Restricted stock units (RSUs) are one of the most common forms of equity compensation — and for good reason. Unlike stock options, RSUs don’t require a purchase or buy-in from the employee.
While RSUs are rarely guaranteed (they tend to come with vesting and payment terms that more closely align with bonus compensation than traditional income), they can still be an important part of your financial plan.
Specifically, RSUs require a certain amount of management and strategy to ensure you don’t face a tax surprise or add risk to your overall portfolio.
What are restricted stock units?
Restricted stock units are shares of stock issued by a company to employees under an umbrella of restrictions or conditions. Typically, RSUs are either single trigger or double trigger.
- Single-trigger RSUs typically rely on a time-based vesting schedule, meaning your RSUs vest based on how long you’ve been with the company. They may follow a graded vesting schedule, meaning you get shares at periodic intervals, or a cliff vesting schedule, where you get them all at once.
- Double-trigger RSUs include additional conditions, like company performance milestones or liquidity events (such as an acquisition).
For instance, Exxon Mobil’s RSUs typically follow a double-trigger vesting schedule, where employees must have worked at the company for 15 years when they turn 55 for their shares to vest.
RSUs and your compensation package
Stock compensation is often associated with high-level pay packages or Silicon Valley startups, but an increasing number of companies are using them as part of broader compensation packages. A recent Deloitte survey showed more than 80% of companies offering some type of restricted stock as part of their compensation.
While RSUs can and should be viewed as part of a total compensation package, it’s important to remember that they aren’t guaranteed and should be viewed as a bonus. The fact that they are paid as a bonus creates additional considerations from a tax perspective.
Tax considerations for RSUs
When your shares vest, their total value (multiply the number of shares by the stock price on the day the shares are vested) is counted as taxable income, regardless of whether you hold the shares or sell them.
Many companies will withhold or sell shares at vesting to help cover your tax liability. However, the guidelines from both the IRS and state governments instruct companies to withhold tax from RSUs at a lower rate than ordinary income. It’s common for companies to withhold too little, leaving employees with a surprise tax bill later on. This is especially true if the value of any new shares is large enough to influence your tax rate overall.
Income tax isn’t the only consideration. If you hold your shares after vesting, you may need to pay capital gains tax when you eventually sell the shares, depending on performance. The rate at which any capital gains are taxed will depend on how long you held the shares after vesting. (It’s worth noting that if the shares decrease in value, you may also be able to claim a capital loss to help offset capital gains in other areas.)
The multiple factors at play regarding taxes and RSUs are some of the many reasons Bogart Wealth includes tax strategy as part of our overall approach to financial planning.
Diversification
As a general rule, we typically avoid highly concentrated stock positions in client portfolios. If vested RSUs create a situation where more than 10% of your portfolio is allocated to a single company stock, you may want to consider diversification.
It’s possible to sell your shares immediately upon vesting and reinvest that money. We can work with you to ensure that money is allocated across investments that make the most sense for your personal portfolio and overall financial plan.
Of course, you may want to hold on to some or all of your employee stock, particularly if you believe in your work and the firm’s future growth. They key is to be strategic about how that allocation fits in with the rest of your portfolio.
If you have questions about how RSUs work at your employer, how to plan for the tax liability, or what to do with vested shares, Bogart Wealth may be able to help. Our team specializes in compensation packages at a number of high-profile companies, including Exxon. Contact us to discuss.
