it did since then is because the business performed better than what the market was expecting. You can claim to know more than the market but I wouldn’t bet large sums on it. You mostly got lucky and luck does not equate skill.
Plus you have too much of your life tied to your employer anyway. Why overextend that exposure?
I know it is not easy to sell shares in some of the best companies around, especially if you happen to work for them. So you can use a trick. You design the most conservative of plans by moving up, say your retirement date or by increasing the amount of income you’d like to draw from your plan in retirement or a mix of the two. That would require you to come up with large dollar amounts to save each year to fund the gaps in your plan and you can use your vested RSU shares to fund them.
This way, you don’t have to divest out of your holdings all at once and instead, you trickle out mechanistically because you had to. No emotions, just as a means to meeting your plan goals.
Thank you for your time.
Cover image credit – Pew Nguyen