Autopilot can be a dangerous thing.
You may have heard the fact that if a pilot’s course is off by 1 degree traveling from San
Francisco to New York, she will end up 40 miles out in the Pacific Ocean.
In fact, a lot of what I do is check and recalibrate my clients’ autopilot settings and today I want
to talk about a setting that I have never seen correct prior to a review:
How to Manage Your RSUs.
What Is An RSU?
An RSU is a “restricted stock unit” which is a fancy way of saying that it is ownership in your
employer’s company. Many tech and other industry employees receive RSUs as part of their
These shares are awarded at a regular time – typically around your review – but vest over a
period of 3 or 4 years. Vesting means they aren’t really yours until that date is reached.
So, today’s awards that vest over four years will become yours in chunks of 25% each of the
next four years.
Think of them like a delayed “bonus” payment. On the day they are awarded, we don’t know
how much they will be worth because it depends on the stock price when they vest over the
next several years.
When Should I Sell?
Because this “bonus” payment comes in the form of stock, you actually have to decide when to
sell the stock and receive the cash.
The first step here is to determine how much of your assets are tied to the performance of your
company. In other words, what percentage of your assets is in company stock.
If it’s over 10%, you are in the gambling zone. Remember, your income is already coming from
your employer and now a large chunk of what you own is tied to them as well.
If you are ok gambling in this way, then so be it, but be sure you understand it can all turn to
vapor rather quickly.
Even if you are under 10%, I would suggest creating a plan to sell all of your vested shares to
further reduce your exposure. As mentioned, your income is tied to your company, and you
likely have a significant portion of your wealth in unvested shares as well.
Remember, diversification is one of the keys to long-term successful investing!
What’s the plan for selling?
Now that we’ve decided to sell some or all of our RSUs, we have to create a plan that considers
both the desire to reduce our exposure to the employer and minimizes the taxes we will pay.
We will apply this to both unvested shares as they vest and to older shares that vested in the
First, the shares that are currently vesting.
You are taxed on the full amount of RSUs on the day of vesting. The market value of the shares
on that day simply goes straight on your W-2 (and usually shows up on your next paystub).
It’s as if they gave you that amount in cash when, instead, they gave you stock.
Understanding this, let me ask you a question: if your company actually did give you cash
instead of stock on the vesting day, would you immediately run out and buy stock?
I’m guessing no, but by holding on to those shares your tax calculation is exactly as if you did!
In other words, at the moment shares vest, you are taxed on the full amount and any future tax
you pay when you eventually sell is based on the value on the date of vesting.
So, the best strategy is to immediately sell vesting shares. This is one instance when the tax
consequences become clear, the strategy becomes clear!
Second, for older holdings, the situation is a bit more complicated.
It’s still true that the tax status began on the date of vesting, but since we now have a gain or
loss from that date, we have to consider whether we will be taxed as short- or long-term capital
gains. This is determined by whether you have held the shares for at least a year after vesting.
And our tax burden could be high. If it is not, then we might consider simply selling all the
shares today to reduce our exposure!
But let’s look at the situation where the tax burden is significant.
Knowing the tax rates on the individual vested amounts, we can calculate the “tax cost” to
selling which is the amount of the tax divided by the current amount of the shares. Then, we
can rank them from the lowest percentage tax cost to the highest.
Now, we can look at the total tax cost and determine whether to take this “hit” today or over
the next few years.
If we decide to take it over the next few years, we should begin by selling the shares with the
lowest tax cost as a percentage. This will allow us to sell the most value for the lowest tax cost.
What Do I With The Cash?
RSU awards are no different than your salary. They are real compensation for the work you do
and just because the amount varies depending on the stock price should not devalue the effort
you put in to receive them.
I can prove that RSUs are part of your real compensation by asking you this: if your company
decided today that they would no longer offer RSUs and that all outstanding RSUs are void,
would you consider looking for another job?
I believe you would and the reason is…they just made a significant cut in your compensation!
So, now that we know RSU funds are a part of our regular compensation, why would we treat
them any differently than our paycheck?
So what does that mean, exactly? Well, we want to use these funds to support our lifestyle
(today and in the future) so we first make sure our Savings Target is being met.
Our Savings Target is a combination of our net cash needs over the next 5 years and any
additional Emergency Fund we feel is appropriate.
Once our Savings Target is met, any remaining funds go into our long-term Investment Plan.
In other words, they get transitioned into our regular Investment Portfolio.
What Gets In the Way?
There are two things that get in the way: inertia and gambling (though we don’t think of it that
The first, inertia, is simply that it takes effort to sell our RSUs. We have to keep track of the
vesting dates and we have to actually log in to some platform and sell them.
Company’s know this, which is why they set up the compensation system this way to begin with
– they’d rather you own a bunch of stock than be well-diversified!
The second is that we have “feelings” about our company’s stock.
We might believe it’s “too low” to sell right now so we hold it when it goes down.
Other times, we might feel it’s going to continue going up so we don’t want to sell now.
Read those two sentences again and answer me this: if both of those statements are true,
when would we ever sell? The answer is we wouldn’t.
It’s much better to create a plan to regularly sell our company stock to replenish our savings
and invest in our long-term needs that are based on time rather than emotions.
Here’s the Good News
You can make this easy for yourself.
Simply sell currently vesting RSUs as they vest and older RSUs in a tax-wise manner as described
above no matter what the stock price is actually doing.