Restricted Stock Units (RSUs) are a common form of income for employees at large tech companies like Apple, Meta, and Google. In fact, Alphabet Inc. has its own variation called Google Stock Units (GSUs). While these equity awards are a valuable part of compensation, their tax implications can catch even seasoned professionals off guard. Without proper planning, the benefits of these stock awards may come with unexpected financial consequences.
3 Planning Strategies for Restricted Stock Units (RSUs)
Here are a few proactive strategies to help you minimize tax liability and manage risk effectively if you’ve been awarded RSUs or GSUs.
1. Grants and Vesting: Create an Inventory
Grants of an RSU or GSU have no immediate tax consequences. However, once the shares vest, the game changes. Upon vesting (or the lapse of restrictions), you officially receive the shares, and the stock’s fair market value at the vesting date is taxed as ordinary income. This is true even if you don’t sell the shares right away.
To manage your equity compensation, start by creating an inventory of your awards. Knowing your vesting schedule and the associated tax obligations can help you plan your cash flow during the year and avoid surprises when tax time rolls around.
2. Withholding: Increase as Needed
RSUs and GSUs are treated as supplemental income and subject to a default federal withholding rate of 22%. While this amount might seem like enough, it falls significantly short if you’re in the top federal tax bracket of 37%.
To avoid an unpleasant surprise come tax season, consider increasing your withholding rate to match your actual tax bracket. For those in the highest tax brackets, that means bumping up federal withholding to 37% and adjusting state withholding accordingly (up to 13% if you’re in California). This step can save you from scrambling to cover a significant tax bill later.
3. Concentration Risk: Manage It Proactively
Over time, as your company’s stock price appreciates and you accumulate more shares, a substantial portion of your portfolio may become tied up in one company. This concentration can expose you to significant risk, especially if the stock price takes a sudden dip or you are no longer working for the company (I see you, #Xooglers)—and are removed from the day-to-day news.
The solution? Diversification. Start by identifying an ideal target for how much of your wealth you want tied to company stock. Then, strategically sell shares with high cost basis and low unrealized gains to minimize the tax impact of diversifying. This approach allows you to reduce exposure to a single stock and spread risk across thousands of companies.
Take Control of Your Financial Future
It’s easy to delay planning when you’re immersed in work and watching your company’s stock soar. However, analysis paralysis can lead to missed opportunities or unintended risks. By creating an inventory of your RSU/GSU grants, ensuring adequate withholding, and managing stock concentration risk, you can maximize your equity compensation while protecting your financial future.
Need guidance on how to implement these strategies? Schedule a complimentary consultation to determine if we can add value to your financial goals.
Mission Wealth is a Registered Investment Adviser. This commentary reflects the personal opinions, viewpoints, and analyses of the Mission Wealth employees providing such comments. It should not be regarded as a description of advisory services provided by Mission Wealth or performance returns of any Mission Wealth client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mission Wealth manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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