3 Ways To Make The Most of Your Restricted Stock Units, #317

On the show this week, I answer a listener question about restricted stock units, or RSUs—what they are, how they're taxed, and the best strategies for managing them as they vest. I'll take an in-depth look at different types of vesting schedules, tax implications, and the practical choices you have when your RSUs become available. This episode is all about giving you clear guidance to help you make informed decisions about RSUs and making sure your retirement strategy is on the right financial track.

 

You will want to hear this episode if you are interested in...

• 00:00 Explanation of Restricted Stock Units (RSUs)
• 04:19 How stock vesting works
• 05:14 RSUs are treated as ordinary income when they vest 
• 06:52 Understanding RSU Tax Withholding
• 11:36 Investing in Index Funds
• 12:58 Matching investment decisions to risk tolerance and goals 

 

Restricted Stock Units (RSUs)

RSUs represent a promise from your employer to deliver company stock or a cash equivalent in the future once certain conditions, called vesting requirements, are met. These conditions are designed to incentivize and retain employees, ensuring that you benefit as the company grows and performs well.

 

RSUs usually vest in one of three ways:

 

• Time-Based Vesting: The most common approach, where shares vest gradually over a specified period. For instance, a 4-year vesting schedule for 1,000 RSUs would typically see 250 shares vest each year. At ESPN and Disney, a 3-year vesting schedule is standard, with shares vesting twice annually—in the summer and fall.

 

• Performance-Based Vesting: Shares vest only if certain targets are met, such as revenue goals or profit margins. Some grants only vest if multiple targets are reached.

 

• Liquidity Event-Based Vesting: Common in private companies, where shares vest after events like an IPO or a company merger. If you leave your employer before shares vest, you lose any unvested RSUs—a strong incentive to stay.

 

How Are RSUs Taxed?

When RSUs vest, the value of the vested shares is treated as ordinary income, just like your regular salary. This income is reported on your W-2 and is subject to federal, state, and payroll (FICA) taxes. Social Security taxes apply up to a certain annual earnings cap ($184,500 in 2026), but Medicare taxes continue regardless of income.

To cover your tax liability, employers usually sell enough shares on your behalf (a "sell-to-cover" transaction). For example, if 100 shares vest and 20 need to be sold to cover taxes, you’d end up with 80 shares. Employers typically withhold taxes at a 22% rate; if your annual compensation exceeds $1 million, the withholding rises to 37%.

Many employees find themselves under-withheld, especially if they move into higher tax brackets, and may need to adjust their W-4 or set aside additional funds to avoid owing at tax time.

What Are Your Options When RSUs Vest?

Once RSUs vest, you have several paths forward:

 

1. Hold the Shares

Some employees hold their RSU shares, believing in the long-term prospects of their company. This approach can create significant wealth if the stock outperforms, but it also concentrates risk—especially if your job and sizable net worth are tied to the same company.

 

2. Sell Immediately

Selling your shares right away locks in your gains, minimizes risk, and frees up cash to fund other goals, like buying a house or paying for college. Just be cautious about spending it all; ensure you’re saving enough for long-term needs.

 

3. Sell and Reinvest

Sell your RSU shares and reinvest the proceeds in diversified assets, such as index funds (e.g., S&P 500 or total market funds), or bonds if you have a lower risk tolerance. This strategy provides broader market exposure and can reduce the risk inherent in holding too much of a single company's stock.

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• Download my entire book for FREE 
• State Street S&P 500 Index Fund (SPYM)
• State Street Aggregate Bond Fund (SPAB)

 

Connect With Morrissey Wealth Management 

www.MorrisseyWealthManagement.com/contact

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