STRATEGIES
RSU Planning
How vesting works, what it costs, and when to act.
ARE YOU MAXIMIZING THE VALUE OF YOUR RSUs?
As a tech professional with significant equity compensation, you're in a unique financial position. Your RSUs have helped accelerate your total compensation and likely placed you in the top 10% of US households. However, when you have $50K, $100K or even more than $500K in RSUs being granted each year, the excitement often gives way to questions:
// THE UNCERTAINTY
Should I sell immediately or hold?
How do I handle the tax spike when they vest?
How much of one employer's stock simply too much?
If you're currently DIY'ing your own RSU strategy and starting to feel overwhelmed by the these questions, it could be time to get an expert’s opinion.
While every client’s situation is unique, what follows are some basics and general guidelines on RSU planning that we follow. But let’s start with the basics:
RSU MECHANICS
Managing RSUs requires coordinating financial goals (vacation home? retirement savings? champion racing pigeons?) with tax strategy, long term needs, and your employer’s future prospects. Juggling these things is what makes managing RSUs on your own so difficult.
When your RSUs vest, there are two tax-related consequences:
A chunk of taxable income is created. The fair market value of the shares on the vesting date is treated as ordinary income and is included on your W-2.
Your employer typically withholds a baseline percentage of shares to cover mandatory taxes. For high-income earners, this mandatory withholding is often not enough to cover full liability, leading to estimated payment confusion and a potentially painful surprise at tax time.
At Prospero Wealth, we provide the framework to calculate your true tax liability in advance, minimizing W-2 confusion and reducing the likelihood of unexpected tax surprises the next spring. Managing and planning around RSU vesting is easy compared to what comes next...
CONCENTRATED RISK
Managing the taxes created at vesting is one thing, but when discussing RSU’s with our clients, far more time is spent discussing and managing the risks associated with the large RSU positions they’ve built up over time.
It’s no small thing when over 20% of your net worth is tied up in a single, non-diversified asset. Your financial well-being is already tied to your company's health through your salary. By holding a massive equity position in that same company, you are creating a "double jeopardy" situation. If the company experiences a downturn, you risk both your income and your paper wealth simultaneously.
// THE CORE RISK
If the company experiences a downturn, you risk both your income and your paper wealth simultaneously.
SELL OR HOLD?
For many clients, the idea of selling is a bitter pill to swallow. Their financial well being is often attributable in large part to their RSUs. Why change course when the status quo of doing nothing has worked so well? And worse, why give 24%, 32%, or more of that to the government if they don’t have to? The thought makes them nauseous.
The Case for Selling
For many clients, the general recommendation is to sell all or a significant portion of shares immediately upon vesting. This instantly diversifies your liquid capital and mitigates the concentration risk. The gains have already been taxed as W-2 income, so there is no immediate capital gain to worry about.
When Holding May be Appropriate
Holding shares is only appropriate for an allocation that fits within your risk tolerance and is justified by a specific investment thesis. Any shares you hold beyond the vesting date now have a new cost basis (the vesting price) and are subject to future capital gains taxation.
“That’s great” you may be thinking. “But what about large positions accumulated over time? What about my Mag 7 (or Mag 7 adjacent) position that’s 80% capital gains?”
BEYOND THE BASICS
Once a disciplined strategy is in place for newly vested RSUs, the core challenge remains: How do you diversify the large, highly appreciated legacy positions you’ve accumulated?
We already mentioned that every client’s situation is unique, but this is where that becomes especially true.
Unsurprisingly, clients will often agree on the need to diversify, but find the tax consequences too painful to stomach. Depending on the client’s other financial resources, we will explore and potentially make use of one or more of the following strategies:
This has two implications. First, the strategy aims to generate pre-tax returns above its benchmark; not just match the index while harvesting losses. Second, the active management provides ongoing trading opportunities that create natural tax management events without forcing liquidation of positions you'd otherwise want to keep.
The combination of pre-tax alpha and tax alpha has the potential (but no guarantee!) to compound significantly over time for investors in high tax brackets.
FINAL WORDS
There is no silver bullet to exercise highly appreciated RSUs and pay no taxes. All of the above strategies have trade-offs (capital requirements, holding periods, etc.). Nonetheless, we’ve used these strategies in many client portfolios as part of our broader comprehensive planning services, and confidently help them navigate managing their RSUs in the process.
CONFIDENTLY NAVIGATE YOUR RSUs
Managing your RSU wealth successfully requires tax optimization, risk management, and coordinating your equity compensation with your long-term financial plan.
If you think you could benefit from a level of coordination, time commitment, and subject matter knowledge that goes beyond what you’re able to do on your own, consider reaching out to one of our advisors at Prospero Wealth.
The strategies discussed above involve risks including, but not limited to, market risk, leverage risk, short-selling risk, and tax risks. Tax-loss harvesting and tax-advantaged strategies depend on individual circumstances and may not be appropriate for all investors. There is no guarantee that any strategy will achieve its objectives. Prospero Wealth does not provide tax or legal advice. Clients should consult with their own tax and legal advisors regarding their individual circumstances. Past performance does not guarantee future results.