Your RSUs could be a game-changer for your financial future—if you handle them right. It's no surprise that many people are trying to figure out the best way to manage this form of equity compensation as many company RSUs are vesting in this month and early next. Some TLDR first:
- RSUs are basically a bonus in the form of stock from your company
- They are taxed as regular income - plan accordingly
- Make a plan prior to vesting dates to handle buy/sell decisions
What Exactly Are RSUs in the First Place?
RSUs are a form of equity (aka stock) compensation where your company promises to give you shares of stock over time. When you hear/read about a “vesting schedule” all that is, is a preset schedule when those shares go from a promise to actually yours. When RSUs vest, you own the shares, period. Think of RSUs like this: Your company is saying, "Work for us for X years, and we'll give you Y shares of stock over time." It's basically deferred salary in the form of shares of the company and a way to entice you to stick around (if you leave prior to the shares vesting you lose out on those shares).
The first key thing to understand is that RSUs are part of your total compensation and should be thought of as part of your income from the job. When your RSUs vest, you receive shares at whatever the market price is at that time.
When looking at your RSUs in an offer letter you will likely see the award in $ terms, such as $50,000 of shares, instead of a set number of shares. But, this isn’t a guarantee of the amount you will receive at the end of the day. It’s simply saying that the company is promising on awarding you a set number of shares that as of award (or grant) that are valued at that $50,000. By the time you receive them they may be worth more or less than that depending on the swings in the company share price.
Let’s look to a simple example of our Software Engineer, Frodo, to make sense of this along the way. As part of his compensation Frodo gets a grant of $100,000, on the day of the letter that was equivalent to 1000 shares from his company RING (at $100/share). His RSUs vest (become his) over the course of 4 years, 250 each year on February 1st. So, that’s an extra $100,000 ($100x1000 shares) above his base salary. But, he doesn’t get all of that at once. Remember RING wants to make sure Frodo sticks around and therefore only has those shares come to Frodo in chunks over time ($25,000/year). RING is essentially paying Frodo a ~$25,000 bonus each year from this promise of stock, depending on how the stock does between now and then.
Taxes, Always Taxes
Here's where things get interesting (and sometimes painful if not planned for). RSUs are taxed as ordinary income when they vest. That’s worth saying again, they are taxed as ordinary income when they vest. The good news, there are no taxes when they are awarded, which makes sense because they aren’t yours yet. But this catches a lot of people by surprise come vest date.
It’s February 1st, 2025 and Frodo’s first vesting happens with 250 shares. Let’s say RING’s shares went up to $120 over the past year.
- 250 shares vested (25% of original grant)
- Value at vesting: $30,000 (250 x $120)
Remember as far as the IRS is concerned Frodo just got a $30,000 bonus from RING and that means taxes, at regular income rates. Employers will typically withhold some shares to cover taxes, at 22% of the overall value. But that’s often not enough if you’re in a higher tax bracket, leading to a surprise tax bill come next April if you don’t plan ahead.
- Standard Tax Withholding: $6,600 (that’s 55 shares)
- Shares Received: 195 shares of RING ($23,400)
Some Things to Keep in Mind
1. Treat RSUs as Part of Your Total Compensation
The biggest mistake I see people make is mentally separating RSUs from their base salary. Your RSUs are compensation, period. When evaluating job offers or your current pay, add up:
- Base salary
- Annual bonus target
- Annual RSU grant value
- Other benefits
This gives you the true picture of your total compensation package.
2. Don't Let Single Stock Risk Creep Up on You
I've seen too many cases where people let their vested RSUs accumulate over years until they have an enormous concentration in their employer's stock. While it worked out great for some early Amazon or Microsoft employees, it's generally not wise to have too much of your net worth tied to a single company (especially the same company that provides your paycheck!). Consider this: If your company runs into trouble, you could face a double whammy of falling stock price AND job insecurity at the same time.
3. Have a Plan
Rather than making emotional decisions about when to sell vested shares, develop a systematic approach. Three basic strategies for a starting point to think through:
A. The Immediate Seller
Benefits
- Sell all 195 net shares at $120 per share
- Receive $23,400 cash after withholding
- Reserve additional cash for additional taxes
- Can Immediately diversify into other investments with remainder or allocate cash for different life goals
Risks
- Avoid double (salary & stock) concentration risk
- Relatively predictable cash flow
- Flexible options to using cash between lifestyle and long-term investments
- Missing out on big gains from stock run up
B. The Holder
This is the other end of the spectrum; keeping all shares after mandatory tax withholding.
- Hold all remaining 195 net shares at $120 per share
- No reserve additional cash for additional taxes
While this worked for early employees at successful companies, it carries significant risks:
- High level of double concentration in one company. Both salary and investments tied to employer
- Potential for significant losses if company struggles
- Reduced cash flow in current year for lifestyle expenses
- Any further taxes paid out of pocket
Benefits:
- High reward (if the company grows exponentially your wealth could too)
C. The Middle Ground
This is known technically as “halvsies”. This is meeting in the middle of the first two strategies looking to balance risk and upside potential reward. Frodo chooses this path this year, selling 50% of net shares and holding 50%:
- Sell 98 shares: $11,760 cash
- Keep 97 shares for potential growth
Benefits:
- Balancing high reward with a measure of risk management by taking some money off the table
- More predictable cash flow for lifestyle or long term investments
Risks:
- Still may need additional tax withholding to cover taxes
- Risk of company stock going down
- Moderate double concentration risk
The key is developing a plan that starts with what you are trying to do in Your Life, understanding it, executing it, and then iterating when your circumstances or goals change over time (not based on a TV stock guru’s guess at what your company’s future stock price will be). Everyone is bullish on their own company, but think about examples of “great”, blue-chip companies whose stocks have suddenly reversed and gone down over the past few decades.
A Few More Things
1. Build a Tax Reserve Fund
One key tool you can use to help with the management of RSUs and their potential tax impact is build a Tax Reserve Fund. If you have an idea (looking into the future is always a guess, but do your best to make a smart estimate) how much that withholding gap will be (between what you’ll owe to Local, State, and Federal) at the beginning of the year start saving monthly into a dedicated account to help cover those taxes. Better to have the cash ready than scrambling to raise funds when taxes are due.
2. Impact Beyond “Just” What’s Above
RSUs can affect other aspects of your financial planning:
- They might push you into a higher tax bracket
- Large vesting events could impact financial aid calculations for college
- They could affect your ability to make Roth IRA contributions due to income limits
- They might create alternative minimum tax (AMT) exposure
Just like anything in Real Financial Planning, RSUs need to be factored into the whole of your life’s financial puzzle.
3. The Psychology of RSUs is Real
One of the hardest parts about managing RSUs is the psychological aspect. RSUs can cloud judgement. When you see your employer's stock going up, it's tempting to hold onto vested shares hoping for more gains. When the stock is down, it's tempting to hold waiting for a recovery. The (hard) reality is that once RSUs vest, you should think of them like any other stock you own.
Ask yourself this, “Would you go out and buy that much of your company's stock with cash? If not, why hold onto it just because it came with your paycheck?”
K.I.S.S. (Keep It Simple Sam)
Taking a practical implementation plan for your journey:
1. Create an integrated plan (investment, cash flow, taxes)
2. Establish Your System
- Calendar of all vesting dates (visual roadmap can be especially helpful here)
- Set up automatic tax withholding
- Set up Tax Reserve Fund and automate contributions
- Create systematic selling rules
3. Monitor and Adjust
- Track follow-on grants (and overlapping vesting)
- Document cost basis
- Regular portfolio balancing
- Review strategy annually
- Adjust for life changes
Your RSU path is unique. The key is having a clear strategy and sticking to it through market cycles and company changes. Whether you choose to sell immediately, hold for growth, or take a balanced approach, make your decision based on your overall financial goals and risk tolerance.
Remember that RSUs are compensation, not a lottery ticket, treat them accordingly, and they can be a valuable tool in building long-term wealth. As with any significant financial decision, consider consulting with financial and tax advisors for guidance specific to your situation.
With proper planning and discipline, it can lead to life changing financial success and through that a life of true wealth, a life well lived.