RSUs, restricted stock units, are sometimes issued by your employer’s company as a form of a delayed bonus. Since it’s a paid bonus received as compensation in the form of stock, it’s up to you to sell the stock and receive the cash.
However, just like anything else income related, there are taxes involved.
RSUs and Taxes
Private companies are a little more complex than this, but if you work for a public company and you are given RSUs, here is how they work from a tax perspective:
- You are awarded RSUs, but they have not vested yet.
- After some time, you get to the vest date.
- On the vest date, the IRS says, “Aha! You just got a paycheck equal to the current dollar amount of your RSUs, and we’re going to tax you on it!”
By selling at least some of the shares, you are able to pay the taxes owed
Receiving RSUs and allowing them to vest is exactly the same as if you were to get a regular paycheck. The IRS taxes you when you get your paycheck, but instead of cash with the RSUs, you have received stock.
When the RSUs are issued, the value is unknown because it is based on the stock price as they vest in the future. On the vest date, you are taxed on the full amount of the RSUs. The market value is then reflected on your W2 and next wage statement as taxable income.
It’s as if you got your paycheck and then you rushed right out and bought company stock. I bet none of you have used a whole paycheck, right when you got it, to go out and buy stock in your company. But that is what you’re doing if you HOLD your vested RSUs. Furthermore, when you hold your RSU shares you increase the amount of risk you have in your company.
Why you should keep less than 10% of your investable cash in your company stock
As an employee, you more than likely have too much in your company stock. You’re at risk to changes in your company’s performance because you are exposed in terms of your income, career and company stock. If issues arise within your company putting your employment at risk, you could possibly face both a job loss and wealth loss (in the form of declining stock price) at the same time.
Stick to your financial plan
The key to avoiding too much exposure when investing is diversification. We want to be whittling down the company exposure and transitioning those funds into our long-term portfolio. To help control this risk, sell your RSUs as they vest and move the funds over under a long-term portfolio.
You can find out more about how to manage your RSUs here.
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