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Should I Hold or Sell My RSUs?

December 16, 2019 · 7 minute read

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Should I Hold or Sell My RSUs?

Despite an ominous sounding name, restricted stock units, or RSUs, can act as valuable planning tools. Yet once they’re in your hands, you may find yourself at a bit of a loss for what to do: Should you sell or hang on to them? Here’s a look at what happens when your RSUs vest and what opportunities may come next.

A Brief Overview of RSUs

An RSU is not stock, nor is it a stock option. Rather, RSUs are a form of compensation that employers make to their employees in order to give them shares of unvested stock that at a later date upon vesting works as a form of employee compensation.

RSUs are “restricted” because they are typically subject to an employee vesting plan or schedule. When RSUs vest, the actual stock is granted to the employee. When and how much stock vests is determined by a vesting schedule.

RSUs typically vest after certain requirements have been met or a certain amount of time has passed. For example, say an employee is granted 8,000 shares of company stock over a four-year vesting schedule, in which 25% of the stock vests each year.

The employee could receive 2,000 shares of vested stock each year on the anniversary of the grant date. Shares can also vest all at once, or they can vest at different times, over different periods. Vesting may also be tied to employee performance.

RSUs are a way to incentivize employees to stay with their company for an extended period and to help the company perform well—which will hopefully lead to shares of the company stock going up in value.

However, unlike stock options that can go underwater and lose value, RSUs almost always have some value, even when the price of the stock falls below what it was on the date it was granted. Say you are granted 1,000 shares of stock at $50 per share. If the stock falls to $40 per share by the time it is vested, they are still worth $40,000 before taxes.

Once an employee’s stock has vested they can choose to hold on to the shares or they can sell as they would any other stock and use the money for other purposes.

How RSUs Are Taxed

RSUs are taxable when they are delivered after they vest, and are taxed on the market value of the shares at the time of vesting. The value of the shares is subject to federal income taxes, employment taxes, Social Security and Medicare taxes, as well as any state and local taxes that apply to you.

Vested RSUs will often show up as income on your pay stubs and W2s. RSU income is subject to mandatory withholding and your employer may offer you a few options to cover this cost. It may also provide only one mandatory method that you must use to pay the withholding.

Options to pay withholding may include using your own cash, which would not require selling any shares. You may also be able to sell part or all of your shares, using the proceeds to cover the withholding. Or your company may allow you to surrender shares back to the company in exchange for the use of company funds to cover the withholding taxes.

Once your shares have vested and you’ve paid the withholding tax, they are now yours to do with what you will.

Be aware that when you sell vested shares you will likely owe capital gains tax if the price of the shares increased. You’ll only owe taxes on gains the stock makes over the fair market value of the stock on the vesting date.

If you hold the shares for more than a year, they will be subject to long-term capital gains tax rate. Stock held for less than a year may be subject to the short-term capital gains rate, which is determined by your tax bracket and equal to your regular income tax rate.

Depending on your income, the long-term capital gains tax rate can be much lower than the short-term rate. So, in come cases, investors may want to hold their vested shares for a year or longer before they sell to take advantage of the favorable long-term capital gains rates.

Or they may want to sell their shares right after vesting to pursue other financial goals, which doesn’t trigger any additional taxes as there hasn’t been time for the stock price to change.

Trading Restrictions

There may be certain circumstances under which you won’t be able to sell your RSUs right away. Some companies impose “trading windows,” periods of time when you are allowed to sell your shares. You may have to wait for a trading window to open before you can sell your RSUs, which may be a matter of days or weeks.

Also, some companies may use an initial public offering (IPO) as a trigger for vesting RSUs. If this is the case, you may be subject to a lock-up period—a set amount of time during which you are not allowed to sell your shares. Lock-ups typically last 90 to 180 days.

They are usually instated to keep company insiders and employees from flooding the market with shares of stock. After all, these additional shares could put downward pressure on the stock price just as it’s trying to get off the ground. When the lock-up period ends, you are free to sell your shares.

Finally, if you are a company insider who has information about your company that isn’t available to the public yet and might affect stock prices, you may have to hold on to your RSUs until the information is public to avoid breaking insider-trading laws.

What are Some Options with RSUs?

Once your RSUs are vested and safely in your hands, you may find yourself wondering what to do with them and how to plan around them.

First, let’s consider holding the stock. Investors who think their company will continue to do well in the future may decide to hold on to their shares. Some investors may feel a sense of pride in their company or even responsibility to continue holding stock. Yet investors should consider if holding the stock is the best choice for their investment portfolio and financial goals.

If the company experiences a lot of growth, the stock could become valuable. However, it is possible that the company won’t do well and the stock will decline, and that could put investors in a tough position, especially if their financial plan relied on that money.

By holding a concentrated position in any one stock you’re essentially putting all your eggs in one basket, and doing so could open you up to greater risk. In other words, the more stock you hold in one particular company, the greater the effect a price drop can have on your portfolio.

What’s more, if for whatever reason your company runs into trouble, stock value may suffer, but you may also find yourself in a position where your job is in jeopardy. If you lose your job and the value of your company stock decreases, your financial well-being could take a huge hit.

Selling and Diversifying

To avoid taking on too much market risk, investors may want to sell a portion or all of their RSUs to purchase a mix of stocks, bonds, or other assets to diversify their portfolio. A wider variety of assets may reduce market risk, because different assets tend to respond to market conditions differently.

For example, if the stock market takes a downward turn, bonds may continue to do well. Or if domestic stocks take a hit, European stocks may not react the same way. A diverse portfolio can help counteract volatility within your holdings

Diversification is not a process that has to happen all at once. While investors can sell all of their RSUs and build a completely new portfolio, they could also slowly sell and reinvest.

This wait-and-see approach may allow investors to keep a close eye on the value of their company stocks. If it appears that the value is going up, it might make sense to hold on to more shares.

Selling RSUs to Buy Other Assets

You can also use your RSUs to accomplish other financial goals beyond building a diversified portfolio, such as sending a child to college, paying down high interest rate debt or for a down payment on a house.

Some companies, such as SoFi, may offer Non Conforming loan programs that allow vested RSUs as qualifying income. In these cases, history of receipt and future vesting are considered as part of qualifying eligibility.

If you do want to use your RSUs to buy a house, you will want to plan carefully. There are lots of factors at play.

First, if you don’t sell your company stock right away and it seems like it may do well for at least a year, you may want to consider hanging on to it for that length of time.

In doing so, you’ll pay the long-term capital gains tax rate when you sell, which could leave you with more money to put toward your purchase.

If you are using RSUs to help with a down payment on a home, you may want to time your home purchase with the sale of your RSUs carefully. Once you’ve found the home you want to buy and you’ve been approved for a mortgage loan, it may make sense for you to sell your RSUs immediately.

You don’t want to risk the chance that the stock will perform poorly between your mortgage approval and closing. If company shares drop, you may find yourself scrambling to come up with the money from other sources.

Additionally, since some lenders may require proof of liquidation before approving your loan, you may need to sell your RSUs before that takes place.

Also consider opportunity cost. For every investment you make, there is another investment that you aren’t making, so do your research and weigh your options carefully. Is buying a house at any particular time better than holding company stock?

Would it make more sense to sell the stock and reinvest elsewhere in the market? This is a personal decision and will ultimately be up to you based on your own financial goals. Consult with a tax advisor or financial planner if you have questions.

Making RSUs Part of Your Financial Plan

As with any type of investment, you want to be sure that your RSUs are part of your greater financial plan. It’s recommended that you have a plan in place before your stock vests.

So, it could help to set concrete goals that you want to accomplish with your RSUs. These goals can help you see how your RSUs will be used and how that income relates to your regular salary, your savings, and your investment accounts.

Consider the vesting schedule, and if possible, you could try to use it to your advantage. For example, it can help you understand how long you will spend at a company.

You may not want to stay with your employer forever, but you may also want to stay just long enough to receive this valuable boost in income.

The vesting schedule can also show exactly when you’ll have the money in hand to try and accomplish certain goals. For example, if you plan to use RSUs as a down payment on a house, the vesting schedule can help you know when is the right time to start looking at homes for sale.

With preparation and knowledge, RSUs can be a great part of a compensation package. And if you aren’t sure you want to stay invested in your company, or use your RSUs to purchase a home, you do have other options, like utilizing your RSUs to add other investments to your portfolio.

SoFi Invest® allows investors to take a hands-on approach to investing, or set their accounts up to be automated. And they have access to SoFi financial advisors, which may help them achieve their financial goals.

Ready to start investing with zero management fees and options for both active and automated investment accounts? Check out SoFi Invest today.


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