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Restricted Stock Units (RSUs) are a popular form of equity compensation that, after vesting, result in an employee’s receipt of shares of company stock or a cash payout. Similar to a bonus, RSUs can positively affect cash flow but incur taxes that require planning. Many of our clients have been (or will be) granted RSUs by their employers during their careers. It is important for these fortunate clients to develop an understanding of how these interests fit into their overall financial plan.
This checklist helps guide our conversations when advising clients regarding their RSUs. It covers:
Key characteristics of RSUs
Ordinary income tax considerations at vesting
Capital gains tax considerations at sale
Company stock and portfolio considerations
Welcome back to another informative video on stock options by Todd Pouliot from Gateway Financial at www.mygatewaymoney.com. In this video, we'll be discussing "Restricted Stock Units" (RSUs) and providing you with a comprehensive checklist to help you navigate the complexities of RSUs in your financial planning. RSUs are a popular form of equity compensation that can have a significant impact on your financial future, making it crucial to understand their key characteristics, tax considerations, and portfolio implications. Let's dive into the checklist and explore these important areas.
1. Understanding RSUs:
Learn the key characteristics of RSUs, which are a form of equity compensation that results in the receipt of company stock or a cash payout after vesting.
Recognize the similarities between RSUs and bonuses, as they can positively affect your cash flow.
2. Confirming Vesting Conditions:
Familiarize yourself with the specific vesting conditions of your RSUs, such as the vesting schedule (gradual or cliff), liquidity event ties, or performance goals.
Monitor vesting triggers closely to avoid unexpected tax liabilities during tax season.
3. Exploring Distribution Options:
Determine if your plan allows you to defer the distribution of shares until a later date, post-vesting, or at retirement.
Understand any events that may accelerate deferred payments and plan accordingly.
4. Reviewing Vesting-related Tax Considerations:
Understand the tax consequences of RSU grants, as income is recognized when shares or cash are delivered.
Consider the ordinary income tax implications of vesting, including federal, state, and local income taxes, and FICA taxes.
5. Reducing Income Tax Liability:
Explore strategies to reduce your income tax liability when RSUs vest, such as maximizing contributions to tax-advantaged accounts like 401(k)s, 403(b)s, HSAs, and traditional IRAs.
Implement a "bunching strategy" by leveraging donor-advised funds for charitable contributions to maximize itemized deductions.
6. Planning for Withholdings and Cost Basis:
Understand the tax implications of RSU vesting in terms of withholding requirements. Assess if the employer's supplemental withholding rates are sufficient or if estimated tax payments are necessary.
Determine the cost basis for your RSU shares to avoid overpaying taxes. The cost basis equals the amount paid for the stock plus the taxable income included on your W-2 form.
7. Assessing Sale and Holding Periods:
Consider the tax consequences of selling RSU shares, including potential capital gains or losses. Holding the shares for more than one year qualifies for long-term capital gains rates, which are typically more favorable.
Understand the holding period, which starts on the date of vesting unless you choose to defer distribution.
8. Miscellaneous Issues:
Assess your employer's future equity value and long-term viability. Avoid excessive financial dependence on your employer by diversifying your investment portfolio.
Consider the impact of potential company acquisitions on your RSUs.
Align RSUs with your future goals, including coordination with income, savings strategies, estate planning, and beneficiary designations.
Understanding the intricacies of RSUs is essential for optimizing their benefits and avoiding potential pitfalls. By following this comprehensive checklist, you can navigate the complex landscape of RSUs, minimize tax liabilities, and integrate them effectively into your financial plan. Seek professional guidance from experts who can provide personalized advice tailored to your specific circumstances. Remember, diversification, tax-efficient strategies, and thoughtful planning are key elements in maximizing the potential of your RSUs.