How will Restricted Stock Units impact my finances?
Many friends and clients are changing jobs these days as part of the Great Resignation which is making for a very competitive job market. In response, more and more U.S. companies are using equity compensation to attract and retain talent. The most common form of equity compensation given is Restricted Stock Units (RSUs). Amazon, Apple, Google and other companies have recently announced that they will give existing employees additional RSUs to entice employees to stay. Whether you are leaving a job that provided RSUs as part of your compensation or starting a new role with an RSU benefit, it is best to understand how your finances will be impacted.
For those considering a new job or getting a promotion that will provide RSUs as a part of overall compensation, here are the important things to know:
- When RSUs are granted to you they have no immediate impact on your finances, you will owe taxes on the day they vest.
- Understand the RSU vesting schedule so you know how long you will need to stay in your job to receive the full benefit of the RSU grants and how the vesting schedule impacts your expected income for tax planning.
- If you sell your vested RSUs for a gain, you will owe additional taxes.
- Your employer will withhold 22% for taxes (unless you make over $1 million, then 37% will be withheld) but you may still owe additional taxes depending on your personal tax bracket. So be careful to plan for this extra income so you don’t end up with a tax penalty.
- Have a plan for how you will treat your vested RSUs that is aligned with your goals. If you have goals to finance, it may make sense to sell your RSUs the day they vest.
- Holding on to your vested RSUs means you may end up with a concentrated stock position and a big capital gain tax liability. Read this MainStreet post What is a Concentrated Stock Position for more information.
- If you work for a company that is private, your RSUs may not be taxable until the company goes public. This means that at the IPO you could have a big tax liability, it may make sense to work with a professional to help you plan for this.
When leaving a job that gave you RSUs, it is important to consider what happens to your RSUs upon your departure. Your vested RSUs are yours to keep. When the shares vest you own the stock outright. Therefore, leaving a job has no impact on your vested RSUs (this may not be the case if you work for a private company). But the unvested RSUs are just shares that you have been promised, when you leave your job, you lose the unvested RSUs. Before you decide to change jobs make sure you calculate the value of the unvested shares (number of unvested shares x stock price), so you know what you are leaving behind. This information can be useful when evaluating a new job offer or deciding to stay.
Changing jobs may result in significant changes to your finances, especially if RSUs are involved. Review your financial plan and make sure you are still on track to reach your goals and put a plan in place for RSUs so you can avoid costly mistakes.