Wealth
Understanding Restricted Stock Units (RSUs)
How RSUs vest, get taxed at vesting and sale, and why unmanaged grants can quietly turn into concentrated stock risk.
Educational only. Not financial, tax or legal advice, and not a recommendation to buy or sell anything. Any dollar amounts or tax rules here are tied to the year they were written and change annually — verify current figures and talk to a qualified professional about your own situation.
Restricted Stock Units (RSUs) are a common form of compensation where a company grants shares to employees, subject to vesting conditions. Understanding how RSUs work can help you maximize their value and manage taxes efficiently.
How RSUs Work
- Granted: RSUs are awarded but not owned until vested.
- Vesting: Typically follows a schedule (e.g., 33.3% per year) or performance milestones.
- Taxation: Taxed as ordinary income at vesting based on the stock's value. Any future gains are taxed as capital gains when sold.
Benefits and Risks
- No Purchase Cost: RSUs are granted for free.
- Predictable Value: Unlike stock options, RSUs always have value at vesting.
- Stock Price Risk: If the stock drops post-vesting, the value declines.
- Tax Burden: Vesting triggers ordinary income tax, which can be significant.
- Concentrated Position: If you choose not to sell at the vesting period, over time, you could end up with massive tax liability and single stock risk.
Managing RSUs Wisely
- Plan for Taxes: Sell a portion at vesting to cover taxes.
- Diversify: Avoid overexposure to company stock.
Key Takeaway
RSUs are a valuable wealth-building tool, but managing taxes and diversification is crucial.