RSU (Restricted Stock Unit) Basics

Wealth Advisor

Video Transcript

Hi. I’m Jamison, a wealth advisor with EWA. And in this video we’re going to talk about strategies for maximizing restricted stock units if it’s part of your compensation. Restricted stock units can be a form of compensation, especially for executives or anybody that’s at a large corporation.

All it is is a way that employees are bonused, but they’re compensated in a form of company stock. So companies will use this as a way to examples like dangling a carrot out in front of you, tying you to the company.

These will vest every single year so that if you leave anything that is not vested, you end up losing and it ties you to staying at the company. Looking at this specific example, let’s assume that this employee is granted 1000 shares of company stock and the stock is trading at $100 per share.

Year one, this is granted, this really means nothing. They don’t own the stock yet, it’s not theirs until it vests. Generally is a three year vesting schedule. But sake of this, let’s assume it’s going to vest in year three.

So year three now, instead of trading at $100 a share, the stock is trading at $200 per share. Total stock that’s granted that they get that year is $200,000 the year that it vests. It’s important to note that that’s when it’s taxed, not when it’s granted.

So no tax consequence when it’s granted, but when it’s vest, that $200,000 is taxed. Just like any other bonus or compensation, it’s taxed at your marginal tax rate. So assuming you’re in the highest tax bracket, 37% on the whole 200,000, you would pay a total of $74,000 in taxes.

So option one, you could sell this immediately. You could, withhold some of the taxes from that sale, use some of the stock sale to pay the tax. Then you would net the difference of it. Option two would be if you want to hold it, you think that your company is going to continue to grow.

Once it’s vested. Now this is treated either as a short term capital gain or a long term capital gain if you were to hold it. So assume now you hold it for another year, you’re at year four and this $200 per share has now the stock is trading at $300 a share.

So the stock is worth $300,000. You’ve already paid taxes on $200,000 when it’s vested. So if you were to sell it in year before, you’ve held it a year after it’s vested. So it’s now taxed at long term capital gains treatment, you pay 23.8% only on the difference of 300,000 to 200,000.

So $100,000 of growth, you would pay $23,800 in taxes. However, if you were to sell it one day before. So three years and eleven months after it’s granted, same still trading at $300 a share, that’s taxed at your marginal tax rate, which in this example, if you’re the 37% tax bracket is $37,000, that’s about a $14,000 tax difference.

So if you are going to decide to hold it after it’s vested, important to have the thought process of holding it for a year for the long term capital gains treatment. So, a couple of things to be aware of when we’re planning around RSUs, as mentioned before, it’s taxed when vested, not when it’s granted.

Second thing would be if you leave before anything has vested, you lose all of the stock. So, same example if it’s granted, if you leave at year two, right before year three, it vests you lose all of this and none of this is part of your compensation.

So if you are planning on switching jobs, sometimes you can negotiate with the new employer to help buy back the stock that is unvested that you’ll be losing. Third thing to be aware of is generally with if you’re an executive, you have stock options, your benefits, your salary is all tied to the performance of one company.

We generally recommend to keep any individual equity under 10% of your overall balance sheet just so that you’re not too heavily allocated in one company, which you’d want to be aware of, because we’ve seen clients that have up to 90% of their net worth tied to restricted stock units or stock options.

If you have any specific questions on your situation, feel free to reach out and we’re happy to help you.

Show Full Transcript

Recommended Videos

Unlock 10 Key Stress Tests for Your Financial Plan
Physician Contract Renegotiation
US vs International Stocks
EWA Principle: Methods to Avoid Task Switching
3 Best Financial Decisions We Have Seen
Asset Location Explained