RSUs: The Basics

Restricted Stock Units: Tax, Financial, Estate, and Retirement Planning

Richard Friedman

Tax Planning For RSUs

Tax planning is easier for RSUs than it is for stock options. With RSUs, you pay income taxes when the shares are delivered, which is usually at vesting.

Share Withholding: The value of the stock at vesting will be reported on your W-2 in the year when the shares are delivered to you. Your company plan may withhold taxes (federal, state, local, Social Security up to the yearly maximum, and Medicare). Some plans, at least for U.S. employees, let you pay the withholding taxes by "surrendering" an equivalent value of shares. Share surrender lets you not only avoid paying taxes in cash but also helps you to diversify your stock portfolio because you use company shares instead of cash to meet your tax obligations.

Alert: When this difference exists in amount of taxes you will eventually owe, you should factor it into your tax planning. You may need to make an estimated tax payment for the quarter in which vesting occurred or at least put aside the additional taxes to pay when you file your annual return.

RSU Taxation For Non-U.S. Employees: Outside the U.S., for employees in other countries, the timing of taxation for restricted stock units is similar. Income and social taxes are based on the value of the shares at the time of delivery (not grant), and capital gains tax applies to the eventual sale of the shares. Available in the Schwab Equity Awards Center is the Global Tax Guide, which details the specific tax treatment in various countries throughout the world.

Taxes If You Relocate: If you are a U.S. employee and plan to move either into or out of a state with no income taxes, or to a state with lower taxes, review the tax laws of each state. Many states tax RSUs if you live or work in the state during part of the vesting period, even if you don't reside in that state when the award is taxed. If you move, have your company's payroll department change tax withholding from one state to another.

Tax apportionment is similar if you move between countries during the vesting period. At share delivery after vesting, you may owe an amount of tax to your former country of residence that is commensurate with the portion of the vesting period that elapsed while you were working there.

Wash Sale Rules: The wash sale rules in the U.S. tax code disallow taking a tax loss relating to a sale of stock if, within a period beginning 30 days before or ending 30 days after the sale, you acquire substantially identical stock. If you plan on selling other company stock at a loss, ask a tax advisor whether the grant or the vesting is considered an "acquisition" that may defer recognition of the loss and carry it forward to the shares delivered at vesting.

Financial-Planning Concerns

The key date to consider in planning for RSUs is the vesting date, when you have the income hit.

What Triggers Vesting: Time-based RSUs vest simply by the passage of time. If you are employed on the vesting date, you receive the stock. In some cases, vesting may hinge on or be accelerated by performance goals, such as achieving a certain stock price or reaching a total shareholder return on earnings-per-share targets. Be sure you know what triggers vesting.

At some pre-IPO companies, vesting depends both on length of employment and on a liquidity event (i.e., the initial public offering).

Alert: Know what will happen if your employment ends for any reason (voluntary or involuntary). Also understand what will happen if your company is acquired: will the award be canceled, will it continue to vest and convert to shares of the buyer, or will just a portion of it vest?

Sell Decisions: Choosing what to do with the stock after it vests combines an investment decision with a tax decision.

Once RSUs vest, you must decide whether to keep it or sell it. If you need cash to meet personal expenses and/or big purchases (e.g., a home purchase or college tuition), the shares can be an ideal source of funds. Selling the stock almost certainly will help you diversify your portfolio: company stock is usually the most risky asset in which employee portfolios are overweighted. If you are regularly in possession of important confidential information about your company, you may want to consider adopting a Rule 10b5-1 trading plan to facilitate a planned sale of stock.

Retirement Planning

If you plan to retire before vesting, check the terms of the plan or grant agreement. For "qualified" retirement (as defined in the stock plan), the entire award may vest, or a pro rata portion may vest according to your service through the retirement date. The answer to this question will affect your cash flow in retirement and any income-shifting strategies. You may be able to choose a retirement date that maximizes your entitlement to these awards.

Estate Planning

RSUs that vest upon your death become part of your estate when you die, like any other asset you own. RSUs normally cannot be transferred for estate planning before they vest, even to family members, trusts for the benefit of family members, or family limited partnerships, though practices may change. Check whether you may designate a beneficiary to receive your RSUs if you die before vesting.