Understanding Your Restricted Stock Units


RSUs – Restricted Stock Units – have become a more popular way to pay corporate executives in the last fifteen years. This is partly because of a change in accounting principles which made stock options less attractive in response to concerns about abusive pay practices. At Heritage Financial, we help corporate executives and their families with all aspects of their finances, including how to think about their RSUs from a tax, financial planning, and investment standpoint. Following is a brief overview of the basics.

An RSU is an award of company stock that is worthless until it vests. The vesting period is typically three to five years and some performance goals may need to be achieved as well. During the vesting period, the future potential value increases and decreases based on the company’s stock performance. When the RSUs vest, you receive shares or cash. Unlike options, you don’t have to worry about them being “underwater”, meaning they will always have some value unless the company stock is worthless.

There are no tax consequences when you receive an RSU award, but when they vest the value becomes taxable as ordinary income. If you sell the shares then (assuming you chose not to receive cash), you have no additional tax liability. If you do not sell, any future appreciation is treated as a capital gain. If you own them for more than a year past the vesting date, that will be a long-term capital gain. Anything under a year will be considered a short-term capital gain, which generates a higher tax liability. Because of this embedded tax obligation, it’s important not to overstate the value of RSUs in your financial plan. The gross value will eventually be reduced by taxes.

Clients typically sell their RSUs as they vest, pay the tax, and diversify their portfolio with the proceeds. Committing to a pre-determined plan takes the guesswork out of what to do every time an award vests. It also reduces the potential for having to sell company stock later and pay a capital gain if you become concerned that you own too much of it. In addition, unlike other forms of executive compensation, RSUs do not provide the potential for outsized returns if the company stock does well.

A good wealth manager with experience dealing with RSUs will be able to help you create the right plan for them and any other form of executive compensation. For more information about our services and approach please click on the following links:

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