Working with tech employees over the last 20 years, we’ve seen a consistent challenge in balancing their current cash flow needs with their long-term retirement goals. For example, the cost of living and housing on the West Coast, where tech companies dominate, is often higher than in other parts of the country. Even with higher salaries and bonuses, rising costs and timing of income may make it difficult for tech professionals to access the liquidity they need to fully take advantage of their company’s retirement plan. So, how can they balance these critical current and future needs? View the video, as Mark explains how restricted stock units (RSUs) can play an essential role:
How Can RSUs Help Balance Cash Flow and Retirement Contributions?
Many tech professionals earn RSUs, a form of equity compensation. As your career grows and company stock performs well, it can be tempting to hold on to accumulated shares as a long-term investment. However, as everyday expenses rise and cash flow feels constrained, proceeds from RSU sales can serve to free up cash flow for retirement plan contributions without relying solely on salary.
How Can RSUs Support Retirement Plan Contributions?
Because RSUs are taxed as ordinary income when they vest, if you sell a portion immediately or shortly after vesting, you can reduce or avoid capital gains and increase cash flow.
We often guide clients through assessing their cash flow needs and retirement goals before their RSUs vest. This provides a personalized framework for retaining some equity and selling what’s necessary to offset retirement contributions. Planning ahead with an advisor can also help ensure you’re withholding enough to avoid tax surprises later.
What are the Risks of Not Using RSUs as Part of Your Retirement Plan Contributions?
Tech professionals may miss the opportunity to convert RSUs into long-term retirement savings if they hold their RSUs without a strategy.
Certain tech companies offer a valuable benefit that allows employees to make after-tax 401(k) contributions beyond the standard IRS pre-tax limits, which can then be converted via a mega backdoor Roth conversion. Earnings on after-tax contributions will be taxed at the time of conversion, but future growth and qualified withdrawals can be tax-free, which is especially significant for high earners in high tax brackets. While RSU proceeds cannot be deposited directly into a 401(k), they can help provide liquidity to increase your 401(k) deferrals through payroll and fund after-tax contributions. If you’re not using RSUs for cash flow potential, you could risk:
- Missing years of compounded tax-free growth in a Roth account
- Unintentional concentration or over reliance on a single company’s stock
- Reduced withdrawal or cash flow flexibility in retirement
- Increased embedded capital gains when holding RSUs longer than necessary
How to Coordinate RSUs and Retirement with Opes Wealth
RSUs can be a powerful tool in funding your long-term goals, especially for retirement. Rather than choosing between your current needs and your future savings, we can help you align and maximize your resources to best fit your situation. Learn more about how we help tech professionals:
- Develop an RSU selling strategy
- Manage concentration and other risks
- Identify and address tax implications
- Integrate RSUs into their overall investment strategy
Contact us for guidance on what to consider when holding and selling RSUs, and how we can help align critical decisions with your broader financial life.
Transcript:
Mark Duvall (00:00:06:14 – 00:02:24:14)
I’m often asked by tech employees how to balance current cash flow requirements while participating as much as possible in the retirement plans provided by their company. Many people who work within technology receive a significant portion of their compensation in the form of restricted stock units, or RSUs, and they’re tempted to hang on to all of them because they want to accumulate equity value in the company in which they’re working.
At the same time, it’s very expensive to live in the West Coast cities that are dominated by technology. Just high cost of living, high cost of housing. And so just based upon salary and bonuses, it’s actually difficult to meet all of those requirements while taking care of retirement. And then finally, what’s interesting about many of the technology companies is that they actually allow you to contribute more into the retirement plan than simply the pretax limit that’s set by the IRS.
You can actually add in after tax contributions, which are then converted into the Roth option, and Roths grow tax free, which is really advantageous over time. So how do you afford to do all those different things? Well, one of the tricks is to go ahead, and every time RSUs vest, they move to the current market price. It’s the equivalent of, if you hold on to them of saying, “I want to buy the stock at that price,” and instead of holding on to all of them, maybe sell some in order to augment the cash flow required to live offsetting the decreased cash flow that you’re taking from your salary and your bonuses in order to participate more fully enough in the retirement plans that are offered by the technology companies. And your future self will be very happy that you went ahead and did that. One of the things we do is to help people try to balance out those two and give you exact numbers that most take care of your situation.
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