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  • Writer's pictureMark Young

When should you sell your RSU Shares?

Restricted Stock Units or “RSU’s” are one of several forms of equity compensation that many of you enjoy. I often tell my clients to think of RSU’s as being a bonus that you receive in stock.

Generally, we recommend that it is in your best interest to diversify concentrated positions (such as your company stock) as soon as possible. We believe that diversification is especially important in regards to company stock. Think of it this way: Your risk of holding your company stock is exceptionally high because of A) Your job is with the company. If the company has a downturn and has layoffs you can lose your job and B) Perhaps much of your net worth is in company stock and for the same reason, this increases the risk that one company can impact your future financial well being. Compare this to owning a diversified portfolio, where the financial results of one company have a very small impact on your financial well being. For these reasons, we generally recommend that you sell your RSU’s as soon as they vest to you.

When RSU’s vest, they are run through payroll as taxable income, and taxes are withheld for Federal and State. Therefore, there is no tax benefit to holding onto the stock. It would be like if your company gave you a cash bonus, and you immediately went and bought more stock in your company. You wouldn’t usually think to do that if your company gave you a cash bonus, but this is what you are theoretically doing if you hold onto your vested RSU’s.

There are a few other things to consider in regards to your RSU’s.

  1. You may end up with a tax surprise, even though your company withheld taxes. The reason this is often the case is that the withholding rate on RSU’s is 22% (by law) for the IRS and yet your tax rates can go as high as 37%. If you’re in the top tax rate, you will be short on federal taxes by as high as 15%.

  2. You cannot convert the value of the RSU’s to long term gain. Let me explain. Let’s say that you receive 100 shares as an RSU grant valued at $80/share (on the day of vesting). That means that the amount of income run through your payroll (as ordinary income) is $8,000. Each share then has a cost basis of $80. If you hold the resulting shares for the future, your basis is still $80 and your holding period starts on the day the shares vest. You never convert the $80 into long term gain. If you hold the shares for a year and they rise to $90 in value, you will have a long term gain of $10/share.

  3. Sometimes you have restrictions in place that keep you from selling your RSU shares during “blackout periods”. The way to solve this is to put in place a 10B5-1 plan instruction that indicates that you wish to sell the shares immediately as they vest.

If you would like to discuss your situation with us, feel free to reach out to us for a complimentary analysis or your equity compensation.

Clearview Financial, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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