When is the optimal time to sell my RSUs? Many technology company employees receive grants of Restricted Stock Units (RSUs). This form of equity compensation may be in the form of a one-time hiring bonus, a reward for exceptional performance, or part of the annual compensation program.
Regardless of how you received your RSUs, everyone needs to decide when to sell them.
What Are Restricted Stock Units (RSUs)?
A restricted stock unit (RSU) is an award of stock shares in your employer as a form of employee compensation. These shares are restricted in the sense that you don’t own any actual shares until they vest.
Hence, you don’t receive dividends (if you company happens to pay a dividend) and you can’t sell your shares before vesting.
Depending on your company, vesting can occur in a variety of ways. A typical vesting schedule might be a 4-year vesting schedule with 25% of RSUs vesting each year.
But some companies—like Amazon—backload RSU vesting. Meaning you have a small percentage of shares vesting in the first year or two, and the bulk of RSUs vesting in out years.
Vesting Date
Vesting schedules are often time-based, requiring you to work at the company for a certain period before vesting can occur. For more information on how vesting works, see: Schwab RSU Article
Tax Implications
When it comes to equity compensation (options, RSU, ESPP, etc.) from tech companies, employees generally want to consider the tax implications. But with RSUs, although taxes must be paid, there isn’t a tax decision to be made.
RSUs are taxed as ordinary income on their vesting date. Meaning, at vesting, you incur the tax liability for both income tax (Federal and State) and any other payroll taxes for your situation (e.g., FICA, Medicare, etc.).
There is no decision to be made. The vesting date is fixed, and if you want to receive the compensation, the taxes must be paid.
The Decision – time to sell RSUs
An investment decision is what you are making. Do you want to continue holding your company’s stock once your RSUs have vested and convert to regular shares.
Just like any equity investment, there are on-going tax considerations. If you hold the shares, any future gain/loss is a capital gain/loss for tax purposes.
Short-term capital gains (when shares held under 12 months from vesting date) are taxed at your prevailing income tax rate. Hold for more than 12 months post vesting, only pay long-term capital gains rates (0%, 15% or 20%). Plus, potentially another 3.8% Net Investment Income Tax if your income is high enough.
Hold or Not?
Here is one way to think about the investment decision. Vesting RSUs are like a cash bonus. You can think about them just like getting a normal bonus. You owe taxes just like it was cash, and if you immediately sell the shares, you will actually have cash.
So, to flip the sell or not question around, if your employer gave you a cash bonus, would you use it to buy shares in the company?
If not, you should probably immediately sell upon vesting. If you would buy shares, congratulations, you saved the step of placing an order with your broker.
Investment Decision
Not sure if you would buy company shares or not? Then you should evaluate it like any other investment decision, but with a few caveats.
In addition to understanding if your company’s stock is a good investment, you should consider your overall exposure.
Even if an investment opportunity appears worthwhile, you probably want to limit the risk you are taking. All speculative investments, like equities, have risks and the potential to lose money. Potentially your entire investment.
Evaluate holdings of company stock within the larger framework of your entire investment portfolio. This includes not just stocks and bonds, but your human capital.
A unique attribute to consider is that your employment is also tied to the fortunes of your company. If your company fails, you may suffer a loss of human capital as well as financial capital. Meaning you may lose your job and be out of work for a period. Or less dramatically, if your company stumbles, your future compensation may be lower than if it is hugely successful.
Portfolio Decision
If you have other investments, consider how holding company stock fits into your overall portfolio.
Do you have other investments in technology companies that may have similar risks to your company? Are you trying to maintain a ratio of stock to bonds (i.e., a 60/40 portfolio)? Is your financial advisor using an asset location strategy when deciding which holdings go in taxable accounts vs. tax-deferred accounts?
These are just a few of the questions to consider beyond the growth prospects for your company. And simplistically, many advisors also recommend limiting the concentration of any single company in your portfolio to something like 10 or 20% of your total net worth.
Concentrated Bets
Equity compensation is one of the great perks of working for many tech companies. But for every success story, there are many more former high-flyers that are no longer around.
Even successful companies can have periods of very large declines in stock price. As I write this toward the end of October in 2022, let’s look at year-to-date returns for some well-known tech companies:
- Alphabet (Google) – down over 35%
- Amazon – down over 40%
- Apple – down over 18%
- Meta (Facebook) – down over 70%
- Microsoft – down over 30%
- Salesforce – down over 35%
Of these firms, only Apple is down less than the “market” overall.
How Much Do You “Own”?
Do you even know how much your wealth is exposed to your tech company’s stock? When deciding whether to keep your RSU shares after vesting, please calculate your total exposure to the ups and downs of the stock price.
What I mean by this is you should calculate your total equity exposure. Include any other shares you own, 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, all those unvested RSUs should also be included. Assuming you remain with the company, those shares will eventually vest, and you will receive the value.
RSUs and Home Mortgage Qualification
Furthermore, if you think you might want to get a home mortgage in the next few years, there is even another consideration.
If you want RSU income to count toward qualifying for a home mortgage, you should be selling 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: When to Sell RSUs
So, what does this all mean? The conventional wisdom is you should sell your RSUs as soon as they vest. There is no tax benefit if you continue to hold the shares. Treat vesting RSUs like a cash bonus.
If you want to invest in your company, first consider how much exposure you already have. Both financial and human capital. Sum up all the different ways you might own equity exposure (options, other RSUs, ESPP shares, 401(k) shares, etc.).
And if you still want to invest, pick the best vehicle for investing in your tech company. Should you invest inside your 401(k), in a different tax-advantaged account, or via vested RSUs?
Whether or not to sell vested RSUs is a great problem to have. Congratulations to you and your company’s success. Enjoy the spoils.
