Retirement

Making the Restricted Stock Unit Experience: Terms, Taxes and More!

Getting recognized for your hard work is always a great feeling! You have your wages coming in, maybe a cash bonus here and there, and things are looking good. What more could you ask for? However, for many employees out there, you may also have been awarded restricted stock units, or RSUs, as part of your total compensation. RSUs can be a fun addition to your salary and bonus cash, but this type of equity compensation can lead to more questions than not as it is quite complex.

Below, we’ll explore RSUs in more detail to help you make informed decisions about this type of equity as you navigate your financial journey ahead.

What is a Restricted Stock Unit?

Restricted Stock Units (RSUs) are a form of equity compensation typically given to employees in public or late-stage companies.

A grant of units represents the promise of a certain number of shares of the company under certain conditions. However, instead of getting those RSUs immediately on your grant date, you don’t actually own them until your first grant date.

The easiest way to think of RSUs is like you get a cash bonus. However, instead of getting cash in your checking account, your employer gives you company stock.

Violation of RSU Terms

Before we dive into RSUs, it’s probably best to first understand some of those terms mentioned above, such as equity, grants and funds.

Equity compensation

Equity compensation refers to a non-cash payment received as an employee that gives you a share of your company with partial ownership of the business and its profits.

By finding equity as an employee, you are encouraged to do your best in your role. The more successful you are in your role, the better your company will be, and the better your company, the more likely your stock will go up in value. And you know what that means? It translates into more potential income if you choose to monetize those benefits.

Sounds pretty good to all involved, right?

Grants

As part of your offer letter with the new employer, you may be given, or awarded, a guaranteed number of shares that you will receive in the future if you stay with your 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:

  • He was awarded $100,000 in RSUs
  • The average price of XYZ stock at the time of the grant was $25
  • Awarded 4,000 RSUs ($100,000 / $25)

However, you will not have ownership rights or the ability to decide what to do with those RSUs until they vest.

Purchase schedule

You’ve just been awarded RSUs and you’re excited, of course! But, you just read the fine print on your equity award about the purchase schedule. Now, what is this?

Your purchase schedule determines when you access and own your RSUs.

There are two common marketing strategies:

  • Cliff vesting: all shares of RSUs vest after a certain period, which may vary, or when a certain goal or milestone is reached
    • For example: Granted 1,000 RSUs. 25 percent vests after one year and the remainder vests monthly (1/48th of the original grant). This will be considered a 4-year purchase schedule with a 1-year grace period.
  • Limited purchases: a certain percentage of your RSUs will vest each year at a specified time
    • For example: Granted 2,000 RSUs. In a 4-year stock award plan, 500 shares, or 25%, may vest each year.

When your RSUs vest, their dollar value depends on the stock market price that day. This means that the value of your shares can be guaranteed until it is already there, as stock prices fluctuate constantly.

Understanding the Tax Consequences of RSUs

In the best case, you can simply sell your RSUs when they vest, cash out, and move on without worrying about taxes. Well, you know it isn’t! To understand your RSUs clearly, you need to know the tax implications.

Tax Considerations in RSU Grants

When your RSUs vest and become yours at that current market price, you automatically owe taxes on your ordinary income, or ordinary income, tax rates.

The good news is that, in most cases, your company will quickly sell some of your shares to pay part of the tax owed on the purchase. Since RSUs are considered additional income by the IRS (like a cash bonus), the withholding is generally prorated. This usually looks like this:

  • 22% of federal income tax on excess income under $1,000,000
  • 37% federal deduction for additional income over $1,000,000
  • Plus social security and medicare (FICA), and applicable local and state taxes

BEWARE: Some companies may allow you to increase your withholding rate to pay more tax than the additional withholding can handle. Simply put, if your RSU income and other annual earnings push you into the 32% tax bracket, for example, a 22% withholding would not be enough.

As always, an example will help us understand the tax on giving further:

  • Granted 10,000 RSUs from ABC Company on 02/01/2023
  • 25%, or 2,500 units, vested on 02/01/2024 when ABC was trading at $28/share
  • You now have $70,000 of taxable income at ordinary income tax rates
  • Your employer withheld 22% ($15,400) of federal taxes and 7.65% ($5,355) of FICA taxes (no additional withholding occurred since you live in Florida, a tax-free state, in this example)
  • Your employer will withhold 742 shares to pay taxes and the remaining 1,758 shares will be deposited into your account so you can decide what to do next (holding vs selling)

Tax considerations when selling RSUs

You’ve accounted for taxes when your RSUs sell, but the tax implications don’t stop there.

Your cost basis in the shares will be their market value at the time of payment – the same amount that was taxed as income (in the example above).

If you sell your shares, any gain or loss (the difference between the fair market value of your stock at the time of vesting and your selling price) is reported on your taxes as a capital gain or loss. To get the lowest long-term capital gains tax rate (up to 20%), you need to hold the shares for at least a year after the purchase. Otherwise, if it is sold earlier, it is treated as a temporary gain (or loss) and taxed at your ordinary income rate for that year.

Meanwhile, if you sell your shares immediately with a vest, there is no (or little) additional capital gains tax. In this case, you will only be subject to ordinary income tax when your RSUs are issued.

BEWARE: Be aware of the wash auction rule when selling your RSUs.

Addressing Common Questions When Awarded RSUs

With a better understanding of RSUs and their tax implications, you may want to think about some additional questions as you plan to integrate your equity compensation as part of your overall financial picture.

What are the possible strategies for RSUs?

If your RSUs vest, you now have to make the difficult decision of whether to hold on to them or sell them. Let’s think about some of your options here and the potential advantages and disadvantages of each:

  • Hold on to stocks with the expectation that their value will increase over time and sell over time for long-term growth
    • Pro: Your company’s stock continues to grow and you have made the best decision!
    • Con: Your company’s stock has fallen significantly since the vesting period and you would be better off selling and taking the cash at that time.
  • Sell ​​stocks quickly with a vest
    • Pro: You make future decisions about the stock, there are no additional taxes to consider, and you can use that money to put toward your financial goals.
    • Con: You may have missed out on a better future opportunity for that number of RSUs. However, if you receive future RSU vests, and your stock continues to grow, you will be able to earn those benefits by continuing to contribute money.
  • Do a combination of both – sell some shares and keep some shares
    • Pro: From an ethical point of view, you don’t feel like you’re missing out on anything compared to an all-or-nothing approach.
    • Con: See above for both hold on all shares and sell all shares.

BEWARE: A good rule of thumb is to not have more than 10% of your total savings in any one investment, including your company’s stock. This may also influence many of your decisions regarding RSU strategies.

Do you own RSUs and work for a private company? How are things different?

If you work for a public company, you usually have the option to sell RSU shares immediately after meeting the vesting conditions, as long as you comply with your company’s trading policy.

Meanwhile, if you work for a private company and your RSU vest, you may owe taxes but you can sell the shares for the money you’ll need to pay taxes.

However, this situation can be avoided due to a double trigger provision that is often implemented within equity agreements in the private sector. If so, you won’t have full control over your RSUs and taxes won’t become available until both:

  1. Shopping day is coming AND
  2. Your company is experiencing some type of liquidity event, such as an IPO or acquisition

What happens if you leave your company with the RSUs?

If your RSUs vest, those shares are yours to keep even if you leave the company.

However, if you resign or are terminated from your position, you lose any unvested RSUs.

If you work in a private company and you quit before any financial event (like an IPO), you can probably keep the shares you had before your departure.

Either way, you should review your equity documents and agreements to confirm before making any decisions.

Entering Your RSUs Within NewRetirement Planner

While you can’t predict the future of your company’s stock and the value of your RSUs, it can still be helpful to include them safely as part of your overall financial picture.

You can do that with NewRetirement Planner. Follow these steps to enter your RSUs into your plan:

  • STEP 1: Navigate to My Plan > Income > Work and add a job. Enter the total income received as RSU compensation (usually the FMV value on the date the shares are issued) and select the same starting and maturity years.
  • STEP 2: Create an example of a stock account that your RSUs go to by adding a contribution of the value of the RSUs to an after-tax Capital Gains account.
  • STEP 3: If you want to account for the capital gain from the sale of the stock later, enter Cash Flow > Transfer on the date you plan to sell the stock.

For more information, see the NewRetirement Help Center.

Ultimately, a Restricted Stock Unit serves as a great incentive to continue working hard for your company and participate in any future growth. Now that you know how to navigate RSUs successfully, happy planning!


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