RSU and Brokerage: Choosing the Right Account for Employee RSUs‍

RSU and Brokerage: Choosing the Right Account for Employee RSUs‍

August 30, 2023

RSU and Brokerage: Choosing the Right Account for Employee RSUs‍

Suppose you're the founder of a thriving tech startup, and your team has been working tirelessly to drive innovation and growth. As a token of appreciation and motivation, you've rewarded your employees with a generous compensation package that includes Restricted Stock Units (RSUs). These RSUs are like golden tickets, representing a stake in your company's future success.

But here's the catch: Unlike stock options, RSUs are a bit like Schroedinger's gift. They hold immense potential, yet they're locked away, waiting for a special moment to reveal their true value. As the vesting date approaches, you realize that making the most of these RSUs isn't as simple as handing over a shiny certificate. Instead, you're faced with a critical decision that could significantly impact your employees' financial well-being and overall satisfaction with their compensation packages.

This is where brokerage accounts enter the picture, where the choice of where to deposit these valuable assets is the key to unlocking their full potential. This article helps you navigate this complex concept, exploring why brokerage accounts are essential for RSUs and how to make the right choices to benefit both your employees and your company's future.

Understanding RSUs

RSUs are a form of stock-based compensation where employees receive a certain number of shares in the company upon meeting certain vesting conditions, typically a set period of employment. Once the RSUs vest, they become taxable income for your employees, and this is where the importance of choosing the right brokerage account comes into play.

The tax treatment of RSUs is a critical factor when choosing the appropriate brokerage account. Depending on your jurisdiction and the type of RSUs your company offers, there may be different tax consequences. Common tax considerations include:

1. Ordinary Income Tax

When RSUs vest, they are subject to ordinary income tax. It's essential to consider the tax implications, as this can significantly affect your employees' take-home pay. Some brokerage accounts offer features that can help mitigate the tax impact, such as tax-advantaged accounts like 401(k)s or IRAs.

2. Capital Gains Tax

Once RSU shares are sold, any potential gains or losses are subject to capital gains tax. The timing of the sale can influence the tax rate, as holding the shares for a longer period may qualify for lower long-term capital gains rates. Consider whether the chosen brokerage account allows for tax-efficient strategies, such as tax-loss harvesting, to optimize the tax outcome.

Types of Brokerage Accounts

When it comes to deciding how to handle your employees' RSUs, you need to be well-informed about the various types of brokerage accounts available. Each account type offers distinct advantages and is designed to cater to different financial goals. 

1. Individual Brokerage Account

You can opt for an individual brokerage account, which represents the most straightforward approach for your employees to manage their RSUs. Under this arrangement, each employee has their own account, granting them complete control over their investments. While this account type offers unparalleled flexibility, it also comes with individual tax responsibilities. You can leverage this flexibility to align your investments with your unique financial goals and risk tolerance. Additionally, you have immediate access to your RSU shares, enabling you to sell or trade them as you see fit. However, it's essential to note that this autonomy also means you bear the responsibility of managing the tax implications, potentially impacting your take-home income.

2. Employer-Sponsored Accounts

Many companies provide employer-sponsored brokerage accounts, often associated with retirement plans such as 401(k)s or Employee Stock Purchase Plans (ESPPs). These accounts can offer significant tax advantages and long-term savings benefits for you. Through employer-sponsored accounts, you may benefit from reduced immediate tax burdens, thanks to tax deferral or preferential tax rates. Furthermore, these accounts encourage long-term savings, which can be instrumental in securing a comfortable retirement. Some employers may even match your contributions, providing an additional layer of value. Nevertheless, it's essential to keep in mind that employer-sponsored accounts may entail vesting periods or withdrawal restrictions, designed to promote long-term savings objectives.

3. Custodial Accounts

Custodial accounts serve as a specialized option tailored to employees with minor dependents or beneficiaries. These accounts are managed by a custodian on behalf of you, often until the designated beneficiary reaches a specific age, which may vary according to state laws. The primary advantage of custodial accounts is the ability to plan financially for dependents' futures. Income generated within these accounts may also enjoy favorable tax treatment, particularly when benefiting minors. However, it's crucial to be aware that custodial accounts come with some limitations, primarily revolving around access. These accounts are typically intended to provide for the designated minor and may offer less flexibility compared to other account types.

What Does an RSU Brokerage Account Do?

An RSU (Restricted Stock Unit) brokerage account plays a pivotal role in managing and maximizing the value of RSUs for both employers and employees. It serves as the gateway through which RSU shares are delivered, held, and eventually sold or transferred. Here are some of the key functions and benefits of an RSU brokerage account:

1. Holding RSU Shares

An RSU brokerage account serves as a secure digital repository where RSU shares are held in the name of the employee. These shares are not immediately transferable or tradable upon grant; they typically vest over time or upon the achievement of specific performance milestones.

2. Vesting Tracking

RSU brokerage accounts keep a record of the vesting schedule associated with each RSU grant. This schedule outlines when RSU shares become fully vested and accessible to the employee. It helps employees track their progress toward ownership of the RSUs.

3. Access to Investment Options

Depending on the type of brokerage account chosen, employees may have access to a wide range of investment options beyond RSUs. They can diversify their portfolio by investing in stocks, bonds, mutual funds, and other assets through the same account.

4. Tax Management

RSU brokerage accounts are equipped to handle tax-related matters efficiently. They can facilitate the withholding of taxes upon vesting, ensuring that employees meet their tax obligations without the need for extensive manual processes.

5. Liquidity Events

When RSUs vest, employees can use their brokerage accounts to execute transactions. This can include selling vested shares, transferring them to another account, or even exercising certain stock options if applicable.

6. Reporting and Documentation

RSU brokerage accounts provide employees with comprehensive reporting and documentation related to their RSU grants. This includes tax documents, transaction history, and statements, aiding in tax filing and financial planning.

7. Educational Resources

Many brokerage platforms offer educational resources and tools to help employees make informed decisions about their RSU investments. These resources can range from webinars and tutorials to interactive calculators and investment guides.

8. Security and Data Protection

RSU brokerage accounts prioritize the security of sensitive financial data. They implement robust security measures to protect account information and ensure that employee data is kept confidential.

9. Flexibility and Customization

Some RSU brokerage accounts offer customization options, allowing employees to tailor their investment strategy to their individual financial goals and risk tolerance. This flexibility can empower employees to make choices that align with their unique circumstances.

10. Compliance and Regulatory Support

RSU brokerage accounts are designed to comply with legal and regulatory requirements. They help employers and employees navigate complex tax laws and securities regulations associated with RSUs.

11. Employee Engagement

By providing employees with access to a brokerage account for their RSUs, employers can enhance employee engagement and satisfaction. It allows employees to actively manage and monitor their RSU investments, fostering a sense of ownership and control.

Things to Consider When Deciding On A Brokerage Account for RSUs

As an employer, when you're deciding on the ideal brokerage account for your employees' RSUs, several critical factors should guide your decision. Ensuring that your employees have the best possible experience with their RSU program involves considering a range of factors that impact their financial well-being and satisfaction.

✔ Employee Preferences

Understanding your employees' financial goals and preferences is paramount. Some employees may value immediate access to RSU funds, while others may prioritize long-term tax advantages. To address these varied needs, initiate communication with your employees and offer a range of options, including individual brokerage accounts, employer-sponsored accounts, or even custodial accounts, where applicable.

Conducting surveys or one-on-one discussions can provide valuable insights into their preferences, enabling you to tailor the RSU program to meet their individual financial goals and needs, ultimately increasing their satisfaction and loyalty.

✔ Accessibility and Ease of Use

The accessibility and ease of use of the chosen brokerage platform are essential considerations. Opt for platforms with user-friendly interfaces and, where possible, mobile accessibility. Employees should be able to navigate their accounts effortlessly, monitor their RSU holdings, and make informed decisions about their investments on the go.

Additionally, evaluate the availability of educational resources and tools within the brokerage platform. The presence of these resources can empower employees to manage their investments effectively and enhance their overall experience.

✔ Costs and Fees

The costs associated with the chosen brokerage account can significantly impact the value of the RSU program for your employees. Look for brokerage accounts that offer transparency regarding their fee structure. Ensure that employees are well-informed about any potential costs associated with their accounts and investments.

Consider cost-effective options, such as platforms that provide low-cost or commission-free trading, and explore whether your company can contribute or subsidize some of the fees, providing added value to your employees.

✔ Tax Implications

The tax treatment of RSUs is a crucial factor to consider. Understand the tax implications in your jurisdiction and how different account types can impact your employees' tax liabilities. Some accounts, like employer-sponsored retirement accounts, offer tax advantages that can benefit both your employees and your company.

Upstock: A Powerful RSU Plan Management Platform

While basically not a brokerage account with all the bells and whistles, you can count on Upstock to manage your employees’ equity compensation. From onboarding and dynamic equity splitting to the motivational dashboard and in-house legal team, you’re just a portal away from achieving your company goals aligned with your team as you share ownership with your best assets: your loyal workforce.

Interested to learn more? Book a demo with Upstock today and join dozens of startups and early-stage companies under its hood.

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