Restricted Stock Units, or “RSUs,” allow companies to award shares to their employees. “Traditional” stock options can essentially lose their value if the company stock price is below the “strike” or “exercise” price; that does not happen with RSUs. Despite the low stock prices, they are generally worth something (assuming the company stays in business!). Meaning these stock awards can be considerable.
Employees who get RSUs from their company cannot use them until they “vest”–meaning, they get transformed from restricted units to actual shares of stock. At that point, your RSUs will be considered taxable earned income, and your earned income is a simple calculation of the stock price on the day of vesting multiplied by the number of shares vesting that day.
For example, you have 1000 shares vesting, and today’s stock price is $100 per share. You will have $100,000 of income identified today.
If you work at a technology company, there is a good chance you are eligible for RSUs and other benefits. Today we are providing you with a complete overview of RSUs.
How Many RSUs Do Most Employees Get?
Understanding the number of RSUs, you’ll receive when starting a new job can be confusing. Typically, companies will offer a certain number of RSUs as part of your compensation package based on your level and role rather than a static number. This approach allows the company to align its employees’ interests with its own, as giving workers a small ownership stake can incentivize them to prioritize the company’s success. When you join a new company, you should expect to receive an RSU Award Summary outlining the RSUs granted. However, it is worth noting that additional RSU grants are usually awarded annually, typically during a yearly review and compensation adjustment in Q1. It is crucial to remember that if you are new to the company, you may not receive any additional shares at your first review, so do not be surprised if this is the case.
Do Tech Companies offer RSUs To Employees?
In 2023, tech companies should offer RSUs as a part of their team member compensation package. However, it is worth noting that this rule has some exceptions. For instance, working fewer than 30 hours per week may make you ineligible for these stock grants. Additionally, employees at certain job levels may not qualify to receive RSUs. Assuming you do not fall into either of these categories, your company may extend this benefit to you. RSUs can be a valuable form of compensation, as they give workers a small ownership stake in the company, which can incentivize them to work towards its success.
When Do the RSUs Vest?
While generally, employee RSU awards vest at a rate of 25% each year over four years, that isn’t the case at all firms. Instead, let us imagine that ABC company’s on-hire RSU vesting schedule may work as follows:
First Year: 5% of the original grant will vest at year-end.
Second Year: 15% of the grant vests at the end of your second year.
Third Year: 20% of the grant vests at the six-month mark of your third year, and vests same rate at the 12-month point, for 40 percent.
Fourth Year: The grant will be identical to the plan for the third year.
If you find it hard to understand this schedule, let us look at an example. To start, let us say you are awarded $250,000 in Restricted Stock Units. They would be transformed into an initial grant of 2,000 shares, assuming a $125 per share stock price on your grant date. We will think that the price of ABC company stock will stay the same over the four-year grant period, AND we will ignore taxes. Here’s how that grant would be vested over the next four years:
5% of your first grant ($12,500) would vest when you hit your first anniversary with ABC.
At your second anniversary, another 15% ($37,500) would vest.
Instead of waiting another year before the next 20% ($50,000) vests, six months later and again at your third anniversary—totaling $100,000 for the year.
The schedule for the third year would repeat in the fourth year. You will have $250,000 in vested Restricted Stock Units.
It is worth noting that this non-standard vesting schedule might change soon, with ABC considering a monthly vesting schedule to improve employee retention. Additionally, employees may receive additional RSU grants after completing their second year with the company, but these typically won’t vest until year four or five.
RSU grants awarded during annual performance reviews usually vest in May and November, but this can vary depending on the company. Some companies determine their award value at grant, while others use the stock value at vest to assess your target compensation band in the current year. Once your sign-on stock grant becomes vested after year four, things typically follow a May/November vesting schedule, with some exceptions for employees who take a leave of absence or are at a specific job level. Understanding your company’s RSU vesting schedule and how it might impact your compensation over time is vital.
RSUs can be subject to taxes, so it is essential to understand how they will be taxed when they vest. Depending on your company’s policies, you may have the option to sell some of your vested RSUs to cover the taxes owed.
Furthermore, some companies may offer a “make whole” grant to cover the value of unvested RSUs you may be forfeiting by leaving a previous employer. This can be a valuable benefit, especially if you had significant unvested RSUs at your last job.
When considering job offers that include RSUs, it’s essential to understand the company’s stock performance and prospects. If the company’s stock price is consistently declining, your RSUs may not be worth as much as you initially anticipated. On the other hand, if the company is multiplying, your RSUs could be worth significantly more over time.
Potential Tax Treatment
A solid investment plan for your RSUs is essential before they vest. When the time comes, you will have two options to consider:
Selling RSUs for taxes: To take this option, sell enough shares to cover the withholding taxes on the value of your shares. The default “sell-to-cover” transaction is 22% and necessarily covers Federal Taxes. If you receive 1,000 shares, 22% of your shares are sold and sent for tax withholding. We recommend that you do not change this choice not to withhold. Pay your tax bill with cash at year’s end. Early in the year, the withholding will be slightly higher to cover Medicare and Social Security tax, usually totaling 28% of the withholdings. This will leave you with the remaining shares to hold as ABC shares. (1)
Selling RSUs for cash: This option is straightforward – you sell your shares and receive the proceeds. Note that the default sell-to-cover amount will still apply, which we recommend to avoid a large, unexpected tax bill at the end of the year. (2)
It is important to note that the 22% sell-to-cover default may not be enough tax, depending on your level of RSU income. If you owe a lot of taxes each year, you may want to increase your default withholding amount. You should be able to change your election for a single grant or all previous and future grants, but keep in mind that changes only occur during an open trading window.
Selling RSUs for taxes or cash is a personal decision. If you owe a significant tax, you may need to adjust your withholding amount, but remember that changes can only be made during an open trading window.
What Can Be Done with RSUs After They Vest?
After you have figured out how to collect your RSUs, it’s time to decide what you want to do with the money. There are countless investment opportunities worth considering, such as:
Contribute to a 529 plan. If you want to support your children’s higher education financially, a 529 account can be a valuable tool to help you prepare for it.
Contributing to your savings. RSUs can be a convenient way to build a nest egg if you don’t have any urgent financial matters to address.
Preparing for emergencies. Creating an emergency fund is crucial because nobody knows the future of their finances. Now is the perfect time to start if you haven’t already established an emergency fund. Moreover, many employees at tech firms are subject to trading windows, which means they cannot sell their shares at any time. It’s important not to get caught needing cash while you cannot sell your shares, as this happens to several of our clients yearly.
Increasing your 401(k) contributions. If you’re struggling to reach the maximum contribution limit for your 401(k) using only your base salary, selling shares can help boost your cash position and allow for higher contributions. It’s worth noting that you cannot directly contribute RSUs to your 401(k) – a payroll deduction is the only way to make contributions.
Have fun. At Living Your Wealth, we do not only focus on saving and investing (we are not heartless and dull). Our clients receive guidance on responsible spending, ensuring they can enjoy their desired lifestyle while meeting their financial objectives.
How To Know You are on the Right Path
When you understand their work and have a solid investment strategy, RSUs can considerably contribute to your wealth building. Despite this, managing RSUs and other benefits without having confidence or context can lead to spending too much or saving too little.
Take control of this financial opportunity and get a plan in place. Getting professional advice on utilizing your RSUs to the fullest is a good idea. Working with a financial planning firm in conjunction with your tax professional is essential. It makes your life easy, so you don’t have to explain all the intricacies of your company’s benefits! Also, ensure that the professionals you work with have your best interests in mind. You should consider working with Living Your Wealth while creating a plan for your RSUs. LYW specializes in working with Tech Professionals, and we communicate clearly and simply (without the jargon) with our clients. If you are looking for financial professionals who see the people they work with as people, set up a complimentary intro call.
- Before employing this strategy confer with your tax professional.
- Please discuss this option with your CPA or tax professional before selling RSUs.
Living Your Wealth and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.
Securities are offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Western Wealth Management, LLC, a registered investment adviser. Living Your Wealth, LLC and Western Wealth Management, LLC are separate entities from LPL Financial.