What you need to know: RESTRICTED STOCK UNITS
Restricted Stock Units (RSUs) are additional compensation options offered at many publically traded companies. In this program, companies grant shares of their publically traded stock to their employees, over a set period of time.
RSUs are created to incentivize top performers to stay at their company as they progress through their career.
With income that is promised to the employee, there is a perceived loss of income (unvested shares) if someone were to leave before their shares were vested. And since many companies grant these yearly, employees gain more each year to vest according to the schedule.
Vesting Schedule:
There is a schedule that these shares vest over.
- for example, a common vesting schedule is quarterly over four years.
Vested shares are shares that the employee now owns and can sell whenever they prefer. Unvested shares are held by the company and will be transferred to the employee once the vesting schedule is met.
Taxes:
The restricted stock units are taxed at income on the date that they vest. This means that, while your income may appear to be within one tax-bracket, it may be higher than you expect.
- Do I need to save some for taxes? Maybe. But, often, companies will withhold some of your shares for taxes so you don’t have a tax bill you didn’t plan for come April 15th. Make sure to read your company’s plan documentation to be certain.
SO, WHAT SHOULD YOU DO?
You have the option to either diversify or hold onto the shares (if you have blackout periods, see blackout dates section below).
Option A: Sell at Vest
Because you already paid taxes on the shares at the vest price, selling at that time means that you won’t realize additional gains to be taxed as income. You also will be able to choose if you would like to either spend or invest the money as your risk-tolerance and financial objectives (planning for retirement, sabbatical, child’s education or a big purchase, etc.) dictate.
- There are also options to move some of the earnings into tax-advantaged accounts. Talk to a financial advisor* for options are specific to your situation.
Option B: Hold at Vest
If you do nothing, you are effectively choosing to invest in your company at the price your shares vest. From here on out, we will look at this as an investment that you select.
Because your cost-basis was pre-determined for you based on vest date, over the next year, you are strongly incentivized to hold the positions for a full calendar year avoid short-term taxation on any gains (@ your income rate).
Long-term capital gains (the difference between your cost basis and what you sell at) is taxed favorably.
Option C: Combination of Hold & Sell
The same methodology applies to this as the prior two options, however, I mention this because having too much influence from one holding in their portfolio (eg, >10%) can lead to swings above your risk tolerance or sub-par performance.
Picture yourself as a Cisco employee at the turn of the century thinking about retiring. You just watched the share price launch “to the moon”.
The price shot up from $11 per share to upwards of $60 in a matter of months. You’re patting yourself on the back for hanging on to your Cisco stock. You are planning for retiring in the lap of luxury- your child’s college tuition is paid for, your spouse has the home of their dreams and you can afford to do whatever hobby project you want.
And in March 2000 the .com bubble burst.
Two-thirds of your portfolio evaporated and your plans for the next few years evaporates with it. You can’t retire.
It takes nearly a decade to build back what you lost.
And more than 22 years later Cisco still has still not surpassed its all-time high ($80.06 on March 27, 2000).
Now- I will admit that this is not the story of each company affected by the .com bubble. But, with this in mind, off-loading some of the vested shares can help make your portfolio less susceptible to wide swings to your company’s stock price.
Blackout Dates:
If you have blackout dates, you are limited on what days you can and cannot sell your shares beyond your vest date. While this can be limiting, there is an option called a 10b5-1 Plan to allow you to sell through the blacked out periods.
To learn more about this, reach out to a financial advisor to determine if it is right for you.
*Please note that while I am a financial advisor specializing in working stock incentive options (like RSUs and 10b5-1 plans) for software engineers and executives, each plan is different and while this information is widely applicable, your plan may have variation and you should consult with a professional before making any irreversible changes.
Should you be interested in working together, please reach out for a free 15 min consultation to see what working together looks like and if we are a good fit with the contact form (https://www.raymondjames.com/charlottegalamb/contact-us).
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions expressed are those of Charlotte Galamb and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and investors may incur a profit or a loss. Past performance does not guarantee future results.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Shares acquired via an exercise of employee stock options are subject to resale restrictions. Restricted stock is nontransferable and must be traded in compliance with special Securities and Exchange Commission (SEC) regulations.
