It always feels great when your efforts are recognized. The paychecks are coming in, maybe a cash bonus here and there, and things are looking good. What else can you ask for? For many employees, you may also be awarded restricted stock units (RSUs) as part of your total compensation package. While RSUs can be an attractive addition to your salary or cash bonus, this form of stock compensation is highly complex and can raise many questions.
Below, we’ll explain RSUs in more detail so you can make an informed decision about this type of stock as you move forward on your financial journey.
What are restricted stock units?
Restricted stock units (RSUs) are a type of stock compensation typically granted to employees of publicly traded or late-stage private companies.
A unit grant is a promise to deliver a specified number of company shares under certain conditions. However, rather than receiving his RSUs immediately on the grant date, he does not actually own his RSUs until the first vesting date.
When you think about RSUs, it’s like receiving a cash bonus. However, in exchange for cash deposited into your checking account, your employer gives you stock in the company.
RSU terminology details
Before we discuss RSUs in more detail, it’s probably best to understand some of the terms mentioned above, such as equity, grants, and vesting.
stock compensation
Equity compensation refers to the non-cash payments you receive as an employee that give you equity in the company through partial ownership of the business and its profits.
Gaining equity as an employee motivates you to do your best in your role. The more successful you are in your role, the better the company will do, and the better the company does, the more likely the stock will increase in value. And do you know what that means? If you choose to take advantage of these benefits, it will lead to more potential money.
Isn’t that great for everyone involved?
Subsidy
As part of your offer letter to your new employer, you may be granted or awarded a guaranteed number of shares that you will receive in the future if you remain with the company. There is no cost to you if you are granted restricted stock units.
Let’s say you work for XYZ public company and the following happens.
- Granted $100,000 in RSUs
- The average price of XYZ stock at the time of grant was $25
- Earned 4,000 RSUs ($100,000 / $25)
However, until they vest, you don’t have any ownership rights and can’t decide what to do with those RSUs.
Vesting schedule
I just got my RSUs, so of course I’m excited. But you just read the fine print about stock award vesting schedules. Now, what is this?
The vesting schedule determines when you can access and actually own your RSUs.
There are two common vesting schedules.
- cliff vesting: The entire RSU allocation is vested after a certain period of time, which may vary, or after certain goals or milestones are achieved.
- example: 1,000 RSUs awarded. 25% vests after one year and the remainder vests monthly (1/48 of the original grant). This is likely with a four-year vesting schedule and his one-year cliff.
- Gradual vesting: A certain percentage of the RSUs vest each year during a specified period.
- example: 2,000 RSUs awarded. A four-year graduated vesting schedule allows 500 shares, or 25%, to vest each year.
When RSUs vest, their dollar value is determined by the stock market price on that day. This means that stock prices fluctuate constantly, so the value of your shares may be uncertain until they actually vest.
Understand the tax implications of RSUs
In an ideal scenario, you can sell your RSUs after vesting, pocket the money, and move on without worrying about taxes. Well, we know that’s not the case! To clearly understand RSUs, you need to be aware of the tax implications.
Tax considerations when vesting RSUs
Once the RSUs vest and become yours at their current market value, you will automatically owe taxes at your ordinary income tax rate.
Fortunately, in most cases the company will immediately sell some of its shares to cover some of the taxes owed upon vesting. Because RSUs are considered additional income by the IRS (similar to a cash bonus), tax is typically withheld at the additional withholding rate. This typically looks like this:
- 22% federal withholding on supplemental income less than $1,000,000
- Supplemental income over $1,000,000 is subject to 37% federal withholding
- plus Social Security and Healthcare (FICA) and applicable local and state taxes.
Note: Some companies may allow higher withholding rates to cover higher taxes than can be handled with additional withholding. Simply put, if, for example, his RSU income and other earned income for the year reaches his 32% marginal tax bracket, a 22% withholding will not be enough.
As always, examples will help you further understand taxation upon vesting.
- On February 1, 2023, you were granted 10,000 RSUs at ABC Company.
- The 25%, or 2,500 units, vested on February 1, 2024, when ABC was trading at $28 per share.
- Your taxable income at ordinary income tax rates would be $70,000.
- Your employer withheld 22% ($15,400) in federal taxes and 7.65% ($5,355) in FICA taxes (in this example, you live in Florida, which has no income tax, so no additional withholding would occur). did not do it)
- Your employer will withhold 742 shares to cover taxes, and the remaining 1,758 shares will be deposited into your account to determine what you do next (hold or sell).
Tax considerations when selling RSUs
We calculated taxes when the RSUs vested, but the tax implications don’t stop there.
The cost basis of shares is the market price at the time of vesting. This is the same amount that was previously taxed as income (example above).
When you sell your stock, the gain or loss (the difference between the stock’s fair market value at vesting and the sale price) is reported on your taxes as a capital gain or loss. To qualify for lower long-term capital gains tax rates (up to 20%), you must hold the stock for at least one year after vesting. Otherwise, if you sell it early, it will be considered a short-term gain (or loss) and will be taxed at your ordinary income tax rate for that year.
On the other hand, if you sell your shares immediately after vesting, there will be no (or minimal) additional capital gains tax. In this situation, ordinary income taxes arise only when the RSUs vest.
Note: When selling RSUs, be aware of wash sale rules.
Addressing Frequently Asked Questions When Earning RSUs
Now that you have a better understanding of RSUs and their tax implications, you may want to consider some additional questions as you plan to incorporate stock compensation as part of your overall financial picture.
What strategies are possible for RSUs?
Once your RSUs vest, you have to make a somewhat difficult decision about whether to keep them or sell them. Let’s consider some options here, along with their potential advantages and disadvantages.
- Hold stocks in the hope that they will increase in value over time, and sell them later for long-term growth.
- Professional: Your company’s stock certainly continues to rise, and you made the best decision!
- con: Your company’s stock has fallen significantly since vesting, and you would have been better off selling it at that point to get the cash.
- Sell shares immediately after vesting
- Professional: Future decisions regarding the stock are not taken into account, you do not have to consider additional taxes, and you can use that cash to achieve your financial goals.
- con: You may be missing out on the potential for future appreciation of the RSUs in that particular lot. However, if he receives future vesting of his RSUs and his stock continues to grow, he will continue to receive that benefit through continued vesting.
- Combine both – sell some stocks and keep some stocks
- Professional: From a behavioral perspective, it’s not an all-or-nothing approach, and I don’t feel like I’ve failed either way.
- con:See above for information on holding all shares and selling all shares.
Note: A good rule of thumb is to keep no more than 10% of your total savings in any one investment, including company stocks. This could also drive many decisions regarding RSU strategy.
Do you have RSUs and work for a private company? What’s the difference?
If you work for a publicly traded company, you can generally sell your RSU shares as soon as you meet the vesting criteria and receive them, as long as you follow your company’s trading policies.
On the other hand, if you work for a private company and your RSUs are vested, you may be unable to sell the stock for the cash needed to pay the tax, even though you owe the tax. There is a gender.
However, this situation can be avoided for the following reasons: double trigger clause This is often implemented in private company stock agreements. In this case, you won’t have full control over the RSUs and no taxes will be due until both occur.
- The vesting date will arrive and
- Your company has experienced some kind of liquidity event, such as an IPO or acquisition.
What happens if I leave my company with RSUs?
Once your RSUs vest, the shares remain yours even if you leave the company.
However, if you retire or are terminated from your position, you will forfeit any unvested RSUs.
If you work for a privately held company and leave your company before a liquidity event (such as an IPO), you may be able to keep the shares that vested before you left.
In any case, you should review and confirm your equity documents and contracts before making a decision.
Incorporate RSUs within NewRetirement Planner
Although it is not possible to predict the future of a company’s stock and therefore the value of RSUs, it may be helpful to include RSUs conservatively as part of your overall financial picture.
NewRetirement Planner allows you to do just that. To incorporate RSUs into your plan, follow these steps:
- step 1:[マイ プラン]>[収入]>[仕事]Go to and add a job. Enter the gross income received as an RSU award (usually his FMV value on the stock vesting date) and select the same starting and ending ages.
- Step 2: Model the stock account your RSUs use by adding contributions for the value you calculated for your RSUs to an after-tax account with capital gains tax treatment.
- Step 3: If you want to record capital gains from the sale of the stock at a later date, on the day you plan to sell the stock,[マネー フロー]>[振替]Enter the.
See below for more information. NewRetirement Help Center.
After all, restricted stock units serve as a great incentive to continue working hard at a company and participate in its future growth. Now that you have the knowledge to effectively navigate RSU, it’s time to start planning.
