Do you work for a company that issues Restricted Stock Units (RSU)? If you do, then you may be wondering if you should hold or sell and the answer isn’t exactly clear. In the case of RSUs, timing, tax liability, and your risk exposure are important factors to consider.
RSUs are company stock typically issued to employees after they have reached milestones whether that’s completing a project, launching an initiative, or being an employee for a particular amount of time. Sounds pretty good but if you’re thinking you can turn around and sell your shares upon receipt, think again.
RSUs are assigned a fair market value but have no tangible value until vesting is completed. That means your stock is worth nothing until a specific period of time passes. That amount of time is up to the company that issued the stock, in this case your employer. At the time the RSU shares vest, you will be taxed on the current value of the shares as ordinary income (the same as on your paystub). Most of the time, your employer will withhold a portion of the shares that vest to pay the tax bill in the same way your employer withholds income on your paystub so that your cash flow isn’t negatively impacted. Once vested, the remaining shares can be sold and will be taxed as short-term or long-term capital gains if the stock price has increased since vesting.
RSUs to have and to hold…or not? It depends.
Before deciding to sell RSUs or any other company issued stock, it is important to look at all of your investments, income, and risk. A one income household may have a different tax consequence to selling these stocks than a two-income household. If you work for a company that offers stock options as well as Restricted Stock Units (RSU), you’ll need to consider your overall strategy for the company stock.
You, and your family’s financial well-being needs to play a role in determining how you handle RSUs and other company stock. No matter how you feel about your company, if you are the breadwinner or much of your net worth or investable assets are invested in company stock, it may be time to diversify. Some companies hand out stock, in the form of RSUs and options, like candy. While it’s a great employee benefit, it can also be a bit dangerous as more of your net worth is tied to the company, along with your income.
Imagine life changes from what it is today. Say you’re laid off and need access to the stock to cover the cash flow deficit while you look for a new job. There’s a good chance the stock may not be worth what it was once as layoffs tend to occur when a company isn’t doing well.
Let’s take a look at a hypothetical example of an employee we will call Mike.
Examples are hypothetical and for illustrative purposes only. Any investment involves potential loss of principal.
Mike receives a job offer that includes 1,000 RSUs as part of the initial compensation plan in addition to salary and benefits. At the time of issuance the stock is valued at $10 per share for a total of $10,000 and will be vested in five years. Once vested, Mike can sell his shares. The company has been profitable and the stock is now valued at $50 per share for a total of $50,000. If Mike chooses to sell his RSUs, his tax liability will be based on the current value of $50 per share, not the initial $10 per share.
In addition to RSUs, Mike has also received Incentive Stock Options and holds company stock in his Employee Stock Purchase Plan (ESPP), the combination of which has added to his confusion about what to sell and why, and what his strategy needs to be to minimize taxes and risk exposure.
Mike’s situation is a perfect example of where a financial advisor can help evaluate your risks and provide you with choice on how to move forward.
Please contact Thimbleberry Financial if you’d like to discuss your situation.