Congratulations! You may be reading this because you have recently got a job where RSU’s are being given to you. You must be overwhelmed with excitement, and you should be! Your hiring manager quickly explains what RSU’s are and all you hear is a muffled voice from Charlie Brown, because you are way too excited about getting your job. Now Restricted Stock Units can be exciting from the potential payoff you can get as well as shows that the company values your worth, this means money you can use as a down payment for a house or Europe anyone?
Restricted Stock Units is compensation offered by an employer to an employee in the form of future stock. Remember this is a unit, so a right to buy a stock also; the word restricted is key here as it determines when your shares “vest” and when you can sell them. When you accept the RSU’s you can’t just cash out the units right away, sorry Europe trip you have to wait for a couple years, but you will be given something called a vesting schedule, which will outline when your units become stocks.
Schedule is as following
1. Sign contract and receive RSU’s that outline vesting schedule
2. When first portion becomes vested, you pay the difference in the grant price and the current stock price as short term capital gains.
3. First portion of vested stock is yours to sell or keep. (what you do here can lower taxes!)
4. Repeat steps 1-3 till fully vested
For example, let’s say you receive RSU’s of 100 units that begin vesting on an annual basis in denominations of 20 shares. That means every year, you will be granted 20 shares and after 5 years you will be fully vested!! (Woot Europe Trip and House?). Say your RSU’s are granted for $20 a share and when the first year of vesting comes around the stock is currently trading at $30, you would realize the gain of $10 per a share right away but will also be taxed at ordinary tax/short term capital gain tax, which is your ordinary income bracket, click here to learn more about it. Even though you still own the stock, you will have to pay the tax on the immediate realization of profit, unfortunately there is not a way around this but now that the stock is yours there are plenty of strategies to take into consideration.
You should be planning to make sure you have cash on hand to pay the upfront taxes of your short term gains, too often people sell their own vested stock to cover their new vested stock, which is not the Orca way. We believe in tax planning that helps you maximize your profit by taking into consideration additional tax strategies that lower your taxes and maximizes what to keep. You also want to consider the optimal time of selling your stock to take advantage of potential future gains; this is all part of what we believe in and follows our vision of planning not just investing.
At Orca we have partnered with experts who have worked on RSU’s and understand how to make their vesting schedules line up with your goals.