RSUs Are Income, Not Magic: How to Think About Your Restricted Stock Units
(5 minutes to read)
RSUs have a way of feeling like a windfall. The numbers are large, the timing is infrequent, and the shares show up in a brokerage account rather than a paycheck. None of that changes what RSUs are. The shares that vest in your account each quarter are compensation, paid in stock instead of cash, and the IRS treats them as such.
Most tech professionals know this in theory. In practice, many treat their RSUs like a wholly different category of wealth than their salary. That framing can lead to mistakes: under-withholding on taxes, drifting into a heavily concentrated single-stock position, and never quite integrating equity compensation into a coherent financial plan.
The reality is that an RSU vest is two events that you will want to think about separately. First, you got paid in stock. Second, you now own that stock. Deciding what to do with the stock should not be influenced by how you received it. Much of the trouble I see tech professionals get into with RSUs comes from conflating the two.
Here’s how to think through them.
What Actually Happens When RSUs Vest
A restricted stock unit, or RSU, is a promise from your employer to deliver shares of company stock on a future date, provided you’re still employed with the company when that date arrives. Vesting is the moment your employer fulfills that promise. Most public-company RSU grants follow a time-based schedule, typically two to four years with monthly, quarterly, or annual vesting dates. Many private companies implement a “double trigger” element to the vesting, where, in addition to the time-based vesting, the company also requires a liquidity event. This prevents employees from accumulating a tax bill without the means to pay it, but it often leads to a high tax bill in the year of the liquidity event.
When shares vest, the fair market value of those shares on the vest date is taxable as ordinary income, reported on your W-2 the same way as salary or a cash bonus. Your employer typically withholds taxes by selling a portion of the vesting shares (often called “sell-to-cover”), and you receive the net shares in your brokerage account.
Your cost basis in the shares you keep equals the same fair market value that gets reported as income. In other words, the fair market value on the date of vest becomes your cost basis in those shares. If the stock appreciates after vesting, any gain on a subsequent sale is a capital gain, taxed at long-term rates if you hold the shares for more than a year. If the stock declines, you have a capital loss. Either way, the income event is already in the rearview mirror by the time you decide what to do with the shares.
A concrete example: An engineer earning $250,000 in base salary has $200,000 worth of RSUs vest during the year. That $200,000 is reported on the W-2, so total compensation for tax purposes is $450,000. The shares net of withholding sit in the brokerage account with a cost basis equal to the vest-date price.
Why “Hold and Hope” Isn’t a Strategy
One of the most common mistakes I see isn’t that someone consciously decides to hold a concentrated position in their employer’s stock. It’s that they never decide anything at all. Shares pile up in the brokerage account quarter after quarter, and one day the tech professional looks up and realizes that 40% or 50% of their net worth is sitting in a single stock.
That isn’t a strategy. It’s a default.
Concentration risk in a single stock is meaningfully different from market risk in a diversified portfolio. The U.S. stock market as a whole has historically grown over long periods, even through significant downturns. Individual stocks have no such guarantee. Even the most well-run businesses have experienced extended periods where their stock didn’t perform.
A useful mental test exists for whether you actually want the concentrated position you have. Imagine your employer paid you the cash equivalent of this quarter’s vest instead of stock. Would you turn around and use all the cash to buy shares of your employer? For almost everyone, the honest answer is no. That answer reveals an important fact: Inertia is holding the position, not conviction.
Sell-at-Vest as the Default
For many tech professionals, one approach to consider is selling vested RSUs and redirecting the proceeds into a diversified investment plan, debt paydown, or other financial goals. Treat the vest like a cash bonus and deploy it intentionally.
Taking a structured approach can help address inertia in decision-making. By making the default action “sell,” you force any decision to hold into an active choice rather than a passive one. That alone can solve much of the concentration problem.
In some situations, holding some portion of vested shares may make sense, including when it aligns with an individual’s broader diversification strategy, tax planning considerations, or long-term financial goals. If you have strong conviction in the company, a thoughtfully sized position (somewhere in the range of 5% to 10% of net worth, not 50%) may be reasonable. Some employees in senior roles are subject to stock ownership guidelines that require a certain holding. And executives or employees with material non-public information may need to use a 10b5-1 plan, which is a pre-established trading schedule that allows sales during blackout periods.
One concern that often paralyzes people is the tax implications of selling at vest. A very common misconception I see relates to the type of income RSUs generate. Many people believe that holding the shares for at least a year is better because they will qualify for long-term capital gains tax treatment, lessening their tax bill. While this is true for changes in value moving forward, it is not true for the tax bill already generated upon vest. The tax bill on a sale at vest is often small or minimal for many investors because the cost basis generally includes the value that was taxed as income. The taxable gain is only the appreciation between the vest date and the sale date. For shares sold within days or weeks of vesting, that gain is typically minimal.
The Tax Withholding Trap
Here’s a quiet problem that catches some high earners by surprise: Many RSU recipients have a large federal tax balance, and possibly penalties, due when filing, but do not know why. The default federal withholding rate on RSU vests is 22%. For supplemental wages above $1 million in a calendar year, the rate is 37%. But most tech professionals at companies like Google, Meta, Apple, and Nvidia are in the 32% or 35% federal bracket on at least a portion of their income.
That gap between 22% withheld and 32% to 35% owed creates a meaningful tax shortfall.
The math on a $200,000 vest tells the story. At 22% withholding, the IRS receives $44,000. At an effective federal rate of 35% on that income, the actual tax owed is closer to $70,000. The $26,000 difference comes due at tax filing time and may trigger underpayment penalties along the way.
State taxes can compound the issue. For example, the California supplemental withholding rate on stock-based compensation is 10.23%, while the top California marginal rate for high earners can reach 13.3%. The shortfall isn’t enormous, but it stacks on top of the federal gap.
The fix is straightforward: Estimate the actual tax owed on RSU income, then increase withholding from your W-2 wages, make quarterly estimated tax payments, or set aside cash to cover the bill in April. Whichever route you choose, the decision should be made before the year ends.
Integrating RSU Income into Your Financial Picture
Once you have a handle on the tax piece and a default selling strategy, the remaining work is integrating RSU income into your overall financial plan rather than treating it as a side account.
A few practical points. Build a vest calendar so you know when income arrives. Quarterly vests create predictable cash flow events you can plan around. If a vest lands at the start of a quarter, you can deploy proceeds to retirement accounts, taxable investments, debt paydown, education funding, or real estate goals as part of an annual plan rather than reactively.
Look at your total household balance sheet, not just the brokerage account. Concentration in your employer’s stock often correlates with other risks you are already carrying. Your salary, your benefits, and frequently your geographic and sector exposure all depend on the same company or the same industry. A diversified portfolio at the household level requires looking at all of that together.
Coordinate equity compensation across the year. RSU vests, employee stock purchase plan (ESPP) purchases, and any exercises of incentive stock options (ISOs) or non-qualified stock options (NSOs) all interact with each other and with your overall tax picture. The alternative minimum tax (AMT), in particular, can be triggered by ISO exercises stacked on top of high RSU income.
Decide Once, Then Automate
The reason many tech professionals end up with an oversized concentrated position isn’t that they accepted the risk. It’s that they never sat down and made a decision. Vesting happens automatically, withholding is set by default, and the path of least resistance is to do nothing with the shares.
One option is to make the decisions once and let them run. Set your selling strategy, set your tax-withholding adjustment, and set the destinations for the proceeds. After that, every vest is just an execution of a plan you already made, instead of a question you have to answer each time you vest.
RSUs are a powerful form of compensation, and tech professionals are fortunate to receive them. But they are compensation, not magic. Treating them like your salary is the first step toward turning equity into real, durable financial progress. If you’d like to talk through how your RSUs may fit into a comprehensive financial plan — alongside your other equity compensation, tax planning, and long-term goals — I regularly assist clients with questions related to equity compensation and financial planning. You can schedule a complimentary consultation directly.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
I. Maximilian Gonda
Financial Advisor
CFP®