Restricted stock units (RSUs) have become an increasingly common way to compensate employees across many industries. When these company stock grants vest, recipients face an important decision: sell the shares immediately or hold them for future potential growth? In this video, Opes Wealth Chief Investment Officer Louis Odette addresses this important question with straightforward advice.
The Case for Selling RSUs at Vesting
When deciding what to do with your newly vested RSUs, Louis suggests reframing the question: “If you had received that compensation in cash, would you go out and buy the company stock with it? If the answer is no, then you should probably sell your RSUs right away.”
This simple but powerful reframe can help you think about RSUs as what they truly are — compensation. That way, you can make more objective decisions about how these assets fit into your broader financial picture. In other words, it shifts the focus from the stock itself to your overall financial strategy.
How RSUs Are Taxed
RSUs are taxed as ordinary income when they vest (meaning you fully own the shares )— not when they’re granted or when you eventually sell them. At vesting, the full market value of your newly acquired shares is treated as taxable compensation, just like your salary. Your employer will typically withhold some shares to cover taxes, often at a default federal rate of 22%, which may result in a surprise tax bill when you file your return, if your actual rate is higher.
The Tax Case for Selling RSUs at Vesting
As Louis points out, “If you hold them for longer, you can end up with embedded capital gains, which can cause some complications from a tax standpoint in terms of diversifying your position.” Selling your RSUs immediately after vesting offers several tax advantages:
Avoid Paying Unexpected Taxes: A significant RSU vesting event can push you into a higher tax bracket. By selling your shares immediately, you can set aside additional funds to cover any potential tax shortfall.
Eliminate Capital Gains Complexity: When you sell RSUs immediately after vesting, you’ll likely have minimal (if any) capital gains to report. If you hold the shares and they appreciate, you may face additional tax obligations and more complex tax reporting when you do eventually sell.
Prevent Double Taxation Mistakes: When you sell RSUs you’ve held since vesting, you’ll need to carefully verify your cost basis (the price of the shares when they vested) on your tax return. Many taxpayers inadvertently pay taxes twice on RSUs — once at vesting and again when they sell — by failing to make this adjustment correctly.
Beyond Taxes: The Diversification Advantage
RSUs affect your finances in ways other than taxation. Here are several other considerations:
Reduced Concentration Risk: Your financial well-being is already tied to your employer through your salary and career. Holding substantial company stock concentrates your risk, as both your income and investments become dependent on a single company’s performance. By selling RSUs and investing the proceeds in a diversified portfolio, you have an opportunity to spread that risk across different sectors, geographies, and asset classes.
Portfolio Efficiency: Although past performance is no guarantee of future results, historically diversification has been shown to improve risk-adjusted returns. A single stock, no matter how promising, carries company-specific risks — -risks that proper diversification can help mitigate. Even the strongest companies can face unexpected headwinds that may negatively impact their stock price. That’s why diversification matters — it helps protect your portfolio from being too dependent on the performance of any single investment.
Enhanced Liquidity: Converting RSUs to cash increases your financial flexibility and liquidity, making it easier to fund major goals like buying a home, saving for education, or being able to meet unexpected needs without having to sell investments at potentially inopportune times. It also simplifies planning for these and other significant costs compared to relying on company stock, which may fluctuate in value.
When Holding RSUs Might Make Sense
Despite the advantages of selling, there are certain situations where it may be beneficial to hold RSUs for a longer time period:
Company Confidence: You may believe strongly in your company’s mission, leadership, and growth prospects based on publicly available information and your experience working there. This optimism might influence your decision to retain some ownership in the company you’re helping to build.
Executive Requirements: Some senior positions include stock ownership guidelines that require owning a certain amount of company shares.
Tax Rate Considerations: If you already have embedded gains, it could make sense to hold shares until they go long-term or if you think you may be in a lower tax bracket in the future.
A Balanced Approach to Managing RSUs
For many RSU recipients, a thoughtful middle path might be appropriate:
Develop a Systematic Selling Program: Establish a disciplined plan to sell a predetermined percentage of your RSUs as they vest, regardless of market conditions or company performance.
Establish Concentration Limits: Set maximum thresholds for how much of your overall portfolio can be in company stock and sell when you exceed those limits.
Take a Big-Picture View: Consider your RSUs as part of your total investment strategy, including retirement accounts and other investments.
At Opes Wealth, we work with clients to develop personalized strategies for managing RSUs based on their unique financial situations, goals, and risk tolerance. Our approach emphasizes thoughtful consideration of tax implications while balancing potential growth opportunities with broader financial security.
With extensive experience in investment research and strategy, Louis helps clients progress toward their goals and achieve returns through effective planning and investing. Learn more about our approach to investment management and how we integrate a broad range of asset classes beyond traditional stocks and bonds. Start by completing your Personal Financial Snapshot so we can learn more about you.
00:00:00 – 00:45:00
Louis Odette
We’re often asked when employees should sell their restricted stock units if they have equity-based compensation. The short answer is immediately. A good way of framing this, and sort of rethinking through some of the behavioral aspects, is if you had received that compensation in cash, would you go out and buy the company stock with it? If the answer is no, then you should probably sell your RSUs right away.
If you hold them for longer, you can end up with embedded capital gains, which can cause some complications from a tax standpoint. In terms of diversifying your position.
