How to Determine the Best Approach to Managing Your RSUs
It’s one thing to watch the company you work for exceed its sales targets and grow its revenues year after year and another to participate in that success by being rewarded for your contributions. Such an arrangement helps align your interests with those of the company, whereby you want the company to succeed because your equity will increase in value if it does.
For those who are awarded equity as part of their annual total compensation, it’s critical to devise a strategy for those shares well in advance of their vesting. Having a plan for how to handle your shares as they become available will help take the emotion out of managing them. Unfortunately, there is no one-size-fits-all solution when it comes to equity compensation planning.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
By definition, the value of the equity you receive from your company depends on the performance of a single stock. But if you’re like most people—earning those shares rather than purchasing them out of pocket—you don’t view the stock you receive from your company the same as other investments.
In reality, it’s important to make sure you have assessed the tradeoffs you are making by either holding or selling shares upon vesting. There is no straightforward or correct way to address this. But at a minimum, you should think of the stock you receive from your company as part of your overall diversified portfolio, even if it isn’t held in the same investment account.
The number of shares you should continue to hold will depend on several personal factors, such as your tax situation, age, family responsibilities, financial goals, risk capacity, and the number of shares the stock already owns. These factors are what help to determine whether you should adopt a conservative, moderate, or aggressive approach to managing your equity.
However unpopular, the more conservative way to approach planning with RSUs is to sell all your shares the moment they vest. That way, you have locked in any available financial gain between the day you were granted the shares and the day they finally vested.
You also wouldn’t have to worry about any capital gains taxes, as those newly vested shares would not have had a chance to appreciate above the price they were acquired. However, most people who are paid in equity are not this conservative and would consider this approach unsustainable.
The next best option would be to sell enough shares to at least cover any remaining taxes due. There is typically a deficit between the 22% automatic withholding rate that is applied to most RSUs as they vest and your own federal marginal tax rate.
Thus, it is possible to lose money on RSUs even after they have vested. If you do not sell enough shares immediately after vesting to cover the difference between the automatic withholding rate and your marginal tax rate, and the fair market value of your shares declines, you will pay income taxes out of pocket for shares that are no longer worth what they were at the time you received them.
Beyond selling shares to cover your tax bill, it is a good idea to identify your short-term financial goals and the time you have to reach them and calculate the dollar amount necessary to fund them. Once you have identified and assigned a dollar value to that goal, it becomes much easier to determine the number of shares you need to sell at each vesting period in order to reach it.
While it may not be seen as an aggressive approach, choosing to hold all your vested shares forever is actually the most aggressive approach you could take. This kind of concentration can work out beautifully if your company’s stock price continues to rise. It can also just as easily backfire if the company hits a rough patch or fails to dazzle Wall Street analysts quarter after quarter.
If your manager were to hand you $250,000 in cash today, you likely would not log into your brokerage account and use that cash to buy $250,000 worth of your company’s stock. By deciding not to sell any shares and staying fully invested after vesting, you are essentially making that decision—whether consciously or subconsciously.
Regardless of the number of shares you ultimately decide it makes sense to sell as part of your broader financial plan, it is important to keep in mind that until you sell, those dollars only exist on paper. With that in mind, it is wise to take some of your chips off the table at every vesting window. That way, you will have something to show for all your hard work regardless of which direction the company’s stock price moves over time.
*************************
Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE