The Single Most Important Question If You Have RSUs

In my years of experience helping clients plan for equity compensation, I often see clients with blinders on when they think about the risk in their portfolio of investments. Things may be going along nicely at work, steady pay, great bonuses and all these RSUs!

Clients often tell me that they feel great about their company’s future. Tech is booming and they are betting the RSUs they just received are headed for great heights.

However, as we’ve seen in recent months, some of the tech giants have lost significant market cap recently.

Now is a great time to ask the single most important question if you have RSUs:

“Would I invest the same $X,XXX in {insert company here} if I had a choice?”

The reality is, if you flipped a switch and had a big pile of cash in front of you instead of a piece of paper with RSUs on it, you might choose differently.

Maybe you would use the cash for a family vacation. Or maybe you would increase your rainy day emergency fund. But maybe you would shore up your retirement fund.

Imagining a stack of hundred dollar bills instead of a piece of paper can help frame your thinking.

What Happens When You Sell RSUS?

Often I hear from clients that are unsure of what really happens when they sell RSUs. Being scared about the tax impact causes taxpayers to hold onto RSUs far longer than they should.

The good news is that, if you sell immediately after the RSUs vest, there are often very little to no tax consequences.

Let that sink in for a bit.

When RSUs vest, they are immediately taxed through your payroll. Often, shares are withheld to pay taxes and you receive the net amount of RSUs in your account.

So what happens if you sell the shares later that same day? The only additional tax consequences are capital gain tax on the difference between the sales price and the vest price. Provided the stock isn’t terribly volatile, we often see the sales price is pretty close to the vesting price, so there is no additional gain (and perhaps a small loss due to trading fees, etc.)

What If You’ve Held RSUs for a Long Time?

If you’re in this boat, the answer is much trickier. There is a greater chance that your shares might have a big gain or big loss when you sell them.

What if you have a loss? You can only use up to $3,000 of the loss to offset other income. If you have other stock gains, selling both the losers and winners in the same year is good tax planning.

What if you have a gain? It can sometimes benefit you to wait until you’ve held the shares for at least one year to take advantage of long term capital gain rates. If your income puts you in the top Federal tax bracket of 37%, waiting until you’ve held the stock for a year can drop you to a 20% capital gain rate.

It makes sense to find a tax planner that can help if you’re unsure of the tax consequences. We’ve seen situations where waiting a few days has saved clients tens of thousands of dollars.

What If Your RSUs Aren’t Publicly Traded?

Planning can be more difficult if you have RSUs that aren’t readily able to be traded.

The first suggestion I have for clients is to be ready when an opportunity comes. Whether it’s an IPO, company refinancing (looking at you Stripe), or other event like a merger, acquisition, etc. – chances are you’ll need to make a decision in the future about your shares.

It’s best to make a decision ahead of time on how many shares you would like to divest and take time to be comfortable with it. Planning in the heat of the moment can lead to bad outcomes. Be sure you know what the tax impact of a sale would look like and then stick to your guns when the opportunity allows.

Another option for non-publicly traded stock would be to look at a third party financing company like Secfi or Equitybee. Secfi specializes in providing liquidity for larger more established companies while Equitybee provides a market for less well known stocks. Each company charges a fee and potentially takes a portion of the stock gains when a sale is available. 

Summary

If you haven’t developed a plan for your RSUs, now is a great time to do so. Having a plan ahead of time (and knowing the tax consequences) is important and the key behind wealth accumulation. If you need assistance planning for your RSUs, please let us know.