Equity compensation, often in the form of a Restricted Stock Unit (RSU), remains a popular form of total compensation for many of our clients. With the recent market volatility it becomes timely to revisit RSU rules and strategies to better handle taxes, take into consideration financial goals, common pitfalls to avoid, and even get to an eventual work-optional lifestyle.
RSU Basics
RSUs are offered to employees as part of their total compensation, alongside the typical package of salary, bonus, health benefits, etc. Technically speaking, RSUs represent a contractual right to receive company shares in the future. Typically an employee can keep track of unvested RSUs in an investment account, and watch the total value of those shares move with the market. You do not take actual ownership of the RSUs until they “vest” at a predetermined date, commonly over a few years from date of grant. That vesting date is when the employee takes ownership of the shares, and can then make decisions about what to do with them and vote as a shareholder. Each additional grant of RSUs has its own vesting schedule, so the more grants you receive, the more complicated it may become to keep track of.
RSUs and Taxes
It is important to acknowledge tax questions related to RSUs, especially the cost basis. Here are some considerations:
- The day RSU shares vest is the day the cost basis is set (market price, not zero).
- The total value of the vested RSUs is treated as ordinary (earned) income the tax year they vest.
- Gains (or losses) are calculated based on the difference between vest date and sell date, not total proceeds.
- If shares are sold within the first year of ownership with a gain (worth more than the date of vest), those gains may be considered short-term and taxed as ordinary income.
- If shares are sold after a year with a gain, those gains may be taxed as long-term capital gains (currently up to 20%).
- One can strategically sell specific ”lots” (shares that vested on a particular date), which gives a great opportunity to pick and choose shares specifically to reduce your cost basis, which can be especially useful in a volatile market.
- One can consider making charitable gifts with appreciated stock to manage taxation on the gains, which may be a real benefit to both you and the charity. Consider setting up a personal Donor Advised Fund to accomplish more strategic charitable gifting.
- Move concentrated stock into an Exchange Fund (a special type of fund to pool concentrated stock positions from various shareholders) allowing investors to exchange their single stock for the diverse positions in the fund over time.
RSUs and Credit
Most people are familiar with the idea of a home equity line of credit and credit cards. What you might not know is that you can create your own line of credit from a taxable account with the help of RSUs. In other words, just like you can borrow against the value of your home, you can borrow against your shares with a flexible line of credit, accessing your funds without having to sell an asset. Simply, you can borrow against your own assets and spread out the payments over a time period of your choosing. Best of all, the interest rate may be substantially lower than that of other types of credit, and does not affect your credit score when you carry a balance, like a credit card and home equity debt does.
RSUs and your overall financial plan
To take the most advantage of company stock, with no surprises come tax time, it is important to understand what RSUs you are entitled to (including quantities and timing), when they vest (becomes yours), any tax considerations and consequences, and how they fit into your overall financial picture. Thoughtful consideration to timing, taxes and leverage help prevent unnecessary surprises along the way. Partnering with a financial and/or tax professional may be appropriate, allowing you to focus on other things important to you, like your family and career.
If you would like more information on different types of stock compensation, please visit our Employee Restricted Stock fact sheet. It’s never too late to get started. Let’s start the conversation today.
Heather has been named a Forbes Best-in-State Wealth Advisor (2021 and 2022), a Forbes Top Women Wealth Advisors (2020, 2021 and 2022), a Working Mother's Top Wealth Advisor (2020 and 2021 ) and a 2022 AdvisorHub Advisor to Watch
Previous to financial advising, Heather was a Global General Manager at a Fortune 500 company, where stock was a piece of her overall compensation. She has published and been interviewed for her expertise in this area—links for these articles can be found on our website.https://us.rbcwealthmanagement.com/krausethorpewealthmanagementteam/our-team-insights