Comprehensive guide to RSUs: From grant to sale

Receiving RSUs from your company can be an exciting experience. You're now part of the ownership club. But what exactly are RSUs, and how do they work? Most importantly, how can you turn them into real wealth?

This guide walks you through everything about RSUs. From understanding what they are to building a diversified portfolio without spending a penny of your cash.

What are RSUs?

RSUs stand for Restricted Stock Units. Think of them as IOUs from your company, where your employer promises to issue actual shares upon meeting certain conditions.

Unlike stock options, RSUs don't require you to pay anything upfront. You wait for them to vest, and once granted, you own the shares outright.

Here's how it works:

• Your company grants you 1,000 RSUs
• They vest over 4 years ($250 per year)
• After year one, you get 250 actual shares
• You can sell them immediately or hold them

The key difference? With RSUs, you're guaranteed to get something valuable (assuming your company's stock has any value). With stock options, you might get nothing if the stock price drops below your exercise price.

RSUs vs stock options: Which is better?

This question pops up frequently. The answer depends on your situation and risk tolerance.

RSUs offer more certainty. Even if your company's stock drops 50%, your RSUs retain their value. Stock options, on the other hand, may become worthless if the stock price falls below your strike price.

Stock options offer more upside potential. If your company's stock experiences a significant upward surge, options can yield a substantially higher return than RSUs.

Example: Your company stock is at $100.

• You get 1,000 RSUs worth $100,000
• Or you get 2,000 options with a $100 strike price

If the stock goes to $150:

• RSUs are worth $150,000 (50% gain)
• Options are worth $100,000 (2,000 × $50 profit)

If the stock goes to $200:

• RSUs are worth $200,000 (100% gain)
• Options are worth $200,000 (2,000 × $100 profit)

Both perform similarly in this scenario. But if the stock drops to $50, RSUs are still worth $50,000 while options are worthless.

Why do companies give RSUs

Companies don't hand out RSUs out of generosity. They have strategic reasons.

Retention is the most significant factor. RSUs typically vest over multiple years, creating what is often referred to as "golden handcuffs." This means you're less likely to leave when you have unvested RSUs waiting.

Alignment matters too. When you own company stock, you care more about company performance. Your interests align with shareholders.

Cash flow benefits. Companies can grant RSUs without spending immediate cash. They dilute existing shareholders slightly instead of depleting cash reserves.

Tax advantages for companies. Companies get tax deductions when their RSUs vest. This reduces their tax burden.

RSU taxation: What you need to know

RSU taxation trips up many people. Understanding the basics saves you from nasty surprises.

Vesting triggers taxation. When your RSUs vest, you owe taxes immediately. The IRS treats vested RSUs as regular income.

Withholding occurs automatically. Most companies withhold shares for tax purposes. If 100 RSUs vest worth $10,000, your company may withhold 25-30 shares for taxes.

A double taxation risk exists. You pay income tax when RSUs vest, and you pay capital gains tax when you sell (if the stock price has changed after vesting).

100 RSUs vest when the stock price is $100 per share.

• You pay income tax on $10,000
• You sell later when the stock is $120 per share
• You pay capital gains tax on $2,000 profit

State taxes vary. Some states have no income tax. Others tax RSUs heavily. Consider your state's tax situation.

RSU vs ESOP: Understanding the difference

Many people confuse RSUs with ESOPs (Employee Stock Ownership Plans). They're entirely different.

RSUs are individual grants. Your company gives you specific RSUs. You control when to sell after vesting.

ESOPs are company-wide programs. The company creates a trust that owns company shares. All eligible employees participate.

Taxation differs significantly. RSUs create immediate tax liability at vesting. ESOPs often defer taxes until you leave the company.

Control varies. With RSUs, you decide when to sell. With ESOPs, the trust manages the shares.

RSUs vs RSAs: The subtle differences

RSAs (Restricted Stock Awards) are RSUs' cousin. The differences are subtle but essential.

RSAs are actual shares immediately. You own the shares right away but can't sell them until restrictions lift.

RSUs are promises. You don't own actual shares until vesting.

Voting rights differ. RSA holders might get voting rights immediately. RSU holders typically don't vote until vesting.

Tax timing varies. RSAs allow 83(b) elections to pay taxes upfront. RSUs don't offer this option.

Most tech companies use RSUs instead of RSAs. RSUs are simpler to administer and understand.

Your most significant risk: Concentration

Here's the uncomfortable truth about RSUs. They create a dangerous concentration risk.

Single company exposure: Your salary and RSUs are derived from the same company. If the company struggles, both your income and investments are affected.

Sector concentration. If you work in tech, your RSUs are tech stocks. Your portfolio becomes overweight in one sector.

Timing risk. RSUs vest according to the company's schedule, not when you want to sell. You may be forced to hold them during market downturns.

Liquidity constraints. Some companies have blackout periods where you can't sell. This limits your flexibility.

Consider Enron employees. They had salaries AND retirement funds invested in Enron stock. When Enron collapsed, they lost everything.

Building a diversified portfolio with zero cash

Here's the exciting part. You can build a diversified portfolio using your RSUs without spending your own money.

Step 1: Transfer RSUs to a new brokerage account

Most companies deposit vested RSUs into a specific brokerage account. You can transfer these shares to your preferred broker.

Popular options include:

• Fidelity
• Charles Schwab
• E*TRADE
• TD Ameritrade

Choose a broker with low fees and good research tools. You'll be making multiple trades.

Step 2: Sell your company stock strategically

Don't sell everything at once. Create a systematic selling plan.

The 25% rule works well. Sell 25% of your vested RSUs each quarter, providing regular diversification without creating huge tax bills.

Consider tax-loss harvesting. If your company stock drops after vesting, you can sell at a loss to offset other gains.

Time your sales around earnings. Avoid selling right before earnings announcements. Stock prices often swing wildly during these periods.

Step 3: Buy other stocks with the proceeds

Use the money from selling company stock to buy a diversified portfolio.

Index funds provide instant diversification. A total market index fund gives you exposure to thousands of companies.

Consider international exposure. Add international developed and emerging market funds.

Don't forget bonds. Even young investors should have some fixed income for stability.

Example portfolio allocation:

• 40% US total market index
• 20% International developed markets
• 10% Emerging markets
• 20% Bonds
• 10% REITs

Step 4: Reduce portfolio volatility

Diversification naturally reduces volatility. But you can do more.

Rebalance regularly. Sell winners and buy losers to maintain your target allocation.

Dollar-cost average. Instead of investing all proceeds at once, invest gradually over several months.

Consider defensive sectors. Utilities, consumer staples, and healthcare tend to be less volatile than tech.

Practical example: From RSUs to diversified portfolio

Let's see how this works in practice.

Sarah works at a tech company. She gets 1,000 RSUs worth $150,000 when they vest.

Month 1: Sarah transfers her RSUs to Fidelity. She sells 250 shares ($37,500) and buys:

• $15,000 in total market index fund
• $7,500 in international fund
• $7,500 in bond fund
• $7,500 in REIT fund

Month 4: Sarah sells another 250 shares and repeats the process.

Month 7: Sarah sells another 250 shares and invests the proceeds.

Month 10: Sarah sells her final 250 shares and completes her diversification.

Result: Sarah now has a $150,000 diversified portfolio, rather than $150,000 invested in a single stock. Her risk has dropped significantly while maintaining growth potential.

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Common mistakes to avoid

Mistake 1: Holding for too long. Many people fall in love with their company stock and hold RSUs for years without diversifying, creating unnecessary risk.

Mistake 2: Selling everything at once. This creates large tax bills and removes any upside potential from your company stock.

Mistake 3: Ignoring tax implications. RSU sales generate taxable events. Plan your sales to minimise tax impact.

Mistake 4: Not having a plan. Random buying and selling lead to poor outcomes. Create a systematic approach.

Mistake 5: Trying to time the market. You can't predict when your company stock will peak. Stick to your selling schedule.

Advanced strategies for high earners

If you're in a high tax bracket, consider these advanced strategies.

Tax-loss harvesting. Sell losing positions to offset gains from RSU sales.

Charitable giving. Donate appreciated company stock directly to charity. You avoid capital gains tax and get a deduction.

529 plan funding. Use RSU proceeds to fund children's education accounts.

Backdoor Roth conversions. If you're over IRA income limits, use RSU proceeds for Roth conversions.

Managing RSUs during market volatility

Market downturns create unique challenges for RSU holders.

Don't panic sell. Emotional decisions during market crashes usually backfire.

Consider dollar-cost averaging. If your company stock is down significantly, consider slower diversification to avoid locking in losses.

Rebalance your portfolio. Market volatility creates rebalancing opportunities.

Stay disciplined. Stick to your diversification plan regardless of market conditions.

RSUs can be a powerful wealth-building tool when appropriately managed. The key is understanding the risks and taking action to diversify your holdings.

Start with small steps. Transfer your RSUs to a preferred broker, sell a small portion, and invest in a diversified fund. Build the habit of regular diversification.

Remember, the goal isn't to get rich quickly from your company stock. It's to build sustainable wealth over time through diversification and discipline. Your RSUs are just the starting point for a much larger financial journey.

Frequently asked questions about RSUs?

1) What is the best strategy to sell RSUs?

Sell your RSUs in stages over time to reduce risk and manage taxes. Reinvest the proceeds in a diversified portfolio.

2) Can RSU be sold immediately?

Yes, you can usually sell RSUs as soon as they vest, unless your company has blackout periods or trading restrictions.

3) What is the 30-day rule for RSU?

There’s no special 30-day rule for RSUs. The 30-day rule usually refers to the wash sale rule for claiming tax losses.

4) What is the wash sale rule for RSU?

If you sell RSU shares at a loss and buy the same stock within 30 days, you can’t claim the loss on your taxes.

Disclaimer: This content is for informational purposes only and is not financial or tax advice. Consult a professional for guidance.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.