What Happens to Your RSUs When You Retire
While in the middle of your career and possibly raising a family—likely in your 30s, 40s or 50s—it can be challenging to plan for the days when full-time employment is an option for you rather than a requirement. Nevertheless, it is important to keep in mind that the decisions you make during your pre-retirement years directly affect when you can retire and the lifestyle you will enjoy in those years.
The closer you get to your desired retirement date, the less of your overall net worth you should have concentrated in the stock of your employer. Your company stock is likely a significant portion of your overall investment portfolio, and thus your retirement plan. And the more volatile that stock is, the tougher it becomes to incorporate those shares into a retirement income plan.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
For those who receive RSUs as part of their total compensation package every year, a key element to a solid retirement plan is understanding what will happen to your shares and unvested grants once you leave the company. There is, however, no definitive answer for what happens to RSUs when you retire.
Equity grants almost always have vesting provisions that are based on your continued employment at the company that granted them to you. However, this ultimately depends on factors such as the company’s internal policies and the type of RSUs you hold. Understanding how RSUs work and knowing what to expect can help you make the best decision for your situation.
Here’s what you need to know:
Unvested RSUs will likely be forfeited back to the company once you retire. However, depending on the terms of the RSU agreement, there may be some exceptions.
Some companies include provisions for a “normal” retirement age in their stock plan agreement that allows vesting to either accelerate or continue under its normal schedule after retirement.
Depending on the policies of a privately held company, employees may be required to either keep or sell any vested RSUs. Private company shares do not have a secondary market to trade in, making them less liquid than shares of a public company.
Employees may be required to wait until the next window period to sell vested RSUs that are subject to a blackout period.
The stock plan agreement you signed prior to receiving the RSU grant will detail when or whether vesting either continues or stops. Retirement is considered a special termination of service under some stock plan agreements, and those companies generally treat retirement more favorably than they would an employee leaving to work for a competitor.
It is important to closely review your stock plan agreement for the rules that govern a “normal” retirement prior to selecting a retirement date. The plan may also include provisions for an “early” retirement, although this is less common.
If your plan does include a special provision for accelerated vesting, it is also important to consider the tax impact of receiving those shares all at once. RSUs are taxed as ordinary income in the year they vest, and while employers typically withhold taxes at a flat supplemental rate of 22% at the federal level, that rate may be well below your actual marginal tax rate—especially if you’re also earning a final salary or receiving a bonus.
Without requesting any additional withholding or making estimated tax payments, you could end up with a sizable underpayment penalty and a surprise tax bill come April. It’s a good idea to review your expected income and withholdings with a tax professional in advance to ensure you’re not caught off guard.
If you hold unvested RSUs and are seriously considering retirement, it is also important to discuss your plans with your employer before making it official. They can inform you of any exceptions to the terms of your RSU agreement and help keep you from making any irreversible mistakes with your shares.
****************************************
Malcolm Ethridge, CFP® is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s 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