What Happens to Vested RSUs When You Leave a Company?
Navigate the critical steps for your vested RSUs after leaving a company. Understand their enduring value and how to manage them effectively.
Restricted Stock Units (RSUs) are a common component of employee compensation, particularly in technology and finance. An RSU represents a promise from an employer to grant shares of company stock, or a cash equivalent, on a future date if specific conditions are met. This equity compensation aligns employee interests with company performance and incentivizes long-term retention. Understanding RSU implications, especially after vesting, is important when transitioning from employment. Vesting is the process by which RSUs become fully earned and no longer subject to forfeiture.
Ownership of Vested Restricted Stock Units
Once vested, Restricted Stock Units become the employee’s personal property. The shares transform from a promise into actual company stock, giving the employee full control, irrespective of continued employment.
Companies typically deliver vested RSU shares directly into a brokerage account established for the employee, often through firms like Charles Schwab, Fidelity, or E-Trade. This transfer happens automatically once vesting conditions are met, and the employee holds these shares in their personal account.
A distinction exists between vested and unvested RSUs when an employee departs. Vested RSUs remain with the employee because ownership conditions have been satisfied. Conversely, unvested RSUs, still subject to future vesting conditions, are generally forfeited upon employment termination.
While vested RSUs are generally retained, employees should review their RSU grant agreements for unique clauses. Some private companies with “double-trigger” RSUs may require both time-based vesting and a liquidity event, like an initial public offering (IPO), for shares to become fully tradable. In these cases, time-vested RSUs might not be immediately liquid upon departure if the second trigger has not occurred. For public companies, however, vested shares are typically fully accessible and tradable upon departure.
Tax Treatment of Vested Restricted Stock Units
Tax treatment of Restricted Stock Units involves multiple stages, with implications for vested shares when an employee leaves. The initial taxable event for RSUs occurs at vesting, not when shares are sold. At this point, the fair market value (FMV) of vested shares is recognized as ordinary income, subject to federal income tax, state income tax (if applicable), and FICA taxes. Employers typically withhold a portion of shares or use a “sell-to-cover” strategy to satisfy these initial tax obligations.
When an employee sells vested RSU shares after leaving, any subsequent gain or loss is treated as a capital gain or loss. The cost basis for capital gains tax purposes is the shares’ fair market value on their vesting date. Only appreciation in value above the vesting date’s FMV is subject to capital gains tax. A capital loss may be realized if shares are sold below their vesting date FMV.
The holding period for capital gains tax purposes begins on the vesting date. If vested shares are sold within one year, any profit is a short-term capital gain, taxed at ordinary income rates. If held for more than one year, profit qualifies as a long-term capital gain. Long-term capital gains generally receive more favorable tax treatment, with rates typically lower than ordinary income rates (0%, 15%, or 20% depending on income and filing status).
It is important to accurately track the cost basis and holding period for each batch of vested RSUs to determine the correct capital gains tax liability. This information is usually provided by the brokerage firm holding the shares. Proper record-keeping helps ensure IRS compliance and can prevent overpayment of taxes.
Selling Vested Restricted Stock Units
Selling vested Restricted Stock Units after leaving a former employer primarily involves accessing the brokerage account where shares are held. Employees typically retain access to the brokerage platform previously used by their former company (e.g., Fidelity, Charles Schwab, or E-Trade) even after employment termination. Confirm continued access credentials and update any contact information associated with the account.
Once logged into the brokerage account, selling shares is similar to selling any other publicly traded stock. Individuals can initiate a “sell” order for the desired number of shares. Brokerage platforms offer options for market orders (selling at current market price) or limit orders (selling at a specified minimum price).
Transaction fees for selling stock vary among brokerage firms but are generally low, often $0 to $10 per online trade. These fees are typically deducted from sale proceeds. After execution, proceeds are usually available for withdrawal or transfer to a linked bank account within two to three business days, a standard settlement period.
While shares are entirely owned by the former employee, some company-specific administrative considerations might still exist, especially regarding trading windows. Some companies impose blackout periods where insiders, including former employees holding significant company stock, may be restricted from trading. Individuals should be aware of any such restrictions, though these are less common for general employees after departure. Ensuring personal details, like mailing addresses and bank account information, are current with the brokerage firm facilitates smooth transactions and fund receipt.