RSUs Explained: Building Wealth Through Equity Compensation

What are Restricted Stock Units 

Restricted Stock Units, or RSUs are a common form of equity compensation that can be a great way to build wealth, but they can also be confusing.

Let's break it down.

RSU’s are a form of equity compensation that incentivizes you to stay at your company and to help the company grow. You are “granted” a specific number of shares in your company.

This gives you a vested interest in doing your best to help the company succeed and help the stock price increase - increasing the income you get from these RSU’s once they vest. These shares vest or become yours over a period of time, typically 3 years. This gives you an incentive to stay with your employer. 

Tax Implications of RSU’s 

You will pay ordinary income tax on the total value of your RSU’s in the year they vest or become yours. This provides some tax planning opportunities - it may potentially be a good idea to defer more of your income in the years your RSU’s vest to avoid being pushed into a higher tax bracket. 

Once the shares vest they are your common stock shares.

They are taxed like any other capital asset, paying capital gains on any increase in the share price on the day they vest and the day you sell. You own these shares outright, which means you can do whatever you want with them.

• You could hold them to take advantage of the appreciation of the company stock.

• Or you could sell them and take the cash to do whatever you want with it - whether that is investing back into your retirement accounts or using that cash to save for shorter-term goals. 

In any case, RSUs can provide some unique and beneficial tax planning opportunities. It’s important to know how this compensation will affect your overall financial plan and create a plan to take full advantage of them!