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As we’re witnessing with SpaceX, having company stock options can often feel more like a roller coaster than a rocket ship. It helps to establish a plan–when you’re not hearing big claims at the water cooler–for what to do with these options way before the stock becomes available.
Then set conservative expectations and hope for the best. When the stock is available to trade, act swiftly, know how to log in to your portal, and stick to the plan you established.
Decisions made and actions taken tend to be far less regrettable when they’re made based on thoughtful plans rather than reactive speculation.
Here’s the process I walk clients through when they have RSUs. It’s built specifically so the decision gets made before the avoidance or second-guessing instinct kicks in.
Step One: Understand What You Have
Total unvested shares. Exact vesting dates for the next year. Current value of each batch. Doing it in advance means there’s nothing left to figure out in the moment, which is worst-suited for figuring things out calmly.
Step Two: Know the Tax Impact
RSUs are taxed as ordinary income at their value on the vesting date. Employers often withhold at a flat federal rate on that income: 22% up to $1 million in supplemental wages for the year, 37% above that (IRS Publication 15). That flat rate has no idea what bracket you’re actually in.
Here’s what that gap can look like. Say $40,000 in RSUs vest, and combined with your salary, that lands you in the 32% federal bracket. Withholding at 22% covers $8,800. The bracket says you owe closer to $12,800. That’s a $4,000 shortfall sitting until April, and finding it out then is its own kind of forced, last-minute decision.
This is why we collaborate with CPAs for our clients. Talk to a tax professional about your specific numbers well before that happens. Waiting to deal with the tax question until the bill shows up is the same delay instinct, just wearing a different form.
Step 3: Deciding What To Do With Shares
We address the big question of “Sell or Hold” ahead of the vesting date. This might be surprising, but we never anchor this decision primarily in today’s share price. I find a handful of other factors more important in the order of operations.
What is this money for? Is it long-term for something like retirement, or is it earmarked for that kitchen renovation for next year?
Are we over-concentrated? I love that many people feel confident in their company’s future. That said, concentration risk can have serious implications. My litmus test for the RSU decision: if your company gave you this as a cash bonus instead, would you put 100% of it into your company stock?
Schedule + Repeat
Of course, for most of our clients, we know this is a semi-annual process, not a one-off decision. We schedule calendar reminders in anticipation of each vest date and check in to update the information and revisit your financial plan before each decision.
If this kind of structure and accountability would be helpful for you, and you want to feel confident using your RSUs, schedule a time with me. I’ll show you how we do this for clients like you.
***Not intended as a recommendation or offer of any specific advice or services. All investments carry risk, and past performance does not guarantee future results. For detailed information about our fees, services, and background, please view our regulatory disclosure materials on the SEC Investment Adviser Public Disclosure Website (https://adviserinfo.sec.gov/firm/summary/170478).