Upticks: Restricted Stock Units

By Jake Falcon on September 30, 2021

On this episode of Upticks, Jake explains Restricted Stock Units or RSUs. If you’re not familiar, it’s probably for one of two reasons – the first is that you’re retired or don’t have them available at your place of work. If you’re fortunate enough to have access to RSUs, this video is especially relevant for you.

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If you’re unfamiliar with restricted stock units (RSUs), it’s probably for one of two reasons. The first is that you’re retired or don’t have them available at your place of work. The second is you may have heard of them but don’t really understand them. If you’re fortunate enough to have access to RSUs, this blog is especially relevant for you.

RSUs are a form of compensation that publicly traded companies offer employees as a bonus or reward. It’s a great way for an employee to gain shares of their company’s stock.

Typically, there is a vesting schedule for these shares – you have to stay working at your employer for a certain amount of time before the shares legally become yours. You’re not taxed when you receive restricted stock units; taxes don’t come into play until the shares vest and become yours.

It’s especially great when companies start stacking RSUs on top of each other. For example, a company could give you 100 shares in 2021 that vest in 2024; 100 shares in 2022 that vest in 2025; and so on. This is great because you have a rolling amount of money to look forward to. And if your company’s stock is performing well, that makes this windfall all the more valuable.

I personally think RSUs are better for employees than stock options, which some employers offer. Hypothetically, if a company gives you a stock option and it’s trading at $50 a share, at the time of vesting, if the stock is trading at less than $50 a share, the stock option is worthless, and you don’t have access to any shares. This is often referred to as “underwater.”

Meanwhile, with an RSU, even if the stock is worth less when it vests compared to when it was awarded to you, you still get to keep the stock. Something is better than nothing.

Considerations to keep in mind

As I alluded to, it’s crucial to know the vesting schedule of your RSUs. This is important for tax planning purposes, because though you aren’t taxed when you receive RSUs, it is a taxable event when they vest and become legally yours. If you have a lot of shares becoming vested in any given year, you will want to work with your financial advisor and CPA to explore tax-smart strategies you can pursue. As far as how they’re taxed, RSUs are typically treated as ordinary income, not long term capital gains. While I’m not a CPA, at Falcon Wealth Advisors, we are happy to help our clients with tax planning.

It’s also important to think about what will happen to your invested shares should you leave your company. Is it something you can negotiate as part of an exit package if you know your employer is looking to trim staff? Or if you want to leave your employer to go work somewhere else, can you negotiate a signing bonus with that new company since you’re leaving a tangible reward at your soon-to-be previous employer? Of course, most people don’t want to work forever, so it’s possible you may simply have to leave some RSUs on the table when you retire.

One of the perks of being a client at Falcon Wealth Advisors is that we create a customized financial plan for all our clients. In this plan, we’re able to run different scenarios to see how RSUs and their vesting schedule can impact your overall plan.

Mergers and acquisitions, tax treatment

What happens to your RSUs if your company gets bought by another company? This varies between companies, but it’s something you’ll want to be aware of, especially if you suspect a merger or acquisition is in your company’s future.

As these shares vest, many companies will withhold a certain amount of shares for the IRS so that you’re not hit with a substantial tax bill. For example, if at the time of vesting you’re supposed to receive 100 shares, the company may keep 30 to cover taxes.

You’re vested – now what?

Once you’re vested in the RSUs and they’re yours, what should you do? This is a question we help clients with all the time. One option is to transfer the shares to an account with your financial advisor. And at Falcon Wealth Advisors, we have some advanced trading strategies (like covered calls) we can employ to help increase the benefits of your RSUs. Contact me if you want to learn more about these strategies, though I highly recommend you not pursue them unless you’re working with a credentialed financial advisor.

Other times we hold the shares for a target price and then exit. Some clients want to give the shares to a favorite charity or invest them in a donor advised fund, which we can help with. You can also give the shares to family members. Or you can sell them and further diversify your overall portfolio.

One less common option is to sell the shares and keep the cash they generate. But if you need to pay off high interest debt, this may be a practical idea.

RSUs are a terrific benefit for workers, but they do lead to some big decisions about what to do with them in the long term, and in regard to tax planning. If you have RSUs and would like guidance on how you can use them to enhance your financial plan, please contact me directly at Jake@falconwealthadvisors.com.

Clients choose to work with us to enhance their financial literacy and explain exactly what their financial plan means to them.

-Jake Falcon, CRPC®

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.