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Two Key Goals for Managing your Restricted Stock

What Are Two Key Goals For Managing Your RSU's? 

When you receive company shares as a part of your compensation, managing the complexity and implications can be mind-boggling. On top of a long-list of both life and work 'to-do's' you now have another item to add to the list: What do I do with my restricted stock (or ISOs, NSOs, etc)? 

Luckily, when it comes to RSU's, simplifying the complexity down to a couple clear goals can be particularly clarifying. 

  1. Tackle taxes proactively 
  2. Avoid concentration risk and diversify your investment portfolio in a tax-efficient manner. 

Tackle Taxes Proactively with RSU's

First things first: be proactive while managing the tax implications of your RSUs. Like any income, you pay taxes on your RSUs. In fact, when they vest, RSUs are taxed as personal income (not capital gains). Your company's payroll provider usually withholds taxes on this income, but it often isn't enough. This can result in an unexpected tax bill during tax season. Ouch! 

If you decide to hold on to the shares instead of selling upon vesting you now have set yourself up for other tax implications, mainly short or long-term capital gains tax on any gains. (By the way, we wrote about the three key dates to track (Grant date, Vesting date, Sell date) while managing your restricted stock here.)

All to say, it pays to have a plan prior to your shares vesting. In this way, you can be proactive and focus on execution rather than getting overwhelmed by options or complexity. 

Avoid Concentration Risk  

Whether early or late in your career, restricted stock holdings often accumulate faster than other assets on your balance sheet. This is of course heightened when RSU grants are left unmanaged, unassessed, or unplanned for. Ultimately, this can lead to a situation where you have a concentrated position in a single, often-volatile, stock. More, your career and annual income are already tied to your company. If the tides of fortune change, as they often do economically or for company-specific reasons, you might be looking for new opportunities at the same time as the stock has been cut in half or worse.  

This is called concentration risk. 

To put a number on it, anytime a single holding, like your company's stock or the stock of another company, equates to more than 5-10% of your total net worth you now have  a significant degree of concentration risk on your balance sheet. We think holding any more than this amount in company shares is speculative at best. At worst, it can lead to more disastrous scenarios. 

There is an easy solution, it is simply to be proactive in managing concentration risk. Coordinating diversification strategies with your tax plan and overall financial plan is a simple way to improve and de-risk your overall financial situation. 

View Your RSUs as Income, not Savings

One last thing. View your RSU's as income, not savings. When the shares vest you have received taxable income. What you do next is up to you. You can sell your shares and do something else with that money. Or, you can decide to invest in your company' stock (this is the default position because no one sells for you). What we often see is that individuals default toward the latter, and miss opportunities with the former. For example, maybe you regularly building a RSU portfolio, but you are not maxing out your 401k, Roth IRA, or other tax-efficient savings opportunity. This is a missed opportunity. 

So, before you decide to hold onto your shares, ask yourself the following, "How else could I use this cash?" 

  • Could you invest it elsewhere for tax savings (i.e. deferred 401k)? 
  • Could you invest in a Roth IRA where it will never be taxed again? 
  • Could you payoff high-interest student loans or other consumer debt? 
  • Could you build your emergency savings fund? 
  • Could you simplify diversify into other companies or assets?
  • Is there a vacation you would like to talk? A friend you'd like to travel to see? 
    • Yes, assuming you are being financially prudent overall, spending the cash from RSU sales is OKAY! 

Ultimately, compel yourself to make an argument for holding onto your restricted stock shares rather than coming up with reasons to sell. There are plenty of reasons to sell. Selling should be the default. Holding is harder to justify. 

To end, stepping back from the complexity of RSU's, it's best to focus instead on what your goals are. Your goals are yours. We want you to achieve them. When it comes to RSU's, we think the principle goals should be proactively managing the tax implications and limiting concentration risk. For more, check out the above video, where Trailhead Partner, Bill Mulvahill, CFP®, CPA, discusses these strategies and more. 

If you have any questions, please don't hesitate to reach out. 

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