Five Benefits of RSUs: Understanding the Nuances of Restricted Stock

Annrose Isaac CPA, CFP®, MBA
Annrose Isaac CPA, CFP®, MBA
Restricted Stocks

If your employer has granted you equity compensation in the form of restricted stock units (RSUs), it’s important to understand the potential benefits and what they mean for you. RSUs offer a future promise of uncertain value but, when vested, that value becomes more concrete. It is essential to understand the nuances of RSUs and how they can benefit you so that you can develop a savvy strategy for managing restricted stock in your financial plan. Below, we’ll discuss five benefits of RSUs.

1.    The Timeline is Easy to Understand

A main benefit of RSUs, especially compared to other types of equity compensation, is their relative simplicity. You’ll have a straightforward timeline of events, which often looks like this:

  • Your employer grants RSUs to you (which is not a taxable event).
  • Your RSUs vest after you meet the vesting requirements, and you are taxed on the value of the units that day.
  • Part (or sometimes all) of the income tax due is withheld for you.

You will usually receive shares of stock in a brokerage investment account equal to the value of the shares at vesting, less the amount withheld for taxes. (Some employers allow you to select cash instead, so read your plan documents carefully to see if that’s an option.)

After the shares are deposited into your brokerage account, you own them. It’s just as if you purchased them yourself that same day. You can choose to keep them, sell them, or take any other actions your ownership rights allow.

2.    RSUs are Easy to Value

Some equity compensation valuations are tricky, but you can use a simple calculation for restricted stock. Multiply the number of RSUs awarded by the current fair market value of the stock. (Restricted Stock x Stock Price = Current Value.)

You can do this calculation at any time to determine the value of your RSUs. Of course, that value is a future promise until your stock award vests. It’s certainly possible that the value will remain relatively stable between now and your vesting date, but it’s likelier that the value will change during that time. This is an important detail to remember when you’re strategizing about how you’ll use your RSUs when they vest.

 


SEE ALSO: Stock Options 101: What You Need to Know About ISOs, NQSOs, and Restricted Stock

 


3.    There is a Clear Vesting Schedule

There’s a simple reason that the ‘R’ in RSUs stands for ‘restricted.’ When you receive them, they are, indeed, restricted. What this means is that you must meet specific criteria in order for the restrictions to be lifted. Once they are, you can claim the value of your shares.

So, what are these restrictions? Most are tied to the vesting schedule. We’ll use an example to illustrate:

Let’s say your company awards you 1,000 RSUs, but with the restriction that they only vest if you remain with the company for three years from the date they are granted. Prior to hitting that three-year mark, you face a substantial risk of forfeiture, as defined by the IRS. During that time, the value of the unvested RSUs is not taxed. If you make it to three years and the RSUs vest, you’ll receive your shares of the company stock (or the value paid as cash if that’s an option in your specific plan document).

Your vesting schedule is important from a financial planning standpoint because it can be useful in helping you plan a strategy for the value of your RSUs. Knowing your vesting schedule can help you make better decisions about tax planning, investment planning, and what to do with your RSUs once you have ownership and, therefore, the option to act.

4.    Taxes Will Usually Be Withheld for You

If you make it to the point of your RSUs vesting, this is a taxable event – and you’ll owe income tax on the full value of the stock as of that vesting date. For income purposes, RSUs are taxed as ordinary income, meaning they’re subject to Medicare and Social Security wages, just like your typical income.

Rather advantageously, most employers will withhold income tax for you on the vested value. Many will also include the value of your vested RSUs on your W2, keeping things simple on your end. Note that most employers who withhold income tax for you do so at the statutory rates of 22% on the vested value for federal taxes, plus 10.23% if you are subject to CA state taxes, plus 1.45% for Medicare and 6.2% for Social Security, for a potential withholding of 39.88%. The state tax withholding amount will be different if you live outside of CA.  These statutory tax withholdings may not cover your full federal income tax or your full state and local tax liabilities.  It is important to work with your financial advisor/ tax preparer to ensure that you have paid sufficient taxes during the year to avoid tax underpayment penalties and interest that could become due if you have not performed appropriate tax planning during the year.

SEE ALSO: Strategies for Optimizing Employee Stock Options

 

5.    RSUs Mean Fewer Decision Points for You

Restricted stock also brings with it the benefit that several critical decisions are made for you, rather than by you (as with other types of equity compensation like Non-Qualified Stock Options or Incentive Stock Options). In some instances of employee stock options, you must choose when – and if – to act on your stock options. It can be complicated to strategize around things like valuation, cash flow needs, and income tax.

With RSUs, there’s a forced flow of events, which can remove the confusion and uncertainty tied to other types of stock options. You’ll know your vesting schedule, the fair market value you will receive, and that at least some of your tax withholding will be done for you. This automation for RSUs makes it easier to take full advantage of your equity compensation. Still, you should make sure to remain engaged in the process so that you can address tax planning issues and make smart decisions about what to do with your stock shares when they vest.  Despite how much you know about your employer’s stock, keep in mind that you do not know about everything that could affect the stock’s future valuation.  For example, a new competitor could take significant market share from your employer, a regulatory change could drive down company sales, a change in management or a product recall could impact future valuations of your employer’s stock.  Consequently, it is wise to consult with your financial advisor to determine a tax-efficient strategy for selling or gifting your vested RSUs to avoid having too much of your family’s net worth tied up to your employer’s stock.

Final Thoughts on the Advantages of RSUs

As you can see from the benefits above, RSUs are an attractive offering. They generally result in value for you, the employee, without a lot of complexity tied to that outcome. To make the most of your RSUs, be sure you understand how much value you have, and devise a plan for addressing taxation and cash flow after vesting. RSUs can be an incredibly valuable addition to your financial plan when incorporated properly.

If you would like to work with a financial advisor to devise a financial plan that serves your needs, contact us today! At Wade Financial Advisory, we currently serve clients working for companies such as Tesla, Facebook, Nvidia, Applied Materials, Apple, Microsoft Corporation, Google, Intel, Cisco Systems, Hewlett Packard, Pure Storage, Zoom Video Communications, Amazon, Adobe Inc., Palo Alto Networks and may others. We would be pleased to serve you and your family, too.

This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.

Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions.

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