Equity compensation has become a familiar perk for many professionals—especially in fast-growing industries like tech, healthcare, and finance. Among the different types, Restricted Stock Units (RSUs) stand out because they’re simple on the surface. However, they can be surprisingly complex when it comes to taxes and long-term planning. They can play a significant role in building your wealth, but it’s important to know how to manage them wisely.
What Are RSUs?
Restricted Stock Units, or RSUs, are a form of equity compensation that allows you to share in your company’s success over time. They represent a promise from your employer to grant you company stock at a future date—typically after you’ve met certain conditions, such as staying with the company for a set number of years or achieving specific performance goals.
Unlike stock options, which give you the right to purchase shares at a set price, RSUs don’t require any out-of-pocket investment. Once the shares vest, they’re automatically delivered to you either as actual shares or their cash equivalent. This simplicity is part of what makes RSUs appealing, especially for employees who want to participate in company growth without the complexity of exercising options.
However, that simplicity comes with a catch: when RSUs vest, the value of those shares is treated as ordinary income, meaning you’ll owe taxes in the year they become yours. This creates both an opportunity and a planning challenge. How do you make the most of your new shares while staying ahead of the tax bill?
For example, if you receive 1,000 RSUs and 250 shares vest each year over four years, you’ll pay ordinary income tax on the market value of those 250 shares each year as they vest. Once vested, the shares are yours to hold, sell, or use as part of a broader investment strategy.
Understanding the Tax Implications
RSUs can be one of the most straightforward types of equity compensation to understand, but their tax treatment can still surprise many recipients. The key thing to remember is that RSUs are taxed as income when they vest, not when they’re granted. That means you’ll owe ordinary income tax on the market value of the shares the moment they become yours.
Let’s say 250 of your RSUs vest when the company’s stock is trading at $50 per share. That $12,500 (250 × $50) is considered taxable income for the year, just like your salary or bonus. Employers typically withhold a portion of the vested shares or cash equivalent to help cover federal, state, and payroll taxes. However, the amount withheld isn’t always enough to cover your full tax liability, especially if you’re in a higher income bracket.
After your RSUs vest, you now own actual shares. From that point on, any changes in the stock price create potential capital gains or losses. If the stock price rises and you later sell your shares for more than their vesting value, the additional gain is taxed at the capital gains rate. The rate you pay depends on how long you’ve held the stock:
- Short-term capital gains apply if you sell within one year of vesting and are taxed at your ordinary income rate.
- Long-term capital gains apply if you hold the shares for more than a year before selling, typically resulting in a lower tax rate.
To Hold or to Sell?
It’s natural to feel loyal to the company you work for, especially when its stock performs well. But as with any investment, it’s important to evaluate risk and diversification. The “two-step” taxation associated with RSUs—ordinary income at vesting and capital gains (or losses) at sale—makes timing especially important. Some employees sell vested shares immediately to avoid exposure to future price drops or additional tax complexity. Others may choose to hold shares longer if they feel confident in their company’s prospects and want to benefit from favorable long-term capital gains rates.
However, holding too much company stock can lead to concentration risk, which can occur when a large portion of your wealth depends on one company’s performance. If this situation sounds familiar, you may also want to read our related post, “When One Stock Takes Over: Managing Concentrated Positions in Your Portfolio,” for strategies to balance risk and align your investments with your goals.
Because RSUs can push you into a higher tax bracket or create unexpected year-end tax bills, it’s essential to plan ahead. A financial advisor can help you evaluate how your RSU income fits with your broader financial picture, estimate additional taxes owed beyond employer withholding, and determine when selling shares makes the most sense for your goals.
Planning Strategies for RSUs
1. Set Aside Funds for Taxes
Many employers withhold a portion of vested shares to cover estimated taxes, but this amount isn’t always enough. Consider working with your advisor to calculate your total tax exposure so you’re not caught off guard at filing time.
2. Diversify After Vesting
Selling a portion of vested shares and reinvesting in a diversified portfolio can help manage single-stock risk. Your advisor can model different sales strategies to align with your income, risk tolerance, and long-term objectives.
3. Coordinate with Other Equity Compensation
If you also have stock options or ESPP shares, coordinate your strategy across all forms of equity compensation. This helps you manage tax timing, liquidity, and portfolio balance.
4. Incorporate Charitable or Estate Planning
Gifting appreciated shares to charity, either directly or through a donor-advised fund, can provide a charitable deduction and avoid capital gains tax. Likewise, incorporating RSUs into your estate plan can help streamline wealth transfer while managing future tax implications.
A Broader View of Your Financial Picture
RSUs can be both a reward for your hard work and an opportunity to build lasting wealth. But without a plan, they can also lead to unexpected tax bills or unbalanced portfolios. Integrating your RSU strategy with your overall financial plan helps ensure your equity compensation supports—not distorts—your long-term goals.
At Curio Wealth, we help clients navigate equity compensation with an eye toward tax efficiency, diversification, and life planning. Whether you’re just starting to receive RSUs or have accumulated several rounds over the years, let’s talk. We can help you make decisions that fit into your broader wealth strategy.
