How to Manage Your RSUs and Avoid Costly Mistakes
Key Takeaways
- RSUs are a form of compensation and should be treated like income
- Selling shares at vesting can help reduce company concentration risk
- Older RSUs require tax-aware selling decisions
- A clear plan helps remove emotion and improve long-term outcomes
The Dangers of Running on Autopilot
Running on autopilot can be dangerous.
If a pilot’s course is off by just one degree traveling from San Francisco to New York, they will miss their destination. The same is true for your finances. Without regular adjustments, you can drift away from your long-term goals.
Understanding RSUs
RSUs, or restricted stock units, are a form of compensation that gives you ownership in your employer’s company.
Many tech professionals receive RSUs as part of their pay package.
These shares are typically awarded around your review period but vest over three to four years. Vesting means you do not fully own the shares until the vesting date is reached.
For example:
- Today’s awards vest over four years.
- You will receive 25% each year for the next four years.
- If you leave before the four years are up, you forfeit the remaining awards.
Think of RSUs as a delayed bonus payment. On the day they are awarded, you don’t know how much they will be worth because it depends on the stock price when they vest.
When Should You Sell RSUs?
Because RSUs are paid in stock, you need to decide when to convert them into cash.
Determine Your Company Exposure
Start by understanding how much of your financial life depends on your employer.
Ask yourself:
- What percentage of your net worth is tied to company stock?
- How much of your future income already depends on the company?
If more than 10% of your net worth is tied to company stock, you may be taking on more risk than intended.
Diversification helps reduce that risk over time.
Create a Selling Plan
Even if your company stock exposure is below 10%, it is still helpful to create a plan for selling vested shares over time.
Having a plan helps reduce emotional decision-making and keeps your portfolio aligned with your long-term goals.
The Plan for Selling RSUs
After deciding to sell some or all of your RSUs, create a process that helps reduce concentration risk while also managing taxes thoughtfully.
1. Currently Vesting Shares
The full market value of RSUs on the vesting date is taxed as ordinary income and reported on your W-2.
It is essentially the same as receiving cash compensation.
Ask yourself:
If your company paid you this amount in cash instead of stock, would you immediately buy company shares with it?
For many investors, selling shares at vesting is a simple way to reduce concentration risk.
2. Previously Vested Shares
Older vested shares are more complicated because they may now have gains or losses attached to them.
Your tax treatment depends on:
- How long you have held the shares since vesting
- Whether the gains qualify as short-term or long-term capital gains
If you have held shares for more than one year after vesting, you may qualify for lower long-term capital gains tax rates.
One approach is to estimate the tax cost of selling different groups of shares, then prioritize selling the shares with the lowest tax impact first.
Once you understand the tax cost, you can decide whether to spread sales over several years or take the tax impact upfront.
Handling the Cash
RSU compensation should be treated the same way as salary or bonuses.
Once you convert RSUs into cash, give that money a clear job.
Start by funding your short-term needs and savings goals.
Your Savings Target should include:
- Emergency funds
- Expected cash needs over the next five years
Once those goals are covered, invest the remaining funds into your long-term portfolio.
Overcoming the Biggest Obstacles
Two things often stop people from selling RSUs: inertia and emotional attachment.
Inertia
Selling RSUs requires effort.
You must monitor vesting dates, log into your stock platform, and actively decide what to do. It is often easier to do nothing.
Emotional Attachment
Many people become emotionally connected to their company stock.
If the stock drops, you may think it is “too low” to sell. If it rises, you may believe it will continue climbing.
This mindset can make it difficult to ever sell shares.
A written plan helps remove emotion from the decision.
Is Managing RSUs Really This Simple?
In many ways, yes.
The difficult part is not understanding the strategy. The difficult part is managing the emotional connection to the stock.
Once you commit to a plan, the process becomes much easier:
- Sell newly vested RSUs according to your plan
- Manage older shares using a tax-aware strategy
- Reinvest according to your broader financial goals
To learn more about RSU management and how to recalibrate your financial autopilot settings, click below to schedule your free consultation.
To share your comments, send me a direct email at Joe@BestFinLife.com.
Or if you are ready to improve your financial life, schedule a complimentary virtual conversation here.
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