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Demystifying Restricted Stock Units: A Guide to Your Organization’s Compensation Program

Congratulations! As part of your organization’s compensation program, you’ve been given restricted stock units (RSUs). You’re probably thrilled by the potential extra income, but amid the excitement, it’s important to understand what RSUs entail and how to maximize their benefit.

RSU basics

RSUs are shares of company stock given to an employee. This incentive is commonly used to retain top talent by providing associates with an economic interest in the organization. They are typically given in tranches and vest over several years, meaning you cannot sell the stock or access the funds right away. The amount given usually relates to how well the company did that year and can be tied to an employee’s goals or team performance. Since RSUs are complex and each company’s approach is different, it’s important to review the documents provided when granted RSUs to really understand your specific stock unit plan.

All that glitters is not gold

While RSUs may be a profitable form of equity compensation, there are some cons you must consider. When receiving a large volume of a single stock, understanding the amount of risk you can and want to take with your portfolio is vital. This is different for everyone, but individual stocks are inherently riskier than diversified portfolios. When the stock is from your employer, this risk is increased, and if the company isn’t doing well, your source of regular income could also be in danger. A financial advisor can help you determine how much risk is appropriate for you to achieve your goals.

Don’t forget about taxes

Without proper planning, RSUs can result in a large tax bill. Typically, when RSUs vest, the full amount of the shares is taxable as ordinary income on the date they vest. This is true even if you don’t sell your shares, so it’s important to have a plan to pay the applicable federal and state taxes. Although most companies default to automatically selling a portion of the shares for tax withholding upon vesting (for example, selling 22% of your shares automatically and going to federal taxes), this is not always the case.

Ensuring you either have withholding from your shares or are making adequate estimated payments will help you avoid penalties and decrease your tax bill when you file. It’s also advisable to keep an eye on the share price as your vesting date approaches, as the potential income can be a lot higher than you may have anticipated if the share price has increased.

RSU shares vesting can also catapult you into a higher tax bracket, meaning you may be paying more in taxes than you otherwise would be. One of the best ways to minimize this impact is to maximize your deductions within the year the shares vest. Depending on your specific goals, this can potentially mean funding a 529 college savings plan or a health savings account (HSA). If you’re itemizing deductions, you may want to push as many tax deductions as possible into the present year – such as prepaying property taxes for the following year – depending on your total state tax. If giving back to charity or your church is important to you, it could be a good year to give a larger amount or consider funding a charitable donor advised fund (DAF) to continue gifting in future years.

Once your vesting requirements are met

Make sure you are incorporating your vested RSUs in your retirement plan. It can be tempting to count on your unvested shares in your financial future but try to limit that as much as possible. When the shares do vest, it will just make the picture even brighter. RSU sums can add up quickly and make a substantial impact on your goals.

When RSUs vest, they’re usually put into a brokerage account in individual name. Depending on the amount within the account and state laws, this could cause your estate to go through probate if something were to happen to you. Talk with your estate planning attorney to explore if it makes sense to journal funds from the individual account to a joint or trust account when they vest to avoid this possible complication.

Maximize your RSUs

Receiving stock compensation in the form of RSUs can be hugely beneficial. But knowing the right way to leverage and ensure you are not missing out on potential value – or paying more in taxes than you could be – makes it all the better.

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Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP®, CIMA®, CPWA®, RMA® is also a member of the National Association of Personal Financial Advisors (NAPFA).      

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