If you work for a technology company and get Restricted Stock Units as part of your compensation package, then this blog post is for you. In this article, we will explain what an RSU is and the tax treatment of RSUs. We will share the strategy that we often use for our clients when dealing with RSUs.
What exactly are Restricted Stock Units?
Basically, they are a form of equity compensation that’s really popular among technology companies like Google, Facebook, Adobe, Oracle, and Logitech. They’re essentially company stock that you get over time. For example, if you work for Google and they decide to give you five Google RSU shares every three months. Let’s say the price of Google increases to $2,000 per share by the time it vests (becomes yours even if you leave the company). So five times $2,000, you’ll essentially get $10,000 worth of company stock each quarter, which is $40,000 a year. That’s a considerable sum of money!
What is the tax treatment for RSUs?
RSUs are treated as taxable income. You have to pay federal and state taxes when relevant. So you may want to check your pay stub to make sure that your employer is withholding a sufficient amount of federal and state taxes from these RSUs.
One RSU Strategy
If you just sit back and do nothing and work for a company for a really long time, you might end up accumulating hundreds of thousands of dollars in one company stock. We have client at District Capital – when we met her, she had approximately $800,000 worth of money all in one stock.
You might be thinking, “Wow, that’s really amazing that she has managed to accumulate that much money over time!” Well, it is amazing, but she was also holding that amount of money all in one stock, which can be extremely risky. You never know what might happen to a company. It might be great now, but what if there’s an accounting scandal in the future? Or what if it goes bankrupt because of the pandemic? Look at General Electric (GE). It was considered a safe stock until it wasn’t. At one point, its value dropped to a fourth of what its value was years ago.
One way to lower risk is to sell your RSU shares that you receive as soon as they vest. You can then invest them in a diversified basket of stocks or bonds. Diversification is a really key component in investment planning. Now, what you’re probably thinking is “it’s going to be really hard for me to get rid of these Google shares. I’ve only seen them go up over time and I’ve sort of fallen in love with these shares.” But ask yourself this: if you have $50,000 worth of money to invest now, would you place it all in just one stock? If you think of it like that, most people would not put their entire $50,000 all into one stock knowing how risky it is. Keeping your RSUs in one stock is the same concept.
So that’s it! I hope you learned something about RSUs. If you do have an RSU, your company might also be offering an Employee Stock Purchase Program (ESPP). So make sure you check out our article on ESPP and whether or not you should participate. If you have questions or would like more information you can schedule a discovery call with one of our financial planners here at District Capital.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help middle-class professionals achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.