You're feeling pretty confident these days. First, you're doing awesome work at a great company, and second, your restricted stock units (RSUs) have vested.
Now for the big question: When do you cash your shares out? If you're like most RSU recipients, you plan to hold on to your shares for a year before selling. That way, you'll avoid the very high tax rate on short-term capital gains, and pay the lower, long-term capital gains rate, right?
Actually that's not how RSUs work. Amazingly, their tax treatment is something that few people in the tech industry understand. Your taxes are calculated and withheld by your company as soon as your units vest. And that tax cut is painful, by the way: Depending on where you live, the IRS and your state of residence could end up taking nearly 50% of your stocks value.
So to be clear, there is no reason to wait a year before dipping into your vested stock. In fact, if you wait a year to sell your stock, and the stock price falls during that time, you'll feel foolish because you'll have paid taxes on the higher, original amount.
The bottom line: You might as well go ahead and do whatever you're going to do with your vested stock. And for a lot of you, there are two choices:
1. Sell shares immediately; start living a little larger.
2. Keep shares and let them appreciate so you can one day live much, much larger.
But allow me to suggest something crazy: Use your stock proceeds to create an actual, grown-up investment portfolio—one that contains a blend of different investments rather than just the stock of your company.
Building diversified investment portfolios is standard practice among people who have money they don't want to lose. I could explain the academic theory about why diversification is the best way to balance risk and reward, but in the end, the logic is pretty simple: Don't keep all your eggs in one basket. And when you own nothing but company stock that is exactly what you're doing.
I know what you're thinking—that this is loser talk. Your company's stock is only going to go up, and never down, right? And every share you keep is going to make you that much richer. There's one problem though: Even tech companies have long periods of flat or falling stock prices. And yes, they go bust, a la Pets.com, Webvan and Covad.
I know, I know, your company is different. But when you limit your investments to the stock of any one company, that's really risky behavior. If your company runs into trouble, not only will your stock crater, but you might be out of a job as well. When your wealth is all in the form of your company's stock, you're not just putting all your eggs in one basket, you're living in that basket too.
So consider this: You already have a good amount of wealth through your RSUs, and you're probably going to receive a lot more units over the years. You are already successful, and you will continue to be more and more successful. Now it's time to start protecting your wealth by creating a real, well-rounded investment portfolio.
By all means buy yourself some nice things. And keep a bunch of your company stock so you can live the good life one day. But in the meantime, sit down with a financial advisor and talk about taking part of your stock and building a real investment portfolio. If you'd like to talk about RSUs, taxes or investing, don't hesitate to get in touch.
Bijan Golkar is a Certified Financial Planner™ and licensed tax preparer with FPC Investment Advisory Inc. in the San Francisco Bay Area.
I have RSUs and selected the sell to cover option. Now that it's after I imported my info into TurboTax suddenly I'm showing I owe a huge amount of taxes, this doesn't seem right. Why am I getting taxed twice? How do I get it to recognize I've already paid the taxes?
Can someone explain to me why you get taxed on the shares when you haven't done anything with them? I thought you'd only be taxed if they're sold. If you're paying taxes without even selling them, via forced sell-to-cover, then is there any option really besides selling them all right away?
Q1: If a vested amount is kept for less than a year, and the stock price has decreased from the original vesting date. If the RSUs are sold what happens at this point? For the sake of discussion the vested amount is 10 shares for $100 each, but due to price stock price has now decreased to $70 .
Q2: Same scenario as Q1, but waiting over a year?
Q3: Same scenario as Q1, but waiting over a year, but the stock price is now $120?
Is the general recommendation to extract the money once vested?
Q1 & Q2 would both result in a loss of $30 per share. KEY POINT: You already paid ordinary income tax on the $1,000 of the 10 shares the year received.
Q3: You would pay long-term gain rates on the $20 per share. You already paid ordinary income tax on the $1,000 of the 10 shares the year received.
You are correct, the general recommendation is to sell the position upon vesting. Do not be left holding the bag on a position you paid ordinary income tax rates on.
Uploading contracts to an online database should not take too long, and with the right solution, there should be a way to quickly drag and drop them into folders. Of course, the contract management team may want to give some thought as to how those folders are categorized. In some industries, it may make sense to classify them by agreement type, whereas in others they may need to be grouped by timeframe or date. It is obviously important to do what makes sense for your company and to ensure everyone understands the classification system that is instituted. With this sort of well-oiled system in place, it is a lot easier to keep a handle on things.
Divide and Conquer.
This is another area that is very industry-dependent, but it is highly unlikely that any company can afford to have an entire contract team devoted to managing one portfolio. More than likely, it is more realistic to divvy up the team and the contracts so that there is a leader for each relevant sphere. The entire team will obviously have to coordinate and communicate, but resources must be allocated in the most efficient manner possible. In turn, this will allow for several individuals to keep an eye on a smaller batch of contracts, thereby facilitating those periodic reviews.
Outsource the Tedium to Technology.