The Top Five Reddit Questions on Restricted Stock Units

Restricted stock units (RSUs) remain a frequent topic of conversation on Reddit, especially on the two subreddits r/personalfinance and r/FinancialPlanning. Drawing from the posts and questions we’ve seen over time, we compiled five of the most common questions and our take on the answers. 

1. What Should I Do When My RSUs Vest? 

This was a popular question, especially from people who received RSUs for the first time. These users asked if they should hold or sell the shares they receive from their RSUs upon vesting. Most responders posted that they typically sell RSU shares as soon as they vest.  

Several commenters also shared a helpful way to think about it: treat the RSUs the same as a cash bonus. If the company paid you the value of the RSUs in cash, would you turn around and invest that cash in the company stock? If the answer is yes, consider holding onto the shares. If the answer is no, then consider selling the stock to convert it to cash. 

That’s our default recommendation as well. Because you pay ordinary income tax on RSUs when they vest and employers typically withhold income and payroll taxes automatically, taxes don’t drive you to sell or hold the shares. It’s purely an investment decision. Often a prudent answer is to sell the shares and use the cash for living expenses, add to your diversified investment portfolio, or a little of both.  

2. Should I Include Income from RSUs in My Budget? 

This was a particularly insightful question that sparked plenty of discussion. RSUs are intended to be part of your total compensation package and have some characteristics that may make it reasonable to include their income in your budget. While RSUs function much like a bonus (and are taxed like bonuses), they differ in important ways. For example, RSUs are often more predictable. You typically know the number of shares you will receive as your RSUs vest, even if you don’t know their exact value because the company’s stock price fluctuates.  

Bonuses, however, vary based on individual, team, and company performance in the best case and are purely discretionary (random) in the worst. With reasonably good short-term predictability, including some or all of your projected RSU income in your budget can make sense. 

An important factor in deciding how much RSU income to include in a household budget depends on your total income and what percent of that income comes from RSUs. Some executive compensation packages include a high percentage of total compensation from RSUs. In that case, including RSU income in the annual budget will be necessary. In other cases, where RSU income is a small part of total income, it can be better to live off the salary component of compensation and treat vesting RSUs as extra income to be saved.  

For many households, it’s better not to become dependent on RSU income to subsidize their long-term standard of living. That’s because if RSU income drops because all RSUs finish vesting and the company doesn’t give refresh grants, it’s often hard to cut back on expenses enough to bring the budget back in line. 

For long-term planning, we typically include only currently granted RSUs in our financial models and do not include possible future grants. This is a safe assumption and our starting point for most financial plans. 

3. How Are RSUs Taxed? 

This question appears in many posts in a variety of contexts. A key concept is that RSUs are taxed in two parts. 

First, the value of RSUs is taxable as ordinary income when the RSUs vest. The income is reported on your pay stub when the RSU vests (and on Form W-2 at year-end). You owe federal, and possibly state, income tax and payroll tax on the value of vested RSUs. If you sell the shares immediately, you owe no additional tax. 

Second, the market value of the vested shares on the day you receive them (which isn’t always the same as the vesting date; there can be delays) becomes your cost basis in those shares. If you later sell the shares, any increase or decrease in value from that cost basis will result in a taxable gain or loss subject to the normal rules for investments. If you hold the shares for more than one year, the gain will be taxed at the favorable long-term capital gains tax rates.  

Otherwise, gains will be taxed at short-term capital gains tax rates (which are the same as ordinary income tax rates). Any losses are deductible against capital gains incurred during the year. Up to $3,000 in losses can be deducted against ordinary income. You can carry forward any additional losses and use them in future years. 

Tax Tip: Many people hold their RSU shares after vesting and later decide to sell some of them. Several posts asked about which shares to sell first. Usually, a good order to sell them to minimize income tax is the following: 

1. Shares with greatest to least short-term capital loss 
2. Shares with greatest to least long-term capital loss 
3. Shares with least to greatest long-term capital gain 
4. Shares with least to greatest short-term capital gain 

4. How Does Tax Withholding Work? 

This is another common question related to taxes that comes up in a variety of ways. It is important to remember that the company will withhold taxes from the RSU income when the RSUs vest. The amount of tax the company withholds is often not correct for your situation, though, because by law, companies withhold federal and state income taxes at a specified tax rate.  

For example, companies typically withhold federal tax at a rate of 22% of RSU income. We often find that withholdings on RSUs are not enough to cover the full tax liability, and because of this, year after year many people with RSUs owe more income tax than they expect. The solution is to create a tax projection during the year to calculate the correct amount of tax owed and make additional estimated tax payments throughout the year to cover the withholding shortfall. 

5. What Should I Do with My Private Company RSUs? 

Several questions focused on private companies, and those situations are typically the most complicated. Deciding what to do with these often depends on the specific features of the company’s stock plan and the facts and circumstances of an individual’s situation. RSUs in private companies can create both problems and opportunities. 

Most large private companies now issue what are called “double-trigger RSUs.” This type of RSU has the normal time-based vesting schedule and adds a second triggering event, such as an IPO or acquisition. Both the time-based vesting and liquidity event have to happen for vesting to occur, thus the name double-trigger. These RSUs are designed this way to prevent you from owing tax on shares you receive that you cannot sell. This isn’t a problem with RSUs from publicly traded companies because you (or usually the company) can sell shares to raise cash to pay income tax that becomes due when RSUs vest.  

In the case of private companies, however, you cannot sell shares, and in the worst case you need to raise cash from outside sources to pay your tax bill. Double-trigger RSUs solve this problem. (Double-trigger vesting can still generate difficult tax situations, though, as it can lead to a large amount of income in the year of a liquidity event, which can make the under-withholding problem even worse.) 

Some private companies may have other mechanisms to allow you to pay the tax on vesting shares while continuing to hold some of the shares, which can potentially create a good investment opportunity. It’s difficult for individual investors to buy stock in private companies, and an RSU from a private company may enable you to do just that. Still, you will want to do your research to make sure it’s a good investment before deciding to hold the RSU shares. You will also want to make sure you understand exactly how you will pay your tax on the vested RSUs. 

Bottom Line: Seek Reliable Input 

There is plenty of great discussion on Reddit about how to handle various issues related to RSUs, some from knowledgeable sources and some from not-so-knowledgeable sources. Before you make an important decision on your RSUs, make sure to get input from a source you trust. 

Savant Wealth Management provides comprehensive wealth management services, including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want help properly managing your RSUs and using them to build wealth, schedule a complimentary consultation. 

Bruce R. Barton Managing Partner / Financial Advisor CFP®, CFA®, MBA

Bruce is a CERTIFIED FINANCIAL PLANNER® professional and Chartered Financial Analyst® (CFA®). He works with clients in the technology, biotech, and biomedical industries, drawing on his background in engineering and product management.