What to Do With Vested RSUs: Sell, Hold, or Diversify?

Restricted Stock Units (RSUs) are a common component of employee compensation. These units represent a promise from an employer to grant shares of company stock or their cash equivalent once specific conditions are met. Managing vested RSUs is an important financial consideration, as these decisions significantly impact an individual’s financial well-being and tax obligations.

Vesting and Initial Taxation

Restricted Stock Units (RSUs) are a form of equity compensation. The process by which conditions are met, and RSUs officially become owned by the employee, is known as vesting. Until vesting, the employee does not own the shares and cannot sell or transfer them.

Vesting schedules vary, with common types including time-based and performance-based vesting. Time-based vesting typically involves shares becoming available gradually over a set period, such as 25% each year over four years, sometimes with an initial “cliff” before regular vesting. Performance-based vesting requires achieving specific company or individual milestones.

Upon vesting, the fair market value (FMV) of the shares is considered ordinary income. This amount is subject to federal, state, and payroll taxes, like a regular salary or bonus. Employers commonly handle this initial tax obligation through a “sell-to-cover” method, where a portion of vested shares is automatically sold to cover required tax withholdings. Some companies may allow employees to pay the withholding tax with cash, preserving all vested shares. The value of the shares at vesting establishes their cost basis for future tax calculations.

Strategic Decisions for Vested Shares

Once Restricted Stock Units vest and initial tax implications are addressed, individuals face decisions regarding these shares. The primary choices include selling the shares immediately or holding onto them.

Selling vested shares immediately is a common strategy. This approach provides immediate liquidity, allowing access to cash for various financial needs, such as debt repayment, down payments, or funding other investments. Selling promptly also helps mitigate the risk of being overly concentrated in a single company’s stock, which can be volatile. If shares are sold right after vesting, there is typically little to no capital gain to be taxed, as the sale price is generally close to the vesting price. This strategy simplifies tax reporting and reduces exposure to potential stock price declines.

Conversely, holding onto vested shares is an option for those who believe in the company’s long-term growth potential. If the company’s stock price appreciates, holding shares can result in substantial long-term capital gains, often taxed at more favorable rates than ordinary income. Holding shares also allows individuals to receive any dividends the company may pay. However, holding company stock introduces concentration risk, tying wealth to the performance of one entity. The decision to hold or sell should be influenced by personal financial goals, the need for diversification, and individual risk tolerance.

Ongoing Tax Considerations

Managing Restricted Stock Units extends beyond initial vesting, as subsequent transactions also carry tax implications. Once RSUs vest and the initial ordinary income tax is paid, any future appreciation or depreciation of the shares is subject to capital gains or losses when sold.

The tax rate applied to capital gains depends on the holding period after vesting. If shares are sold within one year of their vesting date, any profit is considered a short-term capital gain and is taxed at ordinary income tax rates, ranging from 10% to 37% depending on taxable income. If shares are held for more than one year from the vesting date, any profit is classified as a long-term capital gain. Long-term capital gains generally benefit from lower tax rates, typically 0%, 15%, or 20%, based on income level and filing status.

Dividends received from held company stock are also subject to taxation. Dividends can be classified as either ordinary (nonqualified) or qualified. Ordinary dividends are taxed at an individual’s regular income tax rate. Qualified dividends are taxed at the lower long-term capital gains rates if certain holding period requirements are met. Accurate record-keeping of vesting dates, share quantities, and their fair market values at vesting is essential for proper tax reporting.

Incorporating RSUs into Your Financial Plan

Integrating Restricted Stock Units into a comprehensive financial plan involves considering their role beyond immediate vesting and taxation. A primary aspect is portfolio diversification. Holding a substantial portion of wealth in a single company’s stock, especially that of an employer, can expose an individual to significant concentration risk. Financial planning often suggests limiting exposure to any single stock to a small percentage, such as 10% to 30%, of an overall investment portfolio. Developing a systematic selling strategy, perhaps utilizing a Rule 10b5-1 trading plan, can help manage this risk and rebalance holdings over time.

The proceeds from vested RSUs can be strategically allocated to achieve various financial goals. This may include bolstering an emergency fund, making a down payment on a home, funding educational expenses, or accelerating contributions to retirement accounts like 401(k)s or IRAs. Utilizing tax-advantaged accounts for these investments can further optimize growth and reduce future tax liabilities.

RSUs also have implications for estate planning. Upon the death of the owner, appreciated shares typically receive a “step-up in basis” to their fair market value on the date of death. This can significantly reduce or eliminate capital gains taxes for heirs when they eventually sell the shares. Designating beneficiaries for brokerage accounts holding vested shares is important to ensure a smooth transfer of assets.

Charitable giving can also be a tax-efficient strategy, particularly for appreciated shares. Donating appreciated stock held for more than one year directly to a qualified charity can allow donors to avoid capital gains tax on the appreciation while potentially claiming a tax deduction for the fair market value of the gift. Seeking guidance from a qualified financial advisor is often beneficial to tailor strategies and optimize tax outcomes.