To Sell or Not to Sell: The RSU Dilemma Unveiled

To Sell or Not to Sell: The RSU Dilemma Unveiled

August 30, 2023

To Sell or Not to Sell: The RSU Dilemma Unveiled

Should you sell your RSUs or hold on to them for potential future gains? That's the pressing question that many of us grapple with.

Congratulations on earning those Restricted Stock Units! But as exciting as it is to see those RSUs in your account, deciding what to do next is far from straightforward. You'll be juggling with market trends, tax considerations, and your own personal financial goals.

Let’s clear up everything you need to know about RSUs, look at the influencing factors, and weigh the pros and cons of selling versus keeping them.

Ready to make a more informed decision?

Understanding RSUs

Before diving into the big decision of whether to sell or keep, it's crucial to get a solid grasp on what RSUs are all about. Think of this as laying down the building blocks for that all-important choice ahead.

What Are RSUs?

Restricted Stock Units—known as RSUs—are more than just shares in a company; they're a contractual promise. The company essentially promises that if certain conditions are met, the shares will belong to you.

Unlike traditional shares or stock options, you don't have to reach into your pocket to buy them; they come as part of your compensation package.

How Do RSUs Work?

Picture a treasure chest, secured with a lock. The key to that lock? It's called a vesting schedule—a predetermined time period after which the RSUs convert into actual shares you can sell or transfer. Until then, they're technically not yours.

And while you're thinking about that treasure, remember, the taxman is going to want a piece of the pie. Taxes on RSUs are typically withheld at the time of vesting, so make sure to factor that in.

The Pros of RSUs

Why all the buzz about RSUs? One of the significant upsides is their guaranteed value.

Unlike stock options, which have a strike price you need to consider, RSUs offer a more secure form of compensation. If the company's stock price rises, your RSUs rise with it.

In many ways, it’s like having a backup plan that's built into your earnings.

The Cons of RSUs

But nothing in life is completely rosy and golden. RSUs bring along their own set of challenges.

For starters, you can't control when they vest—that’s predetermined by your employer. Then, there's tax season. The IRS treats RSUs as income, not capital gains, which could bump up your tax liability for the year.

Feeling a bit more enlightened? Armed with this foundational knowledge, you'll find it easier to weigh your options next.

Factors Influencing the Decision

Deciding whether to sell or keep RSUs is more than just a coin toss. It's influenced by a variety of factors, each with its own level of impact. Consider this a roadmap for making a well-rounded decision.

Market Conditions

The stock market isn't just for Wall Street aficionados; it's where your RSUs live and breathe.

Consider the current market trends and your company's recent performance. If the company is on an upswing and industry experts are bullish about its future, holding onto RSUs could be advantageous. For instance, if you were holding onto Tesla RSUs in 2017, selling back then would have meant missing out on significant gains by 2020.

Personal Financial Goals

Maybe you're eyeing a house in Malibu or planning for a financially secure retirement. Whatever the dream, it will influence your decision about RSUs.

For example, if you’re aiming to make a large purchase in the next year, the guaranteed money from selling RSUs could act as a safety net, as opposed to the unpredictability of holding onto them.

Tax Considerations

Taxes are an inevitable part of life and RSUs are no exception. Keep in mind that RSUs are considered supplemental income and are subject to federal tax withholding at a flat rate. State and local taxes could also apply.

Selling immediately after vesting minimizes income tax, but holding and selling later could qualify them for long-term capital gains, which could be a lower tax rate. It's always smart to consult a tax advisor to tailor advice to your specific situation.

Liquidity Needs

It's impossible to foresee when a financial crisis will hit. Maybe the car breaks down or an unexpected medical bill comes in the mail. If immediate liquidity is a concern, selling some RSUs upon vesting can quickly turn them into cash, without having to tap into savings or take on debt.

Now, let’s lay out the benefits and drawbacks of each path—selling and keeping—to help inform your decision.

Selling RSUs: The Pros and Cons

Selling RSUs could be akin to striking gold or missing out on a treasure trove. Understanding the upsides and downsides can make the journey a lot easier.

Pros of Selling

  1. Immediate Liquidity: Selling RSUs means turning them into cash—fast. Imagine the comfort of knowing that an unexpected expense won't put a dent in long-term savings. It's like having an emergency fund, but without the years of building it up.
  2. Diversification: Keeping all assets in one place is akin to betting it all on red. Selling RSUs provides the opportunity to invest in other assets, reducing risk. For example, consider investing in an S&P 500 index fund, which has historically shown stable returns, as a contrast to a single-company stock.
  3. Financial Goals: Whether it’s purchasing a home or starting a business, liquidating RSUs can be the financial boost to make these dreams a reality. Say a down payment for that Malibu home is around $200,000; selling RSUs could get you there faster than any savings plan.

Cons of Selling

  1. Tax Implications: Selling RSUs immediately could mean a hefty tax bill, especially if it bumps you into a higher tax bracket. For instance, earning $80,000 and selling $21,000 worth of RSUs would put you over the $100,000 mark, moving you from a 22% to a 24% federal tax rate.
  2. Lost Potential Gains: A fast sell might mean missing out on significant growth. Imagine you had Apple RSUs in 2005; selling them immediately would have meant missing a 100-fold increase by 2020.
  3. Emotional Impact: The regret of selling too soon can be psychologically taxing. Remembering how a fast sale led to missed financial gains can lead to emotional decisions in future investments.

Navigating the pros and cons of selling RSUs is like piecing together a jigsaw puzzle. Up next, let's turn the tables and explore why holding onto RSUs might be the path you'd want to consider.

Keeping RSUs: The Pros and Cons

One sure thing now or potential for more later? Opting to hold onto RSUs is a bet on the future—both yours and the company's.

Pros of Keeping

  1. Long-Term Investment: Feel bullish about the company? Holding onto RSUs can mean higher potential gains as the stock price increases. For instance, had you hung onto Amazon stock from 2010 to 2020, the value would have increased over twentyfold.
  2. Tax Efficiency: The longer you hold, the more favorable the tax situation. After a year, those capital gains could be taxed at a lower rate, potentially saving thousands of dollars.
  3. Emotional Peace: Knowing that you have a vested interest in the company can provide a sense of security and belonging, adding more than just financial value to your life.

Cons of Keeping

  1. Market Risks: Stock markets are unpredictable. Holding onto RSUs from a company in a volatile industry can be like riding a roller coaster—thrilling, but potentially stomach-churning.
  2. Overexposure: Too much of anything isn't good, even company stock. Remember Enron? Employees who invested heavily in company stock lost nearly everything.
  3. Opportunity Cost: Every dollar tied up in RSUs is a dollar that could be diversifying your portfolio. Missing out on other investment opportunities is a risk not to be ignored.

Quick Tips for Keeping RSUs

  1. Have a Strategy: Aimless holding serves no one. Set specific goals.
  2. Diversify Elsewhere: Offset risks by investing in other financial instruments.
  3. Monitor Performance: Regularly check company financials and market conditions.
  4. Understand Tax Implications: Different holding periods come with different tax rates.
  5. Stay Updated: A quarterly report can make or break a stock's performance.

In conclusion, holding onto RSUs is like having a stake in a potentially winning horse. The gamble is high, yet the potential gains might justify it.

Ready to explore the steps involved in actually selling or keeping RSUs?

Steps for Selling or Keeping RSUs

Making a choice is only half the battle; taking action is the other half. Whether you're cashing out or holding for the future, it's crucial to know what needs to be done.

Steps for Selling RSUs

  1. Contact Your Broker: Typically, RSUs will be in a brokerage account set up by the company. To sell, you'll need to contact the broker, often via an online portal.
  2. Check the Limitations: Some companies have “blackout periods” when employees can't sell stock. Ensure that you're not in violation of any such rules.
  3. Consider the Taxes: Remember, RSUs are taxed as income the moment they vest. Make sure you understand the subsequent tax implications of selling.
  4. Execute the Sale: Once everything's in order, you can proceed to sell your RSUs. You may be given options like limit orders, market orders, or stop orders.

Steps for Keeping RSUs

  1. Confirm the Vesting Schedule: Knowing when your RSUs will fully vest is crucial. Mark those dates on your calendar to stay on top of things.
  2. Store Securely: Ensure your RSUs are stored in a secure brokerage account with trusted credentials. Security breaches are no joke.
  3. Keep Monitoring: Set alerts for stock price fluctuations or company news. Being proactive allows you to make timely decisions.
  4. Revisit Investment Goals: Every so often, revisit your financial objectives to confirm that keeping the RSUs still aligns with your life goals.

So, there you have it—the essential steps for either selling or keeping those valuable RSUs. As you ponder the options, consider this: Choices define outcomes, but making informed choices defines success.

Final Thoughts

Navigating the world of RSUs isn't just about understanding what they are. It's about making them work for you in the context of your broader financial picture, which likely includes other forms of equity compensation.

Sure, RSUs offer a guaranteed value and a relatively straightforward path to ownership in a company. But they also come with their own set of challenges and decisions, ranging from tax implications to market conditions.

With the right strategy and mindset, RSUs can be a powerful tool in your financial arsenal. Evaluate the market, consider personal financial goals, and understand the tax consequences. If the path forward still feels a bit foggy, don't hesitate to bring in the experts—a chat with a financial advisor can provide that much-needed clarity.

To wrap it all up, RSUs can be a win-win, but the key to success is making informed decisions. So take stock—quite literally—of your options, and make your move.

Want to know more about RSUs and how you can leverage them for your financial success? Drop us a message. Let’s talk!

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