Comprehensive Financial Planning for Restricted Stock Units: Navigating Taxes and Decision-Making

Navigating the Financial Future of Restricted Stock Units: A Guide for Employees
As more companies grant restricted stock units (RSUs) to middle management positions rather than just senior executives, it becomes crucial to create a comprehensive financial plan when receiving equity compensation from your employer. In fact, according to data from the National Association of Stock Plan Professionals in 2021, over 94% of public companies now offer RSUs as part of their employee stock plans.
From a tax perspective, an expert and Certified Financial Planner, Chelsea Ransom-Cooper notes that this compensation is comparable to receiving cash bonuses. After the shares have vested or become fully owned by employees after a predetermined period (vesting schedule), individuals will then decide whether they want to sell these stocks or continue holding them.
The vesting process could be graded, which means releasing stock in specific increments over time, or it may follow a cliff pattern such as one year of employment. Leaving the company before unvested shares have matured would cause you to forfeit your claim on those shares
If you are granted RSUs by an employer, it’s crucial that you anticipate regular income taxes on their market value once they vest because tax withholding may not be sufficient.
Companies typically impose a flat rate of 22% or 37%, according to Bruce Brumberg, editor-in-chief and co-founder of myStockOptions.com, which covers RSUs and other equity compensation programs.
If your tax bracket is higher than the withholding percentage provided by your company, you may need to make quarterly estimated taxes payments since you will owe additional income tax based on how long these shares have been owned:
• For short-term capital gains (stocks held for less than a year), individuals must pay regular income tax.
• If stocks are retained past the 12-month time limit, those gains will instead qualify as ‘long-term’ and be subject to lower taxes.
It’s essential that employees weigh their whole fiscal picture including any effects RSU stock profits might have on student loans for education purposes or eligibility for certain tax breaks.
In summary, it is crucial when receiving equity compensation from your employer in the form of restricted stocks units (RSU) to create a comprehensive financial plan. This includes understanding how taxes will be affected by vesting and selling shares as well as weighing the potential impact on other aspects of one’s fiscal situation such as student loans or tax breaks.