New Year, New Decisions for Your Restricted Stock Units
Contrary to what you might infer from the title of this blog post, I am not trying to guilt anyone into making New Year’s resolutions we know most are broken by February 1, anyway.1
However, as the calendar turns, it’s time to start planning for some important compensation-related decisions you’ll need to make in the New Year.
The first quarter is often a busy time when it comes to compensation matters. You may have received a raise, many employers pay out bonuses, stock options and restricted stock units are granted, and previously granted stock awards may vest. That’s a lot of activity and a lot of money potentially in motion! This blog post will focus on what to consider when your restricted stock units (RSUs) vest in 2024.
According to a 2019 study done by The Ayco Company, 72% of the responding companies offered RSUs to their employees2, which means there’s a good chance you may be working for an employer who offers RSUs as part of its long-term incentive plan.3
An RSU is an agreement that the company will provide you, as an employee, with a certain number of shares of company stock at some point in the future. At the time of the agreement (or grant), there is no taxable event to you because all you’ve gotten at that point is the promise to receive stock, so no actual value has changed hands.
There are various vesting schedules for RSUs. The most common schedule I’ve seen is the three-year cliff (e.g., RSUs are granted to you in 2023, vested in 2026) or the one-third vest over three years. In the latter schedule, if you receive a grant in 2023 one-third vests in 2024, one-third vests in 2025 and one-third in 2026. You will be taxed when the RSUs vest or lapse (i.e., taxation is based on the number of RSUs granted, multiplied by the stock price on the day of the vest/lapse). The vested amount is considered ordinary income and will be taxed as such.
Employers may withhold shares from the original grant to cover taxes on the income that the vesting generates. If your employer does NOT withhold taxes on your RSUs, you’ll need to account for the extra income when planning for your taxes. It’s worth discussing with a CPA the consequence that RSU vesting might have on your income and taxes for the year. Do not wait until tax filing to have this discussion or there may be some higher-than-anticipated tax bills.
How to manage your RSUs
So, now we know what RSU are and how they are taxed. What actions can you take once your RSUs vest and you own actual shares of your company stock? This is where the planning comes into play.
First, it’s important to have an inventory of how much company stock you own. You need to understand how concentration in one stock may impact your overall financial plan, investment portfolio and financial goals. Take into account that your bonus, benefits and salary are also tied to the same company. If something were to happen to the company, what would that mean for you financially?
Let’s say you have now gained a good sense of how much company stock you can comfortably own, and you’ve determined that you should sell some. It’s time to break down the shares you have; remember that once RSUs vest, they’re like any other stock holding and are subject to long-/short-term capital gain rules starting from the day they vest.
I believe it’s also important to have a plan for the dollars once you sell the stock. Will you add the proceeds to a diversified portfolio? Pay off debt (the caution here is that if you hold very low, fixed debt, it may not make sense to pay it off now), fund a major expense like a new car, vacation or college? Perhaps you won’t sell at all, but instead will gift long-term appreciated stock to charity in a tax-effective manner. It’s a good time to review your personal circumstances and financial goals.
If you want to reduce your overall company exposure, you might be able to sell a portion of your stock in a tax-neutral way. Based on market conditions over the last year, it’s possible that you may have losses from shares that vested in early 2023. Consider using those losses to help offset others that may be held at a gain, which will reduce your overall tax burden.
You can also turn to your investment portfolio as a whole, looking for losses you may use to fully or partially offset the gain made by selling company stock. I have found time and time again that emotion often stops investors from making any concrete decisions. If you fall into this bucket, consider setting limit orders or implementing a 10b5-1 plan to take the emotion out of selling your company stock.
As we ring in 2024, it’s time to start planning for the compensation decisions you should make to optimize your financial plan. Please reach out to your Corient Wealth Advisor if you need to revisit your financial plan or would like help in determining how much company stock to own and what plan you should have to divest some of your shares if your personalized plan indicates that you need to.
ABOUT THE AUTHOR
Abigail Rosen, MS Financial Planning
Abby is a Partner, Wealth Advisor in our Morristown, NJ, office. She is a CERTIFIED FINANCIAL PLANNER™ professional with over 17 years of experience in the financial industry. Prior to her career in finance, Abby was an officer in the United States Navy. Abby specializes in working with corporate executives to help them take full advantage of their available benefits, implement with respect to employer stock concentrations and manage their stock option strategies. She has a designation in Global Financial Planning. Previously, she served at legacy firm RegentAtlantic as a Wealth Advisor and Co-Head of the Corporate Executives Group.
She graduated with a Bachelor of Arts from the College of the Holy Cross and received a Master of Science (distinction) in Financial Planning from Bentley University. She was 2020 Citizen of the Year for her work as treasurer of the New Jersey Psychological Association Foundation and is treasurer of the Harding Township Educational Foundation (HTEF) and a Girl Scout troop leader.
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