Ian Barr

Ian currently serves as a Financial Advisor with Pure Financial Advisors.  During more than 25 years in the private wealth management industry, he has helped a wide variety of high-net-worth families, executives, business owners, and other hard-working individuals achieve their financial goals. Among his broader financial planning capabilities, Ian has experience in retirement planning, investment [...]

Restricted Stock Units (RSUs) are a popular form of equity-based compensation where employees receive company stock as part of their pay. Pure’s Financial Advisor, Ian Barr, CFP®, discusses RSUs’ terms and tax implications to help employees make informed financial decisions.

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RSUs have become a popular way to compensate employees for their efforts. RSUs are a type of equity-based compensation in which an employee receives shares of company stock as part of their overall compensation package. However, RSUs typically do not grant the employee ownership of the stock outright until certain conditions are met. (That’s why they’re called Restricted Stock Units). RSUs typically come with a vesting schedule, which outlines the conditions that must be met for the RSUs to become fully vested and for the employee to retain ownership of the shares. Once RSUs vest and the employee gains ownership of the shares, they have the option to sell the shares at any time, but in some cases they may be subject to certain insider trading restrictions.

Vesting Schedules

Vesting schedules can be time-based, performance-based, or a combination of both. In time-based vesting, the RSUs become vested over a specific time period. For example, an employee might receive RSUs that vest over a four-year period, with 25% of the RSUs vesting each year.  In performance-based vesting, the RSUs vest based on the achievement of certain performance targets, such as reaching revenue or earnings goals.

RSU Tax Treatment

RSUs are subject to taxation at the time they vest. When RSUs vest, the value of the shares is included in the employee’s taxable income and taxes are withheld accordingly. The employee receives the remaining shares after taxes have been deducted.  When the employee chooses to sell the shares, they are also subject to capital gains taxes depending on how long they held the shares.

What Does the Employer Gain by Offering RSUs?

From the employer’s perspective offering RSUs aligns the interest of the employees with those in the company since employees benefit from an increase in the company’s stock price. They can be an effective tool for retaining top talent, as they provide employees with a stake in the company’s long-term success.

Important Employee Considerations

If an employee leaves their company before their RSUs vest, they may forfeit the unvested portion of their RSUs. The value of RSUs is subject to fluctuations in the stock market, and employees may not receive the full value of their RSUs if the stock price declines after vesting. Employees should carefully consider the tax implications of RSUs, including the timing of vesting and the potential impact on their overall tax liability. It’s very important to make sure you know exactly how much your employer is withholding for taxes when your shares vest.  It’s very common for employers to under-withhold which can create a large tax bill for you at the end of the year and may even require that you pay an estimated quarter tax payments going forward.

While RSUs can be a valuable employee benefit, it’s important for participants to consider diversification and avoid overexposure to their company’s stock. Holding a significant portion of wealth in a single stock can increase risk, and employees should evaluate their overall investment portfolio accordingly.

In summary, Restricted Stock Units are a valuable form of equity-based compensation that can incentivize and reward employees for their contributions to a company’s success. However, employees should fully understand the terms and tax implications of RSUs so they can make informed decisions for their overall financial well-being. If you would like professional advice about how to incorporate your company’s RSUs into your overall retirement plan, please take advantage of our free financial assessment.

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• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.

• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.