Incorporating restricted stock and RSUs (restricted stock units) into your financial plan can get complicated. You will need to make plenty of decisions, such as how long you will hold your shares if you should sell them and put them into an alternative investment, or if you will use the money to meet one of your financial goals.
If your head is spinning, take heart. Here are 10 simple tips to help you maximize your restricted stock and RSUs.
Before We Start, How Do RSUs Work Again (And How Does This Differ From Restricted Stock)?
Restricted stock units (RSUs) are a form of equity compensation that companies grant to employees, in which the employees receive company shares upon completion of a specified vesting schedule. Think of them as a bonus – paid in stock shares instead of cash.
They differ from stock options in that employees do not have to purchase shares at a particular stock price; rather, they are given shares outright once they vest.
By contrast, “restricted stock” is actual stock granted on the award date, but it generally cannot be sold or transferred until it vests. Because you technically own restricted stock at grant (although with restrictions), it may be eligible for dividends and potentially an 83(b) election.
RSUs and restricted stock tie employee interests to the company’s future performance.
However, if you’re not sure how to fit either of these into your overall financial plan, the following rules should help guide you in determining an ideal approach.
Rule #1: Set Your Goals For Your RSU or Restricted Stock Strategy
In order to make quality decisions, you need to determine what you hope your stock will do for you.
When you eventually sell the shares, where do you want that money to go? How do your shares and their potential sale fit in relation to your other income, 401(k), and other savings?
When setting your objectives, keep both your timelines and your financial goals in mind. Whether you have restricted stock or RSUs, these awards can help fund key financial priorities, such as:
- Paying for education
- Providing a down payment on a home
- Growing retirement savings
- Diversifying existing investments
By outlining these aims at the outset, you’ll be able to make more informed choices about whether to hold, sell, or reinvest your shares.
You should also consider how RSUs fit into your broader compensation, especially if they represent a large portion of your earning potential. Be sure to keep them on your radar alongside salary, bonuses, and any other benefits you receive.
Rule #2: Know Your Vesting Schedule
It is important to know the dates your grants will vest since you will need to pay taxes on the resulting income.
If you want to avoid a hefty tax bill, it requires planning ahead. Your vesting schedule will depend on your company and the conditions they place on the stock, but it is usually time-based, requiring you to work at the company for a certain period before vesting can occur.
One helpful approach is to create a timeline or calendar event marking each vest date. By planning around these dates, you’ll have a clearer picture of how your income may spike during certain periods, potentially moving you into a higher tax bracket.
You might also want to see if your company offers any flexibility in your vesting; for instance, some companies allow for acceleration of vesting in certain circumstances, such as mergers, acquisitions, upon disability, or retirement eligibility.
Either way, thinking ahead helps with tax planning and allows you to anticipate your tax liability (the amount you’ll need to pay the government when tax time comes) long before you owe it.
📝 Note: Tax liability is a fancy word for the amount of money you owe in taxes to the government.
Rule #3: Understand the Consequences if You Were to Quit
If you leave your company before your restricted stock vests, you will usually forfeit the unvested grants.
There can be exceptions to this, so be sure to gather all the details from your company before you make the decision to leave.
If you have a significant amount of shares that haven’t vested, it might be worth it to stay with your company long enough to benefit from this reward for your service.
Evaluate the current and future value of your RSUs or restricted stock and think about whether staying at the company until a certain vest date could be financially advantageous. If you are planning a career change, weigh the opportunity cost of leaving unvested RSUs behind against the benefits of a new role.
Sometimes, negotiations with a new employer could include a ‘make-whole’ RSU or stock grant to compensate you for the value you are giving up.
Rule #4: Consider Taxes
Your taxable income will be the market value of the shares at vesting and is subject to federal income tax, Social Security, and Medicare, plus any state and local income tax.
📝 Note: Taxable income is the part of your income that the government uses to figure out how much tax you owe.
Your company may offer you a few ways to pay taxes at vesting, such as withholding shares for taxes, a sell-to-cover transaction for taxes of a portion of the shares, a salary deduction, or simply a check payment. A 22% standard supplement tax withholding, as a sale from shares vested is fairly common. The standard withholding rate often becomes 37% if your total income exceeds $1,000,000.
When you eventually sell the shares, you will pay capital gains tax on any appreciation the stock has from the vest date until the sale date.
To further minimize your overall tax liability, consider increasing contributions to tax-deferred accounts—such as 401(k)s, Health Savings Accounts (HSAs), or other qualified plans—during your vesting years. By carefully coordinating these strategies, you can maintain more control over your income and keep your total tax liability in check.
Rule #5: Look Into an 83(b) Election
With restricted stock (not RSUs), you have the option to make a Section 83(b) election with the IRS within 30 days of the grant date.
An 83(b) election allows you to pay taxes on the value of the stock at the grant date rather than the vesting date.
If you believe the stock price will be higher on the vesting date and you are confident you will meet vesting requirements, this can be a beneficial move for you.
Also, moving the time of taxation to the grant date starts the capital gains holding period earlier, which can make a difference at the eventual sale of the shares.
However, keep in mind that making an 83(b) election does involve certain risks: if the stock doesn’t appreciate or—worse—loses value, you might have paid more taxes upfront than necessary. Additionally, if you leave the company or fail to meet vesting requirements, you generally cannot get a refund on taxes already paid because the election is irrevocable once filed. It’s important to consult with a tax advisor or financial planner to confirm if an 83(b) election aligns with your overall financial goals and risk tolerance.
Rule #6: Tax Rates and Restricted Stock Units
Be sure to anticipate what restricted stock and RSUs will do to your tax rates when you vest.
The extra income could push your income into a higher tax bracket, raise your rate of capital gains tax, and trigger extra Medicare taxes, possibly costing you thousands of dollars. If you plan ahead, you can implement strategies that could keep you in the lower tax brackets.
When you hold restricted stock or RSUs, it’s important to understand their impact on both ordinary income and capital gains taxes.
Tax rates vary by state—some impose high income and capital gains taxes, while others charge little or none. Your location can significantly influence what you owe. Other factors, such as your total income, the length of time you have held the shares, and your filing status, also play a role.
Typically, the market value of your shares becomes taxable income when they vest, which may increase your federal and state tax burden. (Remember, if you made a Section 83(b) election for restricted stock, the income would have been taxed earlier.)
After vesting, any additional increase in the share price is usually treated as capital gains.
Selling shares within a year of vesting usually means paying short-term capital gains taxes at ordinary income tax rates (currently 10% to 37% federally).
Wait over a year, and you’ll generally qualify for long-term capital gains rates (currently 0% to 20% federally). Plus an additional 3.8% net investment income tax for those individuals with high income.
Please note: Tax laws and rates can change, and states may have unique rules that affect your final bill. To stay informed, it’s wise to keep track of any changes or work with a financial professional.
Rule #7: RSU Selling Strategy: Decide Whether to Hold or Sell
Whether or not you sell your shares at vesting will depend on multiple factors, such as tax planning, financial planning goals, and company restrictions.
- If you sell immediately, you can use the shares to pay for the taxes incurred at vesting.
- If you hold your shares, your capital gains tax will be affected when you sell in the future.
Your decision may be influenced by your cash needs, upcoming life events, and other financial planning factors, including diversification, dividends paid on your stock, and alternative investments.
If your company is publicly traded, there can be blackout dates that prevent you from trading and stock ownership guidelines that require you to keep a certain amount of stock. With private companies, there are probably restrictions in your grant or SEC rules that will impact when you can sell.
Rule #8: Remember Dividends
Even though you can’t transfer or sell restricted stock until it vests, the stock is still issued to you and in your name, which means you could receive dividends.
If you have unvested RSUs, this does not apply.
But when a company pays dividends on outstanding shares of stock, it can choose to pay dividend equivalents on RSUs. These may be deferred or accrued to additional units and then settled when the unit vests.
Rule #9: Don’t Let Company Stock Skew Your Portfolio
It’s a cliché, but when it comes to your portfolio, you don’t want to keep all of your eggs in one basket. You don’t want too much of your net worth tied up in your company stock, and since restricted stock and RSUs vest over time, it’s easy to miscalculate how much of your portfolio is reliant on the success of your company.
In order to avoid overconcentration, consider working with a CERTIFIED FINANCIAL PLANNER® to determine how much your holdings in company stock contribute to your overall net worth.
A financial advisor can help you tackle concentration risk by building a plan to gradually reduce your holdings in company stock.
Together, you might set up automatic sales when shares vest, look for opportunities to offset gains through tax strategies, or use hedging tools to manage volatility.
The proceeds can then be channeled into a well-diversified blend of broad-market funds, bonds, or alternative investments, reducing your reliance on a single stock’s performance. Ongoing reviews help make sure your approach stays in step with your goals, risk tolerance, and changes in the market.
With a more diversified approach, you won’t be betting your financial future on a single stock. And as life changes, regular check-ins will help you stay on track.
Rule #10: Rely on a Professional
Managing restricted stock, RSUs, and everything that comes with them can get complicated fast. From taxes to timing to investment decisions, there’s a lot to think about — and it’s easy to feel unsure about the best path forward.
That’s where we come in.
At Archer Investment Management, we help tech professionals navigate the ins and outs of equity compensation and build plans that align with their lives and goals.
If you have ESOs, restricted stock, or RSUs, don’t hesitate to reach out to us to help you maximize restricted stock units (RSUs) and incorporate them into your overall financial picture.
If you’re looking for clarity and a strategy that ties it all together and takes the guesswork out of managing your restricted stock, we’re here to help.
Click here to schedule a call and let’s talk.
Additional Reading For High-Earning Tech Professionals
If you enjoyed this article, you may also like these:
