Skip to content

Financial Planning With Restricted Stock Units: 3 Key Questions

Discover key questions that will help you plan what to do when vesting your restricted stock unit shares. Explore your options with Morgan Stanley at Work.

If you own restricted stock units (RSUs) that are settled in shares, you need to plan for what you will do when the shares vest. Understanding the strategy you'll use—and then implementing it—may be critical to making the right moves for your situation. Whether you retain your RSU shares or sell them when they vest, being prepared will help you be proactive instead of reactive and make the most of the opportunity RSU grants provide.

1. What Will You Receive When Your RSUs Vest?

When your RSUs vest, you are likely to receive the vested value of your RSUs in shares of stock. Unless your plan has a feature that allows an election to defer delivery of the shares until a later date and you properly elected it (or it was mandatory), income taxes will be owed soon after vesting, at share delivery. Note, however, that such elections are subject to a number of restrictions.

 

To cover the tax at the time of vesting, typically either your company may withhold shares or you could sell shares immediately. Your company’s ability to withhold a portion of the shares will depend on the terms of your plan. The remaining shares are often deposited into a brokerage account. In that account, the shares look the same as any company shares you can buy on the open market. 

2. Was Enough Withheld At Vesting?

The value of vested RSUs is typically taxed as ordinary income, subject to federal income tax, Social Security, and Medicare. State and local taxes may also apply. To cover the tax, many companies will withhold at a flat statutory rate (at least for federal taxes). However, depending on your income and thus your tax bracket, there's no guarantee that this withholding rate will be enough to cover all the income tax you owe. That will be sorted out when you file your tax return.

 

Example: You have vested RSUs with a value of $100,000 and a statutory federal income tax withholding rate of 22%. If your marginal tax rate is 32%, you may owe additional income tax of approximately $10,000 when you file your tax return.

 

If you prefer not to owe tax when you file or want to avoid penalties for underpayment, you may consider making an estimated tax payment. On the other hand, if your marginal tax rate is less than the 22% withholding, you may be entitled to a refund with your tax return. For advice on your personal financial situation, please consult a tax advisor. 

3. What Will You Do With Your Remaining Shares?

When your shares are delivered after vesting, you have full stock-ownership rights. That means you are entitled to keep the shares, receive dividends (if any), vote on company-related matters, etc.

 

Your ownership right also means that you can sell, gift, or donate the shares if you want. Receiving company stock as part of your compensation does not mean you have to keep the shares unless your company has stock ownership and retention requirements.

Should You Hold Or Sell?

You can keep the shares or you can sell them to help meet a financial goal—for example, to buy a diversified investment portfolio, pay down debt, save (or pay) for college, buy a house, add to retirement savings, or increase your cash reserves.

 

If you keep your shares, you may  be subject to the risk/reward tradeoff of a single stock position, which could be more volatile than a diversified portfolio of stocks.

 

If you choose to keep the shares, you may want to evaluate how much of your net worth is already allocated to this single stock position. 

Consider A Rolling Strategy

One strategy that may balance the decision to immediately retain 100% of the shares or selling 100% is to implement a plan that suggests selling a certain number or percentage of shares over a set period.

 

Example: You have 1,000 vested RSUs that are now shares owned outright. A rolling sell strategy could be implemented by planning to sell 25% of the 1,000 shares each period for the next 4 periods (250 shares per period). At the conclusion of the 4-year period, you will retain 0 shares from this RSU grant. 

Establish A Sell Schedule

Setting a sell schedule allows you to intentionally reduce your company stock according to a formula. That removes some of the emotional decision-making from the process. You don't need to guess what the stock price will do next or decide you will sell when the price reaches X per share or change your plans once the price does hit that point.

 

A sell schedule is a deliberate and systematic process to manage your stock position in a way that allows you to participate in the upside and manage the downside. Executives and key employees that are privy to material inside information and want to implement a sell schedule, should properly set up a Rule 10b5-1 trading plan that would allow them to do so. 

So, What Now With Your RSUs?

Vested RSUs may be easier to understand and evaluate than other types of equity compensation. But despite their relatively simplicity, RSUs warrant planning before each vesting date.

 

Depending on your financial situation, retaining your shares or selling them and directing the proceeds to fund your goals are options to be considered.  Whichever options you choose, you should know how tax will be withheld, where the tax will come from, if it will be enough and what to do next with your shares. Talk to your tax professional or financial advisor to get a better understanding of what actions are best for you.