Employees can receive many forms of equity- or stock-based benefits as part of their compensation packages. One that you may have heard of is restricted stock units (RSUs).
Like other types of equity compensation, RSUs can be complex and benefit from in-depth planning to reap the optimum reward.
Restricted stock units (RSUs) are a type of employee compensation that gives employees shares of a company's stock. In most cases, RSUs are subject to a vesting schedule and potentially other stipulations.
Employees don't have to pay anything to receive RSUs and are only responsible for taxes when they actually receive them — in other words, when they vest. The vesting schedule determines when ownership rights are activated once a pre-specified number of service years is met.
RSUs are used as an inducement to attract and retain top talent. They are appealing because if the company performs well and the share price grows, employees can benefit financially, encouraging them to contribute to the company's growth.
As employees need to meet certain vesting requirements, RSUs can motivate them to stay put for the long term and, as a result, can improve retention. RSUs can be used by private healthcare systems, public companies, and private employers alike.
Without knowing all the details of your financial situation, the decision to hold or sell your RSUs is a tricky one. As a rule of thumb, selling some vested shares at vest is prudent to the extent that it can cover your tax liability.
For example, if you have 100 shares vesting, you might consider selling 40 shares to cover the tax liability created by the vesting event. Employers and equity compensation plan providers typically have options to facilitate this type of trade.
As referenced above, two critical components of RSUs relate to your investment strategy — the outlook on company performance, thus stock performance, and the diversification aspect. If you are unsure what to do, selling upon vesting might be a good option if you plan to diversify your proceeds to an investment portfolio.
Lastly, if you've engaged with a financial planner and understand your financial picture, holding vested shares might also be a good option. Depending on your rank within your company, your role might cause you to hold shares as a show of good faith to your fellow executives and team members.
There's no question that restricted stock units add complexity to an already complex landscape. As financial planners for doctors and executives around the country, we have deep expertise in equity compensation plans, tax planning implications, portfolio diversification elements, and how your RSUs might impact the rest of your financial plan.
Not sure what to do at your next vesting period? Schedule a complimentary consultation with an SDT financial planner.
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Jordan Bilodeau, CFP®, CEPA, is the Director of Planning & Strategy at Spaugh Dameron Tenny, where he leads firmwide planning initiatives and helps clients navigate complex financial decisions. With experience in portfolio design, tax strategies, and business succession planning, Jordan works with executives, physicians, dentists, and successful retirees to coordinate every aspect of their financial lives. He holds both the CERTIFIED FINANCIAL PLANNER® and Certified Exit Planning Advisor designations and has a Master’s degree in Wealth and Trust Management, providing tailored guidance for clients.
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