By The Planning Center, Financial Planner
Is there anything better than getting a bonus?
Think about it: you’ve worked hard all year and you’re ready to be rewarded. Your boss sits you down, ready to tell you the good news, and they are overjoyed to be giving you an end-of-term… RSU?!
So, what exactly is an RSU?
An RSU is an employer compensation feature that has gained more popularity recently. It stands for Restricted Stock Unit, and it functions similar to a bonus, but instead of a regular bonus that you get in cash/on your paycheck, you get stock units (shares) of your company. It has some sticky tax rules, but basically, it’s a bonus (whoop whoop!)
How do these darn things work?
- Grant Date: Your company will “grant” you shares as of a certain date. Nothing happens on the grant date, or for a while after: you don’t have higher income, you can’t sell the shares, nothing. Basically, it’s a promise to give you shares in the future. (But, this grant date is very important down the road…)
- Vesting Date: Your company will also tell you what the “vesting” period is for these shares. Typical vesting periods are 6 months, 12 months or sometimes longer like 2 years. This period will be defined when you get the grant, and is often called the “vesting schedule,” as sometimes the full amount will not vest at the same time. For example, sometimes half of the stock granted will vest at 12 months, and the other half after 24 months.
- Once your RSU stock has vested, it is yours. You own the stock. You can decide to keep it or sell it at any point now.
- Unfortunately, this is also the date these stock units are taxable…as income. This is why it is similar to a bonus (you just had to wait to get it). Whatever the value of the stock is on that vesting date is taxable to you at your income bracket for that year. Sometimes you will sell a portion of your granted shares to pay for this tax owed. This is certainly a good strategy to consider, because, let’s be honest, who wants to PAY for their bonus?!
- All days after that Vesting Date: It’s all yours, baby! You own the stock and can keep it or sell it. Whenever you sell it, any increase in the value of that stock, its’ stock price, the difference is also taxable. So, if you sell the day after your vesting date, there is likely little growth in value, so the taxable portion will be quite small, and possibly nothing. If you wait and sell that stock days or years down the road, then it’s likely the gain will be much higher, and thus create more tax owed.
- The good news is that any of this gain is… well, gain! You’ve made money, so give yourself a pat on the back for being a wise investor.
- The other good news is that all of the gain is taxable at Capital Gains rates, which is much lower than Income tax rates/brackets. In fact, typically gains are only 15% or 20%, and sometimes 0%.
So, what should the game-plan be once you receive an RSU?
- First of all, there’s nothing you can do until the vesting date. So, at first, just hold it. Patience is key… not like you have any other choice 😉
- At the vesting date, pay the tax owed on that “bonus” (as you would if it was a cash bonus).
- After the vesting date, consider if you want to own stock of that company or not. Is it growing? Do you want to have a stake in the company? Or would you rather diversify your investment and invest in other strategies? Or do you need to build up your emergency savings account? RSU’s offer lots of different opportunities that are dependent on your specific situation and financial goals. The possibilities are endless!
Now, if your company ever offers you an RSU instead of a traditional bonus, I hope I’ve helped clear up what exactly that entails. Although not as straightforward as a bonus, an RSU definitely has its benefits!
For anyone who doesn’t have much experience investing, an RSU might seem intimidating at first. But with the right mindset and a little guidance, it really isn’t that complicated! At the end of the day, you can always sell right after the vesting date. It can also be a great introduction to investing. Who knows, maybe it’ll be the push you needed to become the next Warren Buffett!
When all or part of an RSU grant vests, it will automatically be a taxable event, and the full impact will be reported on your W2 at the end of the year as part of your income that year. If you do not report your income it is illegal and carries heavy penalties. If your RSU has vested and you own stock that is invested, you will receive a 1099 each year declaring your interest or dividends accrued. Again, it is illegal not to report any and all income sources on your income tax return each year.
There are a lot of “stock options” that a company may choose to grant you as part of your compensation package. They each have slightly different granting and vesting schedules associated with them – each with different tax implications. Most employers will not give you a choice over which they offer you, but if you do get the choice, this is the perfect topic to discuss with your financial planner (or time to find one to work with!).1. There are a lot of “stock options” that a company may choose to grant you as part of your compensation package. They each have slightly different granting and vesting schedules associated with them – each with different tax implications. Most employers will not give you a choice over which they offer you, but if you do get the choice, this is the perfect topic to discuss with your financial planner (or time to find one to work with!).
Yes, they can. RSUs are simply shares of stock that you do not yet have access to. They are in your name, but you can’t do anything with them until they vest. So from the grant date to the vest date, the price of the stock can certainly increase, similar to any stock. The same goes for the RSU after it vests – if you decide to keep the stock (after paying the appropriate taxes on the vest date), then that stock could increase in value overtime…in could also decrease in value – it’s a risk worth talking about with your financial planner.
RSUs are not going to minimize your taxes. They are simply another form of a bonus…only instead of a cash bonus, this “bonus” is in the form of a stock grant. This grant has two parts: the first part is taxed as income at your current income tax bracket, but the second part is what happens after the vest date: if you keep it in stock, you will pay capital gains tax on any investment growth of the stock – this includes the short-term vs. long-term capital gains rules (holding the stock 1 year or more). So in this sense, the long-term growth of this RSU grant will fall under the preferential tax treatment of capital gains.
This depends on your tax bracket in the year the RSU vests. The value of any vested RSUs will be added to your income tax year in the year it vests. So if 25% of your RSU grant vests this year, then 25% of your RSU grant will be taxed this year (and 25% the next 3 years, typically) at your current income tax bracket.
At most companies, if you leave you are also walking away from any unvested RSUs. If your RSU has already vested, then it is simply stock in your company and no longer called an RSU. So yes! If you leave your company you can take any vested grants with you.
After your RSU vests you can decide to keep it in your company stock or sell it to diversify your investment. You can move these stocks/funds into any type of investment account that would otherwise accept after-tax money. Typically, this is limited to non-qualified accounts like an individual or joint brokerage account, or a trust account. Remember, any non-vested shares will stay where they are until they vest.
The advisors at The Planning Center can help you set a course for personal growth, financial strength, and most importantly, peace of mind. Give us a call at 888-333-6986. Email us at info@theplanningcenter.com
