Should I Sell My RSUs (Restricted Stock Units)?

Restricted Stock Units (aka RSUs) are a common form of stock compensation for employees of public companies.  If you’re granted RSUs, you get to own these company shares without putting any money down (unlike when you are exercising stock options). You can think of RSUs as a cash bonus, with similar tax implications. So, when is the best time to sell your RSUs?

If your company is public, the best thing to do is to cash them out as soon as they vest. The reason is that RSUs are taxed at the time they vest. You’re paying taxes based on their value at that point in time, so there’s the risk of them declining in value and making your tax bill disproportionately large to the level of income you’re getting. It’s much better to either use the RSU proceeds to meet short-term goals or reinvest into a diversified portfolio to more securely grow your wealth. 

In reality, not everyone will always sell their RSUs immediately. Some people want to hold onto them longer, or at the very least, understand what the other options are. In the rest of this post, I’ll lay out some details on how RSUs work and how to think about the various approaches to selling them.

How do RSUs work?

RSUs are essentially your employer giving you cash that you use to turn right around and buy the company’s stock. When RSUs vest (the point at which you officially own the shares), they’re taxed the same way as a cash bonus of the same dollar amount.

When RSUs vest, taxes are most often automatically withheld at a rate of 22% for federal income tax. However, 22% is more than likely not enough, so unless your employer allows you to set the tax withholding rate higher and more in alignment with your effective tax rate, be prepared to pay more tax. It can be helpful to work with a CPA and/or financial planner to make sure you’re setting aside enough for both federal, state, and local taxes. 

Holding onto RSUs for a long period of time is risky, because there’s always the potential (as with any individual stock) for it to fall in value. And remember, you paid taxes on them already as if they were normal income. If they fall far enough in value, it could potentially negate the original value or worse, you could be in the red. That’s why we default to recommending that clients sell RSUs as soon as possible and reinvesting the proceeds.

Option #1: Sell All RSUs

Because RSUs are treated just like a cash bonus when they vest, there’s no tax advantage for holding on to them. Moreover, investments that are diversified—spread out over many different stocks or bonds—perform better, on average, than investments that are concentrated in one stock. 

The only reason you would decide to hold onto your RSUs after they vest is if you’re making a bet that the company share value will increase substantially over time, better than you would imagine a diversified portfolio might perform. But again, historical probabilities suggest you have a better chance of higher returns with a diversified portfolio.

The best thing to do is to sell them all as they vest. Then either reinvest it into a diversified portfolio or use it for something else you may need. 

Option #2: Don’t Sell Your RSUs

As you hold onto RSUs past their vesting dates, a larger and larger portion of your net worth becomes concentrated in one single stock. This means your net worth becomes more concentrated in your company’s stock. 

For this to make any sort of significant positive impact on your wealth over time, the stock will need to grow more than the broader stock market. Alternatively, it could be disastrous for your net worth if the stock falls in value. 

It’s a big bet to take this approach. So you need to know that you’d still be okay if this particular stock were to substantially decline in value. Be sure that you have enough cash reserves (an emergency fund) and that your other life goals are well on track. You don’t want to be overly dependent on one company’s stock to meet your goals. 

Option #3 Sell Some RSUs, but Not All.

We like to use a “rule of thumb” that no more than 5-10% of your net worth is concentrated in one company’s stock. It comes down to protecting your net worth and prioritizing your goals versus tying your fate to the performance of one company. 

When working with clients who have RSUs, it’s not uncommon to find that 20%, 50% or more of their liquid net worth is eventually tied up in their company’s stock. It can be a big emotional shock to sell all of that down, especially knowing there’s going to be a big tax bill to follow. In this case, we come up with a plan to gradually sell that amount down in bite-sized chunks. We run some sensitivity analyses to demonstrate what would happen to overall net worth if there were to be an X% swing (up or down) in the value of that company’s stock. And ultimately if you are okay with those risks and your financial situation is protected, then it can be perfectly fine to hold onto the stock.

The ultimate goal is to optimize the risk-adjusted return of your portfolio, meaning you’re taking on no more risk than you need to get the same rate of return. It’s impossible to know the future, but diversification is one way in which we can make sure we’re closer to achieving it.

This all being said, it’s worth repeating: the best thing to do is to sell all of your RSUs as soon as they vest. It’s still a wise choice to sell all of them even if the stock price ends up rising, because you are protecting your wealth from undue risk. If you want to use the funds for investments, reinvest in a diversified portfolio. This allows you to still participate in market growth with a lot less downside risk.

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