Just received Restricted Stock Units? Learn what they are, how they’re taxed, and whether to hold or sell to make the most of this employee benefit.

If you’ve just received Restricted Stock Units (RSUs), congratulations. They’re a sign that your company values you and wants you to stick around.

But if you’re unsure what to do with them, you only need to read this article end-to-end

We’ll walk you through everything you need to know so you can feel confident about handling this new asset.

Let’s start with the basics.

What Are RSUs?

Restricted Stock Units are shares your company has promised to give you – but with a bit of a catch. 

You don’t own the shares when they’re granted to you. They’ll become yours only after you meet certain conditions, most commonly working at the company for a specific period. However, once they vest, they’re yours to keep or sell.

Think of RSUs as a “maybe-in-the-future” bonus that can turn into real shares if you stick around long enough.

So What’s the Catch?

Now that you know what RSUs are, the next question becomes. 

Why don’t you just get the shares right away?

The thing is, companies use something called a vesting schedule to encourage employees to stay. This schedule is a timeline for when each portion of your RSUs becomes yours. It’s the company’s way of saying, “Work with us long enough, and the shares will become yours.”

There are two main types of vesting:

1. Cliff Vesting: With cliff vesting, your RSUs will vest at a specific milestone, say one or two years. For example, if you have 1,000 RSUs on a one-year cliff, you’ll receive all 1,000 shares immediately after that period lapses.

2. Graded Vesting: This is a more gradual vesting schedule. For example, if you’re given 1,000 RSUs with a four-year graded vesting schedule, you might receive 25% each year. In other words, you’d get 250 shares yearly for four years until you have all the 1,000 RSUs.

Knowing your vesting schedule is essential because it affects when you officially own the shares. Until they vest, they’re not yours, so planning around these dates is crucial. Companies generally include vesting details in your grant agreement, so be sure to read it to understand the breakdown.

What to Expect at Vesting: The Taxes

When your shares vest, the IRS (or local tax authority) considers that a taxable event.

Here’s how RSUs are taxed:

Income Tax

When RSUs vest, the value of those shares is added to your income for that year. So, if your 250 shares vest when your company’s stock is worth $10 per share, that’s $2,500 in additional taxable income. This means you’ll owe taxes based on your income bracket.

Withholding Taxes

Most companies automatically withhold taxes on RSUs by taking out a portion of your paycheck or selling a few shares.  

If you receive fewer shares than expected, the company has “sold to cover” your taxes. 

However, it might be helpful to keep some funds aside, as this withholding doesn’t always cover the full tax burden, especially if you’re in a higher tax bracket.

Pro Tip: Work with a tax advisor to help you estimate what you’ll owe each vesting period. See how Finny’s can help you connect with financial advisory and help make filing RSU taxes less of a headache.

Your Options After Vesting: Hold or Sell?

Once your RSUs vest, you can hold or sell the shares. That said, here’s what to consider when deciding whether to keep or cash in on your RSUs.

1. Holding RSUs

When you hold onto your RSUs, you become a shareholder This means you’ll benefit if your company’s stock price rises. 

Plus, if you hold the shares for over a year after they vest, you could be eligible for a lower tax rate (known as long-term capital gains tax), which might save you money on the taxes you’ll owe when you sell.

2. Selling RSUs

On the other hand, selling your RSUs can be a great way to turn your shares into cash that you can use now – whether for paying off debt, investing elsewhere, or meeting other financial goals. 

If your company’s stock has gone up, selling while the price is high can lock in the gains. Also, remember that it’s advisable not to keep too much of your wealth in a single stock, so selling some RSUs might help you diversify.

Before you make any moves, check for any restrictions on when you can sell, such as “blackout periods.” Companies often limit trading windows for employees to avoid any conflicts with insider information. So, ensure you’re clear on your employers' policies before deciding.

Planning Ahead: Financial Goals and Diversification

Indeed, RSUs can be a great financial perk, but they can also lead to a big, stock-heavy portfolio. And as much as you might love your company, having all your eggs in one basket can be risky due to the lack of diversity in your portfolio

Think about it.

If you’re already drawing a paycheck from your company and you’re heavily invested in their stock, your financial well-being is tied to the success of one single company. 

If things go sideways for the company, your paycheck and investments are on the line.

Conversely, a diversified portfolio spreads risk by balancing different types of investments (like stocks, bonds, and real estate). That way, you’re not overly reliant on any one source. Besides, diversification can help you manage volatility and make your financial goals more secure.

Pro Tip: Working with a financial advisor can help you create a strategy for balancing your RSUs with other investments. Advisors can also guide you on when to sell RSUs for the most favorable tax outcome.

Potential Downsides of RSUs to Keep in Mind

Like any investment, RSUs come with a few cons that you need to know, including: 

Stock Price Volatility

RSUs are just as prone to ups and downs as any other stock. So, if your company’s stock price declines, the value of your RSUs will drop too. Furthermore, if your company’s stock is very volatile, this might mean some anxious moments as your RSUs fluctuate in value.

Lack of Control Over Timing

Since you can’t choose when RSUs vest, you don’t have full control over when you’ll be taxed on them. This can complicate your tax planning, especially if a big percentage of your RSUs vest in a single year, which could bump you into a higher tax bracket.

Company-Specific Risks

As mentioned, RSUs are tied to your company’s stock. So, if something unfortunate happens to the organization, such as poor financial performance or bad press, it can impact the value of your RSUs.

Tips for Making the Most of Your RSUs

Here are some practical steps to maximize your RSUs and make them work for you:

Monitor Your Company’s Performance

Keep an eye on your employer’s stock performance and overall financial health. This can help you make timely decisions on whether to hold or sell your RSUs. 

If the company is trending upward, holding could be beneficial. However, selling could help you avoid unnecessary losses if there are downturns.

Review Your Portfolio Regularly

As you accumulate more RSUs, your portfolio’s balance may shift heavily toward your company stock. 

Therefore, check your portfolio periodically to see if you need to diversify to maintain a good balance, reduce risk, and safeguard your financial situation.

Set Financial Goals for RSUs

Decide how you want to use the funds from RSUs. Are they for a long-term goal like retirement or a shorter-term one like buying a home? 

Clear goals can help you determine whether to hold or sell based on how close you are to reaching those goals.

Set Alerts for Vesting and Trading Windows

Use calendar reminders or alerts for key dates like vesting events or open trading windows. 

This will keep you on track to make timely decisions about selling or holding and will also help you avoid missing opportunities due to company blackout periods.

Factor in Life Changes

Major life events, like a move, a new job, or marriage, can impact your finances and taxes. 

Therefore, consider these changes when making decisions about RSUs, as your financial goals or tax bracket may shift, affecting whether holding or selling is more beneficial.

Conclusion: Setting Yourself Up for RSU Success

Receiving RSUs is an exciting financial opportunity, but managing them well requires a well-thought-out strategy.

With a balanced approach, your RSUs can be more than just another part of your paycheck – they can be a tool to help you reach your financial goals.

If you’re eager to get more out of your RSUs, Finny can help. 

Our AI-powered platform connects you with financial advisors who have experience in personalized, strategic guidance. Finny gives you access to professionals who can help you maximize RSUs and other financial opportunities.

Check out FinnyAI today to see how we can help you maximize your financial potential with RSUs and beyond.

Start planning your financial future with FINNY today.