When is the Best Time to Sell Your RSUs? | Time to Sell RSU?

When is the Best Time to Sell Your RSUs?

When to Sell RSUs for tech companies

Many employees in the technology sector are granted Restricted Stock Units (RSUs) as a form of equity compensation.

Whether received as a one-time hiring incentive, recognition for outstanding performance, or part of an annual compensation package, RSUs prompt the crucial question: When should you sell them?

 

Understanding Restricted Stock Units (RSUs)

A Restricted Stock Unit (RSU) represents a grant of stock shares from your employer, serving as a component of employee compensation. Unlike traditional stock options, you do not own the shares outright until they vest. Consequently, you do not receive dividends, if applicable, and cannot sell the shares before they vest.

Vesting typically occurs according to a predetermined schedule, often spanning four years with 25% of RSUs vesting annually.

Some companies, like Amazon, employ a backloaded vesting structure, with a smaller percentage of shares vesting initially and the majority vesting in subsequent years.


Vesting Date

Vesting schedules are typically time-based, requiring a specified tenure with the company before shares can vest. For further details on vesting mechanisms, refer to resources such as this Schwab RSU Article.

 

Tax Considerations

Regarding tax implications, RSUs are straightforward. They are taxed as ordinary income on the date of vesting, obliging you to pay income tax (Federal and State) and any other relevant payroll taxes at that time.


The Decision to Sell RSUs

Deciding whether to sell your vested RSUs constitutes an investment decision. Similar to any equity investment, ongoing tax considerations apply.

Short-term capital gains, incurred when selling shares held for under 12 months from the vesting date, are taxed at your income tax rate.

Holding the shares for over 12 months post-vesting subjects you to long-term capital gains rates, potentially with additional Net Investment Income Tax implications for high-income earners.

 

To Hold or Not to Hold?

Here is one way to think about the investment decision. Consider vested RSUs akin to a cash bonus.

If you wouldn’t use a cash bonus to purchase shares in the company, selling immediately upon vesting might be prudent.

Conversely, if you would invest in company shares, retaining them could be favorable.


Evaluating the Investment Decision

Uncertain about investing in company shares?

Evaluate it as you would any other investment, factoring in your overall exposure to the company’s fortunes.

Consider your entire investment portfolio, including stocks, bonds, and even your human capital, as your employment ties you to your company’s performance.

 

Portfolio Diversification – Sell RSUs

Assess how holding company stock aligns with your broader portfolio objectives.

Examine whether you already have exposure to similar risks through other technology company investments. Adhering to principles of diversification, avoid over-concentration in any single company within your portfolio, typically recommended to be limited to 10-20% of your total net worth.

Equity compensation is one of the perks of working in tech. But for every success story, there are many more former high-flyers that are no longer around.

Even successful tech companies can have periods of stock price stagnation or decline. Just look back at 2022, many well-known tech companies suffered losses of over 30% (with Meta Platforms down over 70%).


Understanding Concentrated Bets

While equity compensation offers significant benefits, it also presents risks, with even successful companies experiencing substantial stock price fluctuations.

Assess your total exposure to your company’s stock, including vested RSUs, unvested grants, stock options, and other equity holdings.

Calculate your total equity exposure. Include option grants, shares you have purchased via an Employee Stock Purchase Program (ESPP), stock holdings in your 401(k) account, etc.

You may have a much larger exposure to company stock than you even realize.

And remember, any unvested RSUs should also be included. Assuming you remain with the company, those shares will eventually vest, and you will get the shares.

 

RSUs and Home Mortgage Qualification

Consider selling vested RSUs annually if you anticipate applying for a mortgage in the near future. Mortgage lenders typically seek evidence of a consistent pattern of RSU sales when assessing income qualifications.

For RSU income to count toward qualifying for a home mortgage, sell vested shares each year.

Mortgages lenders will look for a historic pattern of selling RSUs in past years. For more details on using RSU income to qualify for home mortgage, see: RSU INCOME & MORTGAGE QUALIFICATION.


Conclusion: Optimal Timing for Selling RSUs

Conventional wisdom suggests selling vested RSUs immediately, treating them as a cash bonus.

Assess your existing exposure to company stock, both financially and in terms of your employment.

If you want increased equity exposure to your company, pick the best vehicle. Should you invest inside your 401(k), in a different tax-advantaged account, or via vested RSUs?

Deciding whether to sell vested RSUs represents a positive dilemma, indicative of both your success and your company’s prosperity.

Enjoy the rewards of your achievements.

 


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