If your employer handed you a cash bonus instead of your latest RSU grant, what would you do with it? Would you buy your company’s stock?
When regular grants of restricted stock units (RSUs) are part of your compensation, this can be a helpful way to reframe the decision around whether to sell or hold your vested shares. Here’s why it works: The IRS treats RSUs like a bonus, which means the fair market value of your shares is taxed as ordinary income when they vest. If you sell right away, at or near the price of the vested shares, there are little to no additional tax consequences.
With the main tax event already over, holding or selling RSUs becomes about opportunity cost (e.g., what else could you do with a bonus?), as well as risk and risk tolerance. If you’re looking ahead to future RSU vesting events and continuing to collect a paycheck from your employer, you’re exposed in multiple ways to the performance of a single company. A bad quarter or a bad year could have an outsized impact on your net worth. That risk could be a compelling reason to sell your newly vested shares immediately.
But if you would use a cash bonus to buy your company’s stock, perhaps it’s a signal you’re prepared to take on that risk. Let’s look at why RSUs are a prime example of the kind of concentrated stock risk that experts caution against, and when it might make sense to ignore their advice.
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ADAdvertisementUnderstanding when RSUs vest
With RSUs, your employer promises to transfer stock to you once certain conditions are met.
If you hold single-trigger RSUs, you’ll likely have to meet a time-based condition. Your shares vest over a number of years while you’re employed at the company. If you leave, you’ll lose any unvested shares. Employers often use a graded vesting schedule or a cliff vesting schedule.
- Graded vesting schedule: Grants vest periodically over the course of a few years. For example, say you’ve been granted 1,500 RSUs with a vesting schedule of 20% after one year of service and then equal quarterly installments for the next three years. This would mean that after staying with your company for a year, 300 shares become yours. For the next three years, you receive another 100 shares for every quarter that you remain employed by the company.
- Cliff vesting schedule: All grants vest at once. In our example, all 1,500 shares might vest after four years.
If you hold double-trigger RSUs, your RSUs won’t fully vest until a time-based condition and some kind of secondary condition are met. This second trigger is often related to a liquidity event such as a merger, acquisition or initial public offering.
Double-trigger RSUs are common among private companies. That’s because RSUs are treated as taxable income once they vest. But someone holding vested RSUs at a private company likely doesn’t have a market for selling their shares. As a perk, RSUs might seem unappealing if you knew you’d get saddled with a tax bill with no way to sell shares to pay the tax.
The what-if-it-were-a-cash-bonus question is one way to start thinking through what to do with your vested RSUs. But it may help to break it down into smaller pieces. Ross Anderson, a certified financial planner (CFP) and co-founder of Craftwork Capital in Alexandria, Virginia, offers three questions to ask:
- Do you need the money? If you have other goals, such as buying a home, saving for college, or retiring early, you may opt to sell shares to redirect the money to those other savings buckets.
- What do you believe about the company? Even if you don’t need the money you’d get by selling RSUs, if you have a negative outlook for the company, you should reduce the amount of stock you own.
- What are the tax considerations? If you hold shares, and they appreciate in value, you may owe capital gains tax on the growth. You’ll want to plan that carefully. (Learn more about RSU taxes to get the full picture.) But don’t hang all your decisions on this one consideration, Anderson says. “There’s some people who hate taxes so much they never make any money.”
» Don’t want to go it alone? Learn how to choose a financial advisor
The case for selling immediately
So what if you don’t urgently need the money and you believe in the company’s future? Should you hold the shares? Financial advisors generally caution against it because of concentrated stock risk. When a significant portion of your portfolio or your net worth is tied to a single asset or company, any volatility it experiences has a significant impact on you. Spreading out your risk across a variety of assets keeps any single one from drowning your portfolio.
If your compensation includes regular RSU grants, concentration risk is a feature you can’t really avoid. You not only have vested shares, but you also have unvested shares and an income all tied to the same company. This “triple exposure” may sound great if your company is thriving, but that’s not guaranteed to last forever, says James Bashall, a CFP and CPA with NerdWallet Wealth Partners. (NWWP is a NerdWallet-affiliated registered investment advisor.) “Worst-case scenario, the company tanks, you lose your job, you lose your unvested stock, and now your vested stock is worth zero.”
To Bashall, selling the vested shares is a way to mitigate your risk. “Take the portion you can off the table,” he says. Your unvested shares and ongoing employment are your ticket to participating in future growth, while your vested shares allow you to diversify. “The moment they vest, you sell them.”
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ADAdvertisementIf you have a strong — and defensible — belief that your vested shares will significantly increase in value if you hold them, it’s understandable that you may want to go against the advice to sell immediately.
“A lot of advisors are constantly trying to reduce that risk in that concentrated exposure,” Anderson says. “But also being concentrated in a successful company is a fast way to achieve mega wealth.”
Ultimately, it comes down to your risk tolerance and a clear picture of what’s at stake, Anderson says. If you haven’t already, check in on your financial goals. If you’re on track for retirement and able to achieve other goals you care about without selling your vested shares, “maybe I’m willing to take the risk,” Anderson says.
But keep in mind that if you feel a strong sense of loyalty to your employer, you might be biased toward thinking positively about its future performance. Employees at successful companies can be persuaded that their company stock “only goes up,” Bashall says. “Maybe, maybe not. Let's control for the not."
If you decide to hold, you still need a plan that allows you to eventually do something with your windfall. If you’re right, and the shares you hold appreciate in value, the future sale could come with a capital gains tax bill. Anderson says he sees clients get stuck there because they’re afraid to create that taxable gain.
"We want to think of our investments as tools, not treasures," Anderson says. "RSUs can play a big role in creating wealth, but also creating liquidity at times of your life when the money really matters. Being able to contextualize those assets as part of a broader plan is the key.”
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