When Can You Cash Out Your RSUs?

Understanding Restricted Stock Units and Vesting

Restricted Stock Units (RSUs) are a promise from an employer to grant an employee shares of the company’s stock at a future date, usually after certain conditions are met. Unlike stock options, RSUs commit to delivering actual shares without requiring purchase. These units are restricted until a vesting schedule and other conditions are satisfied, meaning they are not fully owned by the employee.

Vesting is the process where restrictions on RSUs are lifted, and the employee gains full ownership of the shares. Until an RSU vests, it is a contingent right to receive stock, not an actual share that can be sold. Vesting transforms these promised units into tangible shares, allowing conversion to cash.

Vesting schedules vary but commonly fall into two categories: time-based and performance-based. Time-based vesting involves a gradual release of shares over a set period, such as a “cliff” vesting on a specific date or a “graded” schedule where a percentage vests each year. For example, 25% of RSUs might vest annually over four years.

Performance-based vesting requires achieving specific company or individual metrics before RSUs convert into shares. These metrics could include revenue targets, product development milestones, or a predetermined stock price. The vesting event grants the employee legal ownership of the stock.

Tax Implications of RSU Vesting and Sale

Taxation of Restricted Stock Units involves two distinct events: vesting and subsequent sale. The fair market value of shares at vesting is considered taxable income to the employee.

When RSUs vest, the value of shares received is treated as ordinary income, similar to wages. This income is subject to federal income tax, Social Security tax, and Medicare tax. Employers withhold a portion of vested shares or cash to cover these tax obligations. One common method employers use is “sell-to-cover,” where a portion of newly vested shares are immediately sold to satisfy required tax withholding.

Alternatively, an employer might withhold cash from the employee’s regular paycheck or require the employee to provide funds for taxes due at vesting. The value of vested RSUs, after tax withholding, is reported on the employee’s Form W-2 for that tax year, contributing to their total taxable wages.

Once RSUs have vested and initial taxes are handled, the employee owns the shares. Any subsequent sale triggers a capital gain or loss, calculated as the difference between the sale price and the fair market value on the vesting date. For example, if shares vested at $50 and are sold for $60, a $10 capital gain per share is realized.

The type of capital gain—short-term or long-term—depends on the holding period after vesting. If shares are sold within one year of vesting, profit is a short-term capital gain, taxed at ordinary income rates. If held for more than one year, profit is a long-term capital gain, which qualifies for more favorable tax rates. If sold for less than their vesting date fair market value, a capital loss is incurred. Sales of vested shares are reported to the IRS on Form 1099-B by the brokerage firm, and the gain or loss is reported on Schedule D of the tax return.

Steps to Convert Vested RSUs to Cash

The initial step to convert vested RSUs into cash is to access the brokerage account where your shares are held, typically through a platform designated by your employer.

Upon logging into your brokerage account, locate your vested shares within the account portfolio. You will then place a sell order for the desired number of shares. Brokerage platforms typically offer different types of sell orders, with the most common being a “market order” or a “limit order.” A market order instructs the broker to sell your shares immediately at the best available current market price. A limit order allows you to specify a minimum price at which you are willing to sell; the order will only execute if the stock reaches or exceeds that price.

After placing your sell order, the transaction will proceed through a settlement period before the funds become available for withdrawal. For most stock trades, including RSU sales, the standard settlement period is “T+2,” meaning the trade date plus two business days. For example, if you sell shares on a Monday, the funds from the sale would typically settle and become available by Wednesday, assuming no market holidays.

Once the funds have settled in your brokerage account, the final step is to transfer them to your personal bank account. Brokerage platforms usually offer options for electronic funds transfers, such as an Automated Clearing House (ACH) transfer. ACH transfers usually take an additional one to three business days to fully process and appear in your bank account after they are initiated from the brokerage.