What to Do with RSU’s

If you work in the tech industry, you may have Restricted Stock Units (“RSU’s”) as a part of your overall compensation package. RSU’s offer several advantages for both employer and employee. In particular, RSU’s are “restricted,” meaning access to them is provided on a vesting schedule. This aspect incentivizes employees to stick around long-term and perform well, so they not only gain access to their shares but also benefit from an increase in the share value. For the company, they can provide this benefit for minimal administrative costs since there aren’t actual shares to track and record. They can also delay the dilution of their shares until the vesting schedule is complete. In all, RSU’s are a win-win across the board, but they’re not without their challenges and nuances. In particular, RSU’s receive their own tax treatment, pose various risks, and can be confusing to fit into your big-picture financial plan. This simple guide seeks to provide some clarity around RSU’s so you can make smart decisions and do what’s best for your financial future.

The Basics

RSU’s are a type of compensation issued in the form of company stock (e.g., Apple, Amazon). Shares are granted and then issued through a vesting schedule that usually occurs after a specific length of time. Upon vesting, the shares are assigned a fair market value and are reported as ordinary income for the employee. 

Due to this tax status, income tax withholding is required. For most of you with RSU’s, withholding can be done as an additional line item on your W-2 paycheck. Or, shares can be withheld or sold to cover taxes upon vesting. 

Unlike traditional stock options, RSU’s do not require you to pay any exercise price for the shares. Instead, the shares are simply delivered to you as a component of your compensation if and when they vest. 

Vesting Schedules

There are two common types of vesting schedules you could have: graded and cliff. 

Graded vesting schedules vest in serial portions at equal intervals, typically over a three to five year period. If you work at Facebook, for example, your RSU’s are subject to a four-year quarterly vesting schedule.[1] Every three months upon your RSU start date, you vest 6.25% of your initial grant for a total of 25% per year. By the end of your fourth year of employment, you are fully vested in your initial award. 

Cliff vesting schedules, on the other hand, vest 100% all at once, but only after a stated service period. Standard cliff vesting schedules are three years or five years. However, for companies wanting to extend the vesting cliff, they might offer you a partial vesting schedule, such as 20% at year two, 30% at year three, and 100% after year ten. 

If you aren’t sure what your vesting schedule is, revisit your initial employment offer letter or track down your grant award paperwork for the details.

Tax Considerations

RSU’s are considered taxable income, so federal, state (if applicable), and local (if applicable) income tax withholding are required alongside both Social Security and Medicare tax withholding as well.

However, RSU’s are also “supplemental wages,” so federal income tax is treated differently than regular income. For the federal piece only, taxes are withheld at a flat 22% (regardless of your tax bracket) on wages totaling less than $1 million per year, and a flat 37% on any excess above $1 million per year.

Depending on your company, you may or may not have different methods available to cover tax withholding, but these could include:

  • Surrendering a portion of your newly delivered shares back to your company and holding the remaining stock.
  • Selling solely the amount needed to cover the withholding and keeping the remaining stock.
  • Liquidating all of your shares to cover the withholding and using the net proceeds to spend or invest.
  • Paying the taxes out of pocket and keeping all the shares that have vested.

RSU’s are a capital asset, so any gains realized upon liquidation are also subject to capital gains taxes. There are two types of capital gains: long-term and short-term. To receive the more favorable long-term gains tax rate (15% for most people), you must hold your RSU’s for at least 12 months after your vest date. If liquidation occurs within 12 months, it’s considered a short-term gain and is taxed at the same tax rate as your ordinary income tax bracket.

If your outlook for the company is generally bright and you believe the share price will increase in value over time, consider taking advantage of the 83(b) election. This Internal Revenue Code provision allows you to pay taxes on the fair market value of your RSU’s upon granting instead of upon vesting. Ideally, this means you would pay your tax liability earlier on at a lower company valuation. You’d also benefit from reaching the long-term holding period sooner than you would if you waited until you were vested.

Potential Risks

Once vested, RSU’s are like any other shares of company stock. As a result, they are exposed to different types of investment risk, namely equity market risk, and concentration risk. 

Equity market risk refers to general market volatility and the risk of loss if the share price falls. Many factors can influence the volatility, including general economic woes, irrational investor behavior, missed quarterly earnings targets, bad press, and more. Short-term volatility can be rather dramatic and impossible to predict, so decisions should always be made through the lens of your overall financial picture.

Concentration risk, on the other hand, refers to the concept of “putting all your eggs in one basket.” Many employees choose not to do anything with their RSU’s, whether it’s for sentimental reasons, a soaring stock price, or analysis paralysis. Regardless, lack of action with your RSU’s can often lead to an overly-concentrated position and greater risk exposure if those shares lose value. 

A general rule of thumb is to never hold more than 10% of your overall portfolio in any single stock position. If you find yourself in said situation, it’s not a bad idea to consider selling a portion and diversifying elsewhere. You might also consider selling for the sole purpose of generating cash to fund short-term goals, such as for a home down payment, paying off high-interest debt, or establishing an emergency fund.   

The Bottom Line

RSU’s can make a big difference in your financial future. However, understanding how they fit into your overall financial picture is the key to maximizing their potential. Pay close attention to the tax consequences of your RSU’s and remain vigilant of building up an overly-concentrated investment portfolio.  Always be aware of the potential havoc a concentrated position could wreak on your overall financial picture if that particular stock value tanks. 

If you need further clarity on how your RSU’s fit into your entire financial picture, schedule a time to chat with us today. We can help!


Forefront Wealth Partners is an independent financial advisory firm that provides creative problem solving to our clients. In a world where change is accelerating and the future uncertain, we provide simplicity and confidence concerning financial, tax, and legal strategies. Our process involves a deep relationship, focusing on meaningful outcomes and dynamic planning.

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness.

This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.

Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser. IFP and Forefront Wealth Partners are separate entities.

[1] Source: Taken from actual client data.