Company Equity Awards – Restricted Stock Units

You’ve been working hard, and your company has decided to reward you with equity compensation in the form of Restricted Stock Units (RSUs).

But what exactly are RSUs, and how should you think about them? That’s what this article is all about.

Restricted Stock Units – What are they?

Restricted Stock Units are a form of compensation where a company promises future shares of its stock to an employee subject to certain vesting requirements. To properly understand RSUs, there are a few important terms to keep in mind:

• Grant – Refers to when a company has promised to give you shares. This doesn’t mean the shares are yours yet. It simply means your company has promised to grant them to you in the future on specified dates.
• Vesting – When shares vest, they officially become yours. Once they’re yours, you are free to do with them as you please.
• Vesting Schedule – Provided by your company’s benefits administrator, this lets you know the amount and frequency of your vesting RSUs. Each grant has its own vesting schedule, so you may have one grant with shares vesting every month and another with shares vesting quarterly. Your RSU vesting schedules should be a major consideration when reviewing your cash flow and understanding your grants.
• Trading Windows – Many companies restrict the ability to sell your vested shares outside of designated trading windows. Trading windows typically last for a few weeks each quarter, but can be more or less frequent depending on your company’s benefits administrator. These restrictions are mostly put in place to protect against insider trading and ensure compliance with regulatory requirements.

If you have questions about your vesting schedule or trading windows, check your plan documents or contact your benefits administrator. If you leave your company, your unvested RSUs are usually forfeited while your vested RSUs will likely remain with you. Each company has its own rules, so it’s important to check with your benefits provider before making any decisions about leaving the company.

Any company that grants equity awards will either set up a brokerage account for you or request that you establish one so they can deposit the awards into the account. Once the shares are in your account, it’s up to you to manage them as you wish.

RSU Taxes – The Basics

Vesting RSUs are taxed as ordinary income, meaning they’re taxed the same as W-2 wages. To account for this, companies withhold shares to cover taxes. This is why you’ll often see fewer shares show up in your brokerage account than were granted.

• As an example, if you have 10 shares vesting, you may only see 6 or 7 shares show up in your brokerage account since your company withheld shares for tax purposes.
• The RSU tax withholding rate for many employees is 22%, though it can increase at higher income levels. As a result, if you receive substantial RSU income and are in a higher tax bracket, the withholding may not fully cover your tax liability, potentially leading to a balance due when you file. As an example, if a person who is normally in the 32% federal tax bracket receives $100,000 of RSUs in a year, they would typically owe $32,000 in federal taxes on their RSU income. However, if their company only withheld 22%, or $22,000, from their RSU income, they could owe an additional $10,000 when filing their taxes.

Adjusting your W-4 with your company to withhold more taxes from your paychecks can help mitigate these potential issues.

The Fair Market Value (FMV) of the shares vesting in your account serves as the cost basis moving forward. If a new batch of RSUs vests at $75 per share, that serves as your cost basis whenever you decide to sell them. If you decide to sell one of those shares a few months later when it has grown in value to $100, you would pay capital gains taxes on the $25 of growth.

The important takeaway is that although vesting RSUs are taxed as ordinary income, any additional growth in the shares between the time they vest and when you sell them is taxed as capital gains.

RSU Taxes – What To Watch Out For

Wash Sale Rules

Other tax strategies, such as tax-loss harvesting, can become more complicated when RSUs are involved, particularly due to the wash sale rule. As an example, in a normal brokerage account, if you buy a stock for $50 and sell it later for $30, you can claim a $20 capital loss to offset other capital gains and, to a limited extent, even some ordinary income taxes. The same concept applies to your RSUs. If you have a company share that vests at $50, but you sell the share at $30, you can claim a $20 capital loss.

The tricky part lies in what’s known as the Wash Sale Rule. This regulation disallows a capital loss if you purchase the same or a substantially identical stock within 30 days before or after the sale. Sounds simple and easy enough to avoid, right? Not necessarily.

Unfortunately, any vesting shares can be treated similarly to purchased shares. This means that if you sell company shares for a loss but have additional shares vest within 30 days before or 30 days after the sale, the loss may be disallowed at that time and instead added to the cost basis of the new shares. The loss is recognized later when those shares are sold.

Major Risks of RSUs

Single Stock Exposure

Many investors delay making decisions regarding their RSUs and allow them to steadily accumulate over time. As a result, the total value can build quickly, often leading to an unintended concentration in company stock.

This can leave their portfolio heavily dependent on a single stock position, particularly the stock of the company they work for. If their company were to have a few bad fiscal years, they could potentially experience both the decline of their company shares decreasing in value and potential job loss.

What can be done to prevent this?

A common strategy to reduce single-stock exposure is to sell RSU shares as they vest and reinvest the proceeds into a diversified portfolio. Since you’ve already paid taxes at vesting, you would typically only owe taxes on any additional gains. Accounting for trading window restrictions, creating a schedule or setting reminders to sell your RSUs regularly can help implement this approach.

If you already have a concentrated position, reach out to your Allworth advisor to discuss the options and strategies available to you.

How RSUs Fit Into Your Financial Plan

RSUs can be a valuable part of your overall compensation, but they should be managed intentionally. The next step is bringing this all together to see how they fit into your overall financial plan.

1. Decide how you’ll handle shares before they vest
   Rather than making a new decision each time shares vest, establish a consistent approach ahead of time. For example, you might choose to sell shares immediately, hold a portion, or maintain a target level of company stock within your portfolio.
2. Set boundaries around company stock exposure
   Because your income and RSUs are tied to the same company, it’s important to define how much exposure you’re comfortable with. Setting a target allocation can help you stay diversified as shares continue to vest over time.
3. Plan for the tax impact in advance
   RSU withholding doesn’t always cover the full tax liability. Deciding ahead of time how you’ll handle any shortfall, whether through increased withholding or setting aside cash, can help avoid surprises at tax time.
4. Align RSUs with specific financial goals
   Rather than letting shares accumulate without a purpose, consider how RSUs can support your broader plan. They can be used to fund large expenses, increase savings, or rebalance your portfolio over time.

The Bottom Line

RSUs can be a powerful component of your overall compensation and financial plan when managed thoughtfully. With a clear strategy in place, they can support your broader goals, whether that’s building wealth, funding major milestones, or maintaining a well-diversified portfolio.

If you’d like help developing a plan for how to manage your RSUs, reach out to your Allworth advisor to review the strategies that make the most sense for your situation.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.