What Are Restricted Stock Units?

While pensions have become a thing of the past, many employers continue to use restricted stock units (RSU) and other forms of equity compensation, to incentivize and retain employees. A RSU is the right to receive stock after you’ve satisfied any conditions imposed by a company (usually a period of time, like remaining employed by the company for four years).

Let’s review an example. William is employed by ABC, a publicly traded car manufacturing company. ABC thinks William has been doing a great job and gives him 500 RSUs as part of his 2022 bonus. The RSUs vest 25% per year, over the next four years. So, in 2023, 125 shares of ABC stock will be vested, at which point William can keep the shares, sell them, or any combination in between.

RSUs are taxed upon vesting, not at the grant date. William will pay ordinary income tax each year as shares are vested. William’s shares will fluctuate in value with ABC’s stock price. If ABC is worth $50 per share on the vesting date, William’s stock will be worth $6,250, before taxes. If the share price is $25, William’s stock will be $3,125, before taxes.

If William leaves the company, he loses any RSUs that have not vested. This is why RSUs may be a good retention strategy for employers. If William expects to receive grants of ABC stock each year, that might impact his decision to sell and diversify as shares are vested. It is common for those receiving equity compensation to receive grants each year, which could lead to having a large exposure to your company stock. A concentrated stock position can add risk to a personal financial plan.

On the vesting date, shareholders have the option to keep or sell some or all of their shares. Leading up to the vesting date, ask yourself: If someone handed you cash instead of shares on that date, would you buy ABC stock, diversify, or use the cash for other life goals?

Investors may hold on to the shares because it’s easy, as they already own the shares. That’s probably a better answer than selling and spending frivolously, but, many times, selling and diversifying is a better option.

Advisory services offered through Veracity Capital, LLC, a registered investment advisor. The information listed above is sourced from www.irs.gov and www.kitces.com, and should not be considered investment advice.

– Michael Collopy, CFP, CIMA, is a partner and financial advisor with Veracity Capital, LLC.