A Guide To Restricted Stock UnitsSubmitted by Castlebar Asset Management on May 24th, 2017
Restricted stock units (RSUs) are a common way for employers to offer stock based compensation to their employees. More employees are starting to see RSUs as part of their overall compensation. Receiving RSUs or stock linked compensation is a sign that things are going well in your career! Since they are an important part of your compensation and becoming a significant part of your net worth it is worth having a deeper look at the impact RSUs will have on your financial plan. Here is what you need to know.
What is an RSU?
Restricted stock units are a stock compensation vehicle that many publically traded companies use to pay a portion of your total compensation. A RSU is a grant valued in terms of company stock although your company’s stock is not issued at the grant date. When the RSUs vest your company will distribute shares (sometimes cash) equal to the value of the units.
What details do you need to know?
There are some key facts you will need to know about your RSUs. The most crucial fact is the vesting date. The vesting date is when your restricted stock units turn into shares you receive and own. This is also the value which you’ll be taxed. You should also know how many RSU you have and shares you have. Your vesting schedule is important to understand. Most companies use a schedule were your shares will vest over a period of time. A common one is your RSUs vest over a 4 year period and you receive 25% each year. Some companies have performance metrics they use. Having this information will be critical to creating a strategy on how to handle your RSUs.
Many people get confused on RSUs when you have to pay taxes and how they are taxed. Your restricted stock units are initially taxed as ordinary income. Taxes are based on the price of your company’s shares on the vest date. Don’t confuse the grant date and vest date. You should also have an understanding how your company handles withholding tax. Usually companies will allow you to tender your shares to cover withholding taxes. Tendering some of your shares means you will give some of your shares back to the company and they will sell them on your behalf to pay any of the withholding tax. If you are unsure how withholding taxes are handled, you will want to get more information on this to prevent any unwelcome surprises when you file your taxes.
If you plan on holding onto your shares after your RSU vests you will have to focus on capital gains or losses. Your capital gains will be based on the price when your RSU vested. The holding period will also start on your vesting date, so if you sell your shares before one year you’ll be subject to short term capital gains.
Taxes are an important component when planning for RSUs. Some people think that when their RSUs vest they only have to pay capital gains. This is incorrect and can be a costly error when tax season rolls around.
How Do RSUs Factor Into Your Financial Plan?
Your RSUs are part of your net worth and need to be factored in your financial goals and plan. Even before your units vest it is important to craft a strategy. My experience with RSU holders is they do three things with their units. Sell them at the vesting date, let them ride or some combination of the two. Each of these approaches could be appropriate for you based on your financial situation.
If you are inclined to sell all your vested units you should know your company’s policy on withholding taxes. Next, knowing what you plan to do with this windfall is extremely important. Common things we see clients use the proceeds for is to boost their rainy day fund, top off a 529 for their children, start preplanned home improvement project or pay down debt. This should not be used as new found money and squandered.
Holding onto your shares is also an option. If you are confident that there is upside appreciation potential for your company’s stock and you are comfortable financially then this could be an option for you. The more important part of the prior sentence is are your financially comfortable. If you are optimistic about your company’s future that is wonderful, but holding onto your stock while passing up the opportunity to diversify your holdings or contribute to other financial areas should supersede any hope of stock appreciation unless your financial life is in great shape.
In my experience, you likely will continue to receive RSUs as part of your compensation package. Your company will continue to issue you more RSUs and you will have more units vest each year if your units have staggered vesting. This is a great situation to be in, but it can have a few unwanted side effects. If your company’s stock moves higher it can often lead to having a concentrated holding in your company’s stock. This can be a positive, but can have a domino effect on your personal finances if things deteriorate at your company. Having a regular flow of RSUs will also increase your need for a solid financial plan.
Restricted stock units and other stock based compensation are going to be more common as you progress through your career. It is important to know a few key details, but more importantly how they fit into your financial planning strategy.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.