Money Matters

How to Manage Your Risk and Taxes if You Hold Restricted Stock Units

Restricted stock units, commonly referred to as RSUs, are becoming an increasingly popular equity compensation option for large and small publicly traded companies. RSUs are appealing because they grant stock ownership to employees based on a vesting schedule or other factors such as performance goals. This approach, in theory, incentivizes employees to stay at a job longer until the stocks vest and contribute to the company’s success and stock value because they “have skin in the game.”

However, some factors to consider with your RSUs could affect your tax liability and net worth. For example, if you have a lot of highly appreciated RSUs, they could pose a significant tax bill once vested or overexposure of the stock in your portfolio. In addition, this type of stock concentration could result in a lack of diversification that could increase your risk if too much of your assets are tied up in your company’s performance. 

Do you find yourself in a situation where you’re trying to balance your exposure to the company that pays you and the company’s stock holding, which is becoming a more significant part of your overall net worth? If so, we’re sharing four strategies to manage your RSUs.

Strategies to Manage the Amount of Stock You Hold

If you have concerns about the amount of company stock you hold relative to your overall net worth, you may consider the following strategies as they suit your situation. Whichever method you choose to reduce your current exposure has a different tax implication, so it’s critical to consult with a financial planner to ensure you fully understand the approach before executing a strategy. 

  1. Charitable Gifting: If you’ve held highly appreciated stock for over a year, you can use it for charitable gifting. This may provide you with a tax deduction while also helping you avoid built-up capital gains.
  2. Dollar-Cost Averaging:  You may consider spreading your tax liability out over a few years through dollar-cost averaging. This approach involves selling small amounts of your stock over time using existing shares or new stock you receive through your RSUs that are continuing to vest.
  3. Hedging Your Exposure: There are more sophisticated strategies to help control your risk from stock concentration. We recommend working with a financial planner to help you employ positions that can help preserve your stock’s value and offset any losses.
  4. Selling a Large Amount: If you have excess cash to make a lump-sum tax payment, you may consider “ripping off the bandage” and reducing your stock exposure as a result. Be sure to calculate how much cash you may need, especially if the stock value has significantly increased.

There are several more characteristics of RSUs and strategies to evaluate, such as if you should make an 83(b) election, what to do if you decide to leave your company, and what to know if your company is privately held. Speaking with a financial planner can help you take a broad view and pinpoint the best strategy for your unique situation to best avoid unwanted tax surprises now or down the road. 

Understanding your RSU agreement, the taxability of the stocks you’re receiving, and the risk you are willing to take can help you build an investment strategy with more confidence and possibly financial benefit in the long run. If you want to learn more about your RSUs, or any other types of stock compensation, please reach out to our team; we will be happy to discuss your individual experience and needs.

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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