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Understanding Restricted Stock Units (RSUs): Building Wealth and Financial Flexibility

Restricted Stock Units, or RSUs, are a powerful type of stock compensation, often used by companies to reward and retain talent by offering employees a stake in the company’s success. At Truly Aligned, we believe that RSUs can be more than just a reward for a job well done—they’re a meaningful opportunity to build wealth and achieve your family’s financial goals.

In this post, we’ll break down the essentials of RSUs, how they work, the tax implications, and strategies for using RSUs in your financial plan. By the end, you’ll be equipped with the knowledge to make the most of your RSUs and see how they fit into a broader wealth strategy.

What Are Restricted Stock Units (RSUs)?


Restricted Stock Units (RSUs) are company shares granted to employees as part of their compensation. Unlike other types of stock compensation, such as stock options, RSUs are issued as actual shares that employees own outright once they vest. However, there are conditions: RSUs come with a vesting period, which is the period you must work for the company before you fully own the shares.

Example:
Let’s say your company gives you 1,000 RSUs that will vest over four years, with a “cliff” after one year. After completing your first year, you’ll receive your first batch of 250 shares. From then on, you’ll receive another 250 shares each year over the next three years, as long as you’re still with the company.

How RSUs Work


Vesting Schedule

A vesting schedule is a timetable set by the company, determining when you’ll earn full ownership of your RSUs. Companies use vesting schedules as a way to retain employees for the long term. Vesting schedules can vary, but a typical example is four-year vesting with a one-year cliff, as shown in our example.

Types of Vesting:

  1. Cliff Vesting: A “cliff” means that none of the RSUs vest until a certain period, often one year. After this initial period, a portion of the RSUs vests all at once.
  2. Graded Vesting: With graded vesting, a portion of the RSUs vests gradually over time, often monthly or quarterly. For example, after the cliff year, a company may vest the RSUs monthly for the remainder of the vesting period.

Truly Aligned Insight:
Vesting schedules are an essential consideration for long-term planning. Understanding how and when your RSUs vest can help you align your income and personal goals with your company’s structure, allowing you to plan for future milestones or investments.

Value of RSUs at Vesting

RSUs hold no inherent value until they vest. Once they vest, their value is equivalent to the stock’s fair market value at that time. Upon vesting, you own the shares and can choose to hold, sell, or do a combination of both.

Example:
If you have 250 RSUs vesting today and the stock price is $50 per share, your vested RSUs are worth $12,500 (250 shares * $50). This amount is now yours, but you must consider taxes, which we’ll discuss next..

Tax Implications of RSUs


Taxes are one of the most important aspects to understand with RSUs. When RSUs vest, they are taxed as ordinary income. The IRS treats the market value of the shares at the time of vesting as income, even if you don’t sell the shares immediately. Let’s break down what this means in more detail.

Tax at Vesting

The fair market value of RSUs at vesting is added to your taxable income, which means it’s subject to federal income tax, state income tax, and payroll taxes (Social Security and Medicare).

Example:
Let’s say 250 RSUs vest for you today, and each share is worth $50. That’s $12,500 of income added to your annual salary. If you’re in the 24% federal tax bracket, the federal tax on this income could be around $3,000. State income taxes, if applicable, would add to this amount.

Automatic Withholding:
To cover your tax liability, many companies offer a “sell to cover” option, allowing you to withhold a portion of your vested shares. For example, if 250 shares vest, you might sell 75 shares to cover the taxes and receive the remaining 175 shares.

Taxes When You Sell

If you sell your RSUs immediately after they vest, there are no further taxes beyond those at vesting. However, if you hold onto the shares and sell them later, you may be subject to capital gains tax on any increase in value after the vesting date.

  • Short-Term Capital Gains: If you sell within a year of vesting, any gains are taxed as short-term capital gains (usually at your ordinary income tax rate).
  • Long-Term Capital Gains: If you hold the shares for more than a year after vesting, gains are taxed at the more favorable long-term capital gains rate.

Example:
If you hold your vested shares and the stock price rises from $50 to $70 over the next year, you would have a gain of $20 per share. Selling after one year would qualify for long-term capital gains tax, which could reduce your tax liability.

Truly Aligned Insight:
At Truly Aligned, we encourage proactive tax planning to optimize the value of RSUs. Whether you choose to sell right away or hold for potential growth, understanding the tax implications can help you make a decision aligned with your financial goals.

Should You Hold or Sell Your RSUs?


Deciding whether to hold or sell your RSUs depends on your personal financial goals, risk tolerance, and belief in the company’s future.

Reasons to Sell Immediately

  1. Reduce Risk: Holding a large amount of company stock can lead to over-concentration risk, where too much of your wealth—and income—are tied to one employer. Selling some shares upon vesting can help diversify your investments and reduce the financial impact if anything changes with your company.
  2. Meet Immediate Financial Goals: If you have near-term financial goals, such as buying a home or funding your child’s education, selling RSUs can provide liquidity.

Reasons to Hold Your RSUs

  1. Believe in the Company’s Growth: If you’re confident in the company’s long-term growth, holding shares could mean greater gains.
  2. Long-Term Financial Goals: If you have flexibility in your financial timeline, holding RSUs can contribute to long-term growth, especially if you can take advantage of the lower long-term capital gains tax.

Example:
If you need funds for a down payment, selling your vested RSUs immediately might be a wise choice. However, if you’re focused on retirement and have other income sources, holding the shares for a year to benefit from potential appreciation and long-term capital gains rates could make sense.

Truly Aligned Insight:
We view RSUs as both an immediate asset and a future investment opportunity. Balancing when to hold or sell depends on a combination of market outlook, personal financial goals, and risk tolerance. We advocate for a diversified strategy that aligns with both present and future financial needs.

Frequently Asked Questions About RSUs


What happens to my RSUs if I leave the company?

Typically, any unvested RSUs are forfeited when you leave. However, vested shares are yours to keep. Some companies have specific rules for departing employees, so it’s essential to check with your HR or benefits team.

Are RSUs the same as stock options?

No, RSUs and stock options are different. RSUs are shares that vest over time, while stock options are the right to purchase shares at a set price. RSUs have a straightforward value upon vesting, whereas stock options only have value if the stock price exceeds the exercise price.

Can RSUs be part of a retirement strategy?

Absolutely. By integrating RSUs into a broader wealth strategy, they can become a valuable component of your retirement plan. The key is to treat RSUs as part of a balanced portfolio, with diversification and tax planning.

Truly Aligned’s Approach to RSUs


At Truly Aligned, we see RSUs as more than just compensation; they’re a way to align your financial future with your career growth. By carefully managing RSUs within a larger financial plan, you can use them to achieve meaningful goals, reduce financial risk, and cultivate a purposeful life.

With RSUs, timing, tax strategy, and clear financial goals can make all the difference. Whether you’re planning to hold for growth, sell for liquidity, or simply need guidance on tax implications, Truly Aligned can help you make decisions that support a joyful, empowered, and aligned financial journey.

Want to learn more about other types of stock compensation? Read Truly Align’s Navigating Stock Compensation: A Comprehensive Guide to ESPPs, ISOs, RSUs, and NSOs.

 

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