Restricted Stock Units – Why you should sell them as soon as they vest

My bonus at my current job consists in Restricted Stock Units (RSUs). Many companies nowadays give away RSUs, and it’s very easy for employees to confuse that benefit with stock options.

How Restricted Stock Units are different from stock options

From a tax perspective, RSUs are very different from stock options, in that you owe tax on them as soon as they vest. Later on, you’ll owe capital gain taxes on them, based on the difference between the vesting price and the selling price.

In other words, it’s as if you received a cash bonus (for which you get taxed immediately), and invested it in your company’s stock.

Andy Rachleff at Wealthfront puts it very well:

If your company gave you a year-end bonus of $100,000, would you use all of it to buy your company’s stock?

Hell, no.

Yet this is basically what you do if you’re not selling your company RSUs as soon as they vest.

I’ve been there, done that: today a significant amount of my wealth is in my company’s stock, because I did not sell as soon as the units vested. This puts me in an unnecessarily risky situation. I’d rather have that portion of my wealth in a diversified ETF. The problem is, if I sell these RSUs today, I’ll be hit by capital gain taxes and probably move to a higher tax bracket. It’s a lose-lose scenario, and wouldn’t have happened, had I sold at vesting time.

What to do if you did not sell your RSUs at vesting time?

I’m now stock with a significant share of my wealth in a not diversified stock. Worse, this stock is tied to my company, so technically I have my main source of income (my salary) and a big part of my wealth tied to the success of my company. So far it’s been doing well, but I can’t be crossing fingers and bet my retirement on this.

So what are the options?

The first thing of course is to act now, and sell my upcoming RSUs as soon as they vest. I’ve been doing that since 2015, now that I understand better how this works. I will not add any more stock of my company as it doesn’t make sense from a diversification perspective. In other words, I’ll sell all RSUs as they come in. It does not solve the problem for my existing stock, but the first thing to do is to not make things worse. The upcoming money can then be invested in diversified funds. This will contribute to reducing the relative amount of my company’s stock in my overall wealth.

Secondly, one thing I’ve been considering recently is to try to sell some of these RSUs and offset them with other stock I own which has been on a losing streak. Basically, selling both losers and my company stock (currently a winner) would end me up in a “zero sum” situation, in order to not impact my tax rate. This would also allow me to reduce my investment in some bad stock… something that I was not emotionally prepared to do until recently, because I hated the idea to sell something that has been losing me money. But now that I’m thinking of the potential tax benefits, and the fact that it would reduce my exposure to emerging markets (and put me more in line with my portfolio target), I am thinking of this as a good thing.

This will, of course, only account for a tiny amount of my company’s stock.

An other option I can think of is to closely monitor my income every year, and figure out how much of the stock I can sell without falling into a higher tax bracket. This is, honestly, more work than I’m willing to do right now, but I’ll have a serious look into it next year, once I understand my tax situation better in the US (April 2016 will be the first time I have to pay taxes since I moved to the US, so I am not entirely sure at this point how bad this will be for me…)

Of course, whenever rebalancing time comes, this stock needs to be the first one to go. This is definitely what I intend to do once it makes sense for me to rebalance through selling (I am still in accumulation phase, so for now I rebalance by buying the ETF that makes the most sense each month).

This will also be true once I reach FI and start using the stach as my source of revenue: Company’s stock will be the first one to go away when it is time to sell. But, unfortunately, this is an other way of saying I heavily rely on that stock not going dramatically down in the years to come. In its current state, it is one of the main drivers of my wealth increase, but it could turn into my worst nightmare once I retire.

Do you have company stock? RSUs? Other monetary benefits? How much of your wealth is tied to your company’s stock?

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