Many companies offer equity stock compensation to attract recruits and incentivize employees to stay longer and continue to add value to the company.

Restricted Stock Units (RSUs) are a significant component of compensation for many employees. Here’s what you need to know.

What is an RSU?

An RSU is a promise by an employer that a company executive will receive future stock.

Why is it restricted?

You cannot sell the shares until they have vested. Before they have vested you do not own them like traditional shares and thereby forgo any voting rights or other rights shareholders have.

What is a vesting schedule?

Usually, the only requirement to receive the RSU is to stay with the company until reaching the vesting date. Most companies spread out the vesting dates over 3, 4 or 5 years. Some companies can also have performance targets that can trigger or accelerate vesting.

What happens if I leave my employer?

If you leave your employer before a vesting date, you will usually forfeit any unvested shares.

How are RSUs taxed?

The value of the shares on the vesting date is taxed as ordinary income. Most companies will withhold a percentage of shares to cover a proportion of the tax, usually at a supplemental rate of 22%. Frequently this may not be enough tax withholding as employees may be in higher tax brackets. The capital gains holding period begins at the time of vesting.

Here’s an example: Joe’s employer grants him 2000 shares of company stock XY that vests at a rate of 25% a year. At the grant date, the market price was $20/share.

The value of the shares received at each vesting date will be taxed as ordinary income.

Joe sells all the stock 18 months after the last shares vest when stock XY is $40/share (2000 × $40 = $80,000). Joe’s capital gain of $21,000 ($80,000 minus $59,000) is taxed at the long-term capital gains rate as he held the shares for more than one year after share delivery.

Is RSU income included in your W2?

At vesting, RSU income and any taxes withheld are included on your W2

What should you do with your RSU?

The steps you take after your RSUs have vested is dependent on your unique situation. Many employees hold on to company stock due to a feeling of loyalty and a stake in their company’s future success. As they load up on company stock, they also load up on risk. This practice ignores the benefits of diversification and investing across sectors, industries and countries. There are multiple examples of executives staking their investments and retirement goals on one company. Over 60% of Enron employee’s 401(k) plan assets were in Enron stock and over 10% of Lehman Brothers’ 401(k) plan assets were in Lehman stock. These employees lost their jobs and a part of their retirement accounts.

As you make the right decision, it’s important to review your overall financial picture and be disciplined with your investment strategy to have long-term financial success.

Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.

To learn more, visit advisowealth.com or email sweta@demo.advisowealth.com