Restricted Stock Units (RSUs) are a form of equity compensation that can be provided by an employer. RSUs vest over time and allow an employee to receive shares of the company’s stock or, in some cases, a cash payout. RSUs can be a very beneficial form of compensation, but they require specific and careful tax planning. It is critical to understand the conditions of your RSUs and how they fit into your overall financial plan.
Understanding the Conditions of your RSUs
One important factor to consider when researching the conditions of your RSUs is the vesting schedule. Depending on your specific plan, your RSUs may vest after a specific number of years, or they may follow a graduated schedule allowing them to vest over multiple years. It is crucial to understand the specifics of your vesting schedule because it allows you to be fully prepared for the timing of a potential taxable event.
In certain situations, your RSUs may vest upon a specific performance goal being met. If this is the case, your RSUs may not vest over a specific timeline but rather immediately upon this event or target being hit. Vesting triggers such as performance objectives should be closely monitored to ensure that you are fully prepared for any tax implications.
You should also consider the options your employer provides for deferring your distribution of shares. In some cases, you may be allowed to continue to hold units until a later date, such as retirement. Depending on the specifics of your financial plan and tax situation, deferring the distribution of your shares may be advantageous. By postponing the distribution of your shares, you may be able to coordinate the timing of tax recognition with your overall plan.
Investment Considerations for RSUs
Have you considered what percentage of your overall investment portfolio is made up of your company’s stock? If your company stock makes up more than 10% of your overall investment portfolio you may want to consider additional diversification strategies specifically focused on tax efficiency. Maintaining too high of a concentration in your company’s stock can be particularly risky.
Downside protection is another investment strategy that might make sense while holding your company’s shares. Ensuring that you own investments with a negative correlation to your company’s stock, can offer a safeguard when it comes to the potential drop in value of your company stock.
Ordinary Income Tax Implications for RSUs at Vesting
It is valuable to understand the timing of taxable events when it comes to your RSUs. The receipt of an RSU does not create a taxable event. Income is recognized when the shares of your company stock are delivered, or in other words, when your shares vest. Upon the transfer or vesting of your shares, the fair market value of the shares is considered compensation taxed at your ordinary income tax rate.
Often it is beneficial to consider ways to reduce your income tax liability in the year that your RSUs vest. This can be accomplished by maximizing deductible savings into tax-advantaged accounts such as your 401(k), Traditional IRA or HSA. Careful planning of your deductible expenses can be another option to assist with lowering your tax liability. Finally, the consideration of a donor advised fund for charitable gifts may be another way to reduce your tax burden.
Check with your employer to determine if they offer the IRC §83(i) election. This election could allow you to defer the recognition of your income for up to five years after your RSUs vest.
Capital Gains Tax Considerations at Sale
When it comes time to consider selling your shares acquired through your RSU plan there are a few details to keep in mind. When you sell shares of your stock, you may have capital gains or losses depending on whether the sale price is higher or lower than your cost basis. Your cost basis equals the amount you paid for the stock (if any) plus the amount included as taxable income (see your Form W-2). If you held the shares for longer than one year, your gains or losses will be subject to long-term rates.
There are many issues to bear in mind when it comes to maximizing the benefit of your RSUs. For many investors, RSUs can be used to achieve future financial goals in coordination with income and savings strategies. We recommend using the checklist below to make sure you are fully prepared when it comes to the specifics of your RSUs. If you would like to discuss how your RSUs fit into your overall financial plan, please feel free to schedule a meeting here.
Investment advisory services offered by Pearl Planning, a DBA of Stephens Consulting LLC., an SEC registered investment adviser. Please remember that past performance may not be indicative of future results. Pearl Planning does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results.
Links are being provided for information purposes only. Pearl Planning is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Pearl Planning is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.
Pearl Planning cannot guarantee that the information herein is accurate, complete, or timely. Pearl Planning makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Pearl Planning, or any non-investment related content, made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s}, be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or a substitute for, personalized investment advice from Pearl Planning. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.
Diversification and asset allocation do not ensure a profit or guarantee against loss. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. Pearl Planning does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. We cannot guarantee that the information herein is accurate, complete, or timely. We make no warranties with regard to such information or results obtained by its use, and disclaim any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
If you are a Pearl Planning client, please remember to contact Pearl Planning, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, odd, or to modify any reasonable restrictions to our investment advisory services. Pearl Planning shall continue to rely on the accuracy of information that you have provided. Please Note: IF you are a Pearl Planning client, please advise us if you have not been receiving account statements (at Least quarterly} from the account custodian. A copy of Pearl Planning’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.pearlplan.com.