What to Do With Your Vested RSUs

Restricted Stock Units, commonly known as RSUs, are a form of equity compensation that companies often use to attract, retain, and motivate their employees. An RSU is essentially a promise from an employer to deliver shares of company stock, or their cash equivalent, to the employee at a future date. This delivery typically occurs after a predefined vesting period, during which the employee must remain with the company and meet certain conditions. This article will guide readers through the various financial considerations and actions to take once these RSUs vest, transforming them from a promise into tangible assets.

Understanding RSU Vesting and Immediate Taxation

Vesting refers to the point an employee gains full ownership of Restricted Stock Units. Before vesting, RSUs are a contingent right, but once vested, the shares become the employee’s property. This event triggers an immediate taxable event, as the fair market value of the vested RSUs on the vesting date is considered ordinary income.

This income is subject to various taxes, including federal income tax, Social Security tax, Medicare tax, and potentially state and local income taxes depending on the employee’s residence. The value of these vested shares is typically added to the employee’s gross wages and reported on their Form W-2 for the year of vesting. This means the RSU income is taxed at the employee’s marginal ordinary income tax rate, similar to their regular salary or bonus.

Companies commonly employ methods to handle the immediate tax liability incurred at vesting. One prevalent method is “sell-to-cover,” where a portion of the newly vested shares is automatically sold to cover the required tax withholdings. The employee then receives the remaining shares after these taxes have been paid.

Alternatively, some companies utilize “net settlement” or “share withholding,” which functions similarly to sell-to-cover. Under this approach, the company withholds a sufficient number of shares from the vested amount to satisfy the tax obligations. The employee is then issued only the net number of shares after the tax withholding has occurred, ensuring the immediate tax burden is addressed without requiring the employee to provide funds out-of-pocket.

Deciding to Sell or Hold Vested RSUs

After Restricted Stock Units vest and the immediate tax obligations are handled, employees face a primary decision: whether to sell the shares immediately or hold them as an investment. Selling vested shares promptly can be a prudent strategy for several reasons, including diversifying investment holdings and reducing exposure to a single company’s stock. This immediate sale allows individuals to convert their equity compensation into cash, which can then be used to meet short-term financial goals, such as paying down high-interest debt or funding a significant purchase. Selling immediately also mitigates market risk, ensuring the value of the RSU compensation is locked in at the vesting date’s price.

Conversely, some individuals choose to hold their vested RSUs, often driven by a belief in the company’s future growth and the potential for the stock price to appreciate further. Holding shares past the vesting date transforms them into a personal investment, subject to market fluctuations. For tax purposes, the cost basis of vested RSUs is their fair market value on the vesting date, which is the amount already taxed as ordinary income.

If the stock price increases after the vesting date and before the shares are sold, the difference between the sale price and the cost basis represents a capital gain. Conversely, if the stock price decreases, the difference results in a capital loss. The tax treatment of these capital gains or losses depends on the holding period after vesting. Shares sold within one year of the vesting date generate short-term capital gains or losses, which are taxed at the individual’s ordinary income tax rate.

Shares held for more than one year after vesting qualify for long-term capital gains or losses. Long-term capital gains are typically taxed at more favorable rates, which can be 0%, 15%, or 20% for most taxpayers, depending on their taxable income. Understanding this distinction is important for tax planning, as converting short-term gains to long-term gains can lead to tax savings. Selling shares immediately after vesting generally avoids additional capital gains or losses, as the sale price is typically very close to the cost basis, but it foregoes any potential future appreciation.

Integrating Vested RSUs into Your Financial Plan

Incorporating vested Restricted Stock Units into a comprehensive financial plan necessitates a strategic approach to portfolio diversification. Relying too heavily on a single company’s stock, particularly that of an employer, can introduce significant concentration risk within an investment portfolio. Selling vested RSUs provides an opportunity to spread investments across various asset classes, such as bonds, mutual funds, or exchange-traded funds, thereby reducing overall portfolio volatility. This diversification helps protect against potential downturns affecting a single company or industry.

Assessing one’s overall financial situation, including existing debt, emergency savings, and long-term investment goals, is a fundamental step in deciding how to manage RSU proceeds. For individuals with high-interest consumer debt, using the cash proceeds from selling RSUs to pay down balances can offer a guaranteed return equivalent to the interest rate on the debt, which is often higher than typical investment returns. Building or bolstering an emergency fund, typically three to six months of living expenses, is another prudent use of RSU proceeds to create a financial safety net.

Contributing RSU proceeds to retirement accounts, such as a 401(k) or an Individual Retirement Account (IRA), can be a highly effective strategy for long-term wealth accumulation, potentially leveraging tax advantages. For instance, in 2025, the contribution limit for a 401(k) is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 and over. Similarly, IRA contribution limits are $7,000, with a $1,000 catch-up contribution for those 50 and older. If retirement accounts are already fully funded, reinvesting the proceeds into a diversified taxable brokerage account aligned with one’s risk tolerance and investment horizon can support other financial objectives.

Managing capital gains and losses from the subsequent sale of vested shares is an important component of a broader tax strategy. It is essential to accurately track the cost basis of each RSU lot, which is the fair market value on its respective vesting date, to calculate gains or losses precisely. Tax-loss harvesting, a strategy involving selling investments at a loss to offset capital gains and potentially up to $3,000 of ordinary income annually, can be employed with vested shares that have declined in value since vesting. However, it is important to be aware of the wash-sale rule, which disallows a loss if one sells a security and repurchases a substantially identical one within 30 days before or after the sale.

Estate Planning and Charitable Giving with RSUs

Once Restricted Stock Units vest, they transform into company stock, becoming an integral part of an individual’s overall estate. Incorporating these shares into an estate plan involves careful consideration of how they will be distributed upon the owner’s passing. This can be achieved through a well-drafted will, specifying beneficiaries for the shares, or by placing them within a living trust, which can offer advantages like avoiding probate and providing more control over asset distribution. Designating beneficiaries directly on brokerage accounts holding these shares can also facilitate a smoother transfer outside of probate.

A significant tax advantage related to inherited shares is the “step-up in basis” rule. When an individual inherits stock, its cost basis is typically adjusted to its fair market value on the date of the decedent’s death. This means that if the heir sells the inherited shares shortly after receiving them, any capital gains tax is significantly reduced or even eliminated, as the gain is calculated only from the stepped-up basis rather than the original vesting date basis. This rule can provide substantial tax savings for beneficiaries, making inherited stock a valuable asset.

Vested shares can also be a powerful tool for charitable giving, offering potential tax advantages when donated directly to a qualified public charity. Donating appreciated stock that has been held for more than one year allows the donor to avoid paying capital gains tax on the appreciation. Furthermore, the donor may be eligible to claim a charitable deduction for the stock’s full fair market value on the date of the donation, subject to certain Adjusted Gross Income (AGI) limitations. For appreciated long-term capital gain property donated to a public charity, the deduction is generally limited to 30% of the donor’s AGI, though excess contributions can often be carried forward for up to five years. This strategy can be more tax-efficient than selling the stock, paying capital gains tax, and then donating the cash proceeds.