Before we jump into a discussion about if you should sell or hold your vested stock, let’s review what RSUs are:
Restricted Stock Units (RSUs) are a common form of stock-based compensation. Restricted stocks will vest at some point in the future. Vested RSUs are very similar to cash bonuses on the day of vesting. At that moment, they have the same exact value as a cash bonus.
Another reason RSUs are like a cash bonus is you’re taxed the same way. You will incur the full tax liability the moment your RSUs vest. Here’s a quick example:
# Shares Vested x Current Value of the Stock = W2 income
1,000 shares x $30 per share = $30,000 of income
Your taxable income would increase by $30,000 as soon as the shares vest. An RSU always has value (unless the company goes bankrupt), so it can be almost as low-risk as cash, as long as you sell it right away.
If you hold the shares after vesting, any gain (or loss) is taxed. Shares held a year or longer from vesting are taxed as long-term capital gains (Less than one year is taxed as short term capital gain).
When making your decision to sell or hold you vested stocks, I prefer to use a simple approach:
Sell Immediately
If your company gave you a year-end bonus of $100,000, would you use all of it to buy your company’s stock?
Probably not. Yet many people I met with hold their company stock when it vests. And before you know it, they have a large portion of their net worth in one stock.
Recently we have seen the risk of owning a single stock. Many well known stocks like Amazon, Tesla, Disney, Netflix, and more are down over 50% from their high! This is why it’s important to diversify.
The best thing to do is to sell them all as soon as they vest. Then you can use this money for short term needs like an emergency fund or use it for other financial goals (saving for retirement, kids college, etc.).
As much as I believe that selling is the best choice, I also recognize that for many people it’s not a step they’re willing to take. Let’s look at some other strategies.
Sell A Portion
I like to use the rule of thumb that no more than 5%-10% of your net worth should be in one company’s stock. You should prioritize your financial goals versus tying your fate to the performance of one stock.
This gives you enough upside if the stock does well. On the flipside, it’s not a large enough portion to completely derail your finances should things go poorly.
Hold Long Term
Not selling any shares and holding long term is the riskiest option by far. If you do this you are making a large bet on your current employer.
If you choose this strategy, I recommend making sure your other financial goals are covered beforehand. Make sure you’d still be okay if this particular stock were to evaporate at any time.
Some of the wealthiest people in the world (Think Elon Musk, Jeff Bezos, Warren Buffett, and more) have achieved massive fortunes by concentrating their wealth in companies they founded.
However, we have seen many people who have lost millions investing in their company stock. For example, people invested heavily in their companies during the Dotcom bubble lost fortunes.
It’s very risky to be overly dependent on one company to pursue your financial goals.
Bottom Line
RSUs can be a great way to earn more money from your company and help you pursue your financial goals. Don’t overcomplicate it and try to think of your vested RSUs as a cash bonus and think about how you will use those proceeds.
If you have any specific questions about your company’s RSU program, your different financial goals, or anything else, please feel free to reach out.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
