No Tax Advantage In RSU

I heard in a casual conversation that some of my co-workers are holding their RSU shares after the shares are vested. They thought there are some tax advantages in holding the RSU shares.

There is no tax advantage whatsoever.

RSU stands for Restricted Stock Unit. It’s a form of equity-based compensation. The employer gives an employee a number of RSU. The employee can’t do anything with them immediately. That’s the restricted part.

These RSU’s vest in batches over a number of years, typically four years. When the RSU’s vest, the employee receives the employer’s stock. If the employee leaves the employer, all unvested RSU’s are forfeited. That’s another part of the restriction.

RSU is basically a deferred cash bonus calculated and paid in shares. If the employer’s stock does well, the bonus becomes larger. RSU is taxed to the employee as a cash bonus when they are vested.

Any gains after vesting can be taxed as a long-term capital gain if you hold it long enough, but you get the same effect if you buy any stock with your own money.

In addition to mistakenly thinking there are some tax advantages to holding RSU shares after they vest, my co-workers also fall for the endowment effect in behavioral economics. If they get a cash bonus they won’t use it all to buy the stock but if they get shares they don’t sell.

Compare with a regular cash bonus:

Holding the RSU shares after they are vested is the same as the employer giving you a cash bonus and you decide to use the bonus to buy the employer’s stock. It works only if you believe the employer’s stock will do better than the market and all other alternatives.

Besides the issue of being undiversified and having too much tied to your employer, just from a pure investment’s point of view, if you are going to buy a stock with the bonus, you can buy whatever stock you want. Is the employer’s stock really the best in a universe of thousands of stocks? Unlikely.

Therefore, always sell RSU shares as soon as they vest. If you are not contributing the maximum already, increase the contributions to the 401k plan, or fund a traditional IRA or a Roth IRA. Otherwise put the money into a diversified portfolio in a taxable account. Don’t hold the RSU shares.

See All Your Accounts In One Place

Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.

FREE E-mail Newsletter

Join over 3,000 readers and get new articles by e-mail:

No spam. Unsubscribe any time.

Comments

  1. Dangerman says

    I can think of one scenario where the statement “no tax advantage whatsoever” is incorrect: when the RSUs are placed into the employee’s 401k plan, such as using the RSUs as a form of matching, then the “Net Unrealized Appreciation” rule comes into effect.

    • Harry Sit says

      I’ve heard companies match with employer stock, not with RSUs. Are you sure companies can do that? A 401k plan can have a vesting schedule for the match. When the schedule hits, the match can’t be taken away. The vesting schedule starts when the employee first starts, not when the match is given. For a long tenured employee, everything is vested immediately. I don’t think it’s possible to use RSU as match because you can’t have restrictions, the R in RSU.

    • Melanie says

      I think I know what he meant. We are granted stock each year. Half goes into RSU’s and half is under your control Each year we have the option to take stock award as stock, have it paid out in cash, or deferred to 401k. If it is taken as stock or cash, it is taxed as ordinary income at marginal tax rates. If it is deferred to 401k, it is only taxed FICA and medicare. So there is potentially some tax advantage there, which is probably why you said to increase contribution to a 401k or IRA at the end of the article. However these 401k deferred stock are not RSU’s they are just ordinary stock that you take ownership of immediately.

  2. Wai Yip Tung says

    Good point about the endowment effect.

    Cash the money and put it in index fund. Clearly you will end up in better position.

    It should be clear that the RSU is taxed after vested because employee received a fractional number of share quite a bit smaller that the whole number they are granted.

  3. AN says

    I still don’t get how there is no tax advantage to holding your RSUs after they vest. As you mentioned above, if you hold them longer than a year then you’re taxed at the lower long term capital gains vs the higher short term capital gains. Is that the tax advantage of holding them (at least for a year after vest) which your co-workers were referring to?

    I’m guessing you’re referring to something else when you said, “there is no tax advantage whatsoever.” Am I correct in assuming that if you were to sell the same day in which they vest, the cost basis of the RSU = that days market value, so there are essentially no capital gains to tax. Unfortunately, if you happen to hod them until the next day, you’re now obligated to hold them for at least a year (unless you want to pay the short term cap gains). I hope I’m making sense.

  4. Harry Sit says

    @AN – The long term capital gains treatment for holding shares for one year applies to any regular purchases. They are not specific to shares from vested RSUs. Therefore there is no tax advantage whatsoever compared to shares you buy on your own.

    If you sell the shares on the same day or a few days after the RSUs vest, there won’t be much capital gains. If you happen to be lucky and the shares appreciated say 10% in a few days, it still doesn’t makes sense to hold the shares for one year waiting for the long term capital gains treatment, because a 2% price drop will wipe out the benefit from the expected lower tax rate. If the stock can gain 10% in a few days, it certainly can lose 2% over a year. I would thank God for my luck and take the short-term gain.

  5. JK says

    @TFB what about if the RSU’s were awarded at a price that is less than the market price when they vest? If you held the stock for a year then the (price@vesting – award price) could be a long term gain?

  6. Harry Sit says

    The RSUs are taxed as income when they vest. The price at the time when they were granted doesn’t matter. Suppose you got 1,000 RSUs a year ago and the stock price was $10 per share at that time. 250 shares would vest each year over 4 years. When your first 250 shares vest, suppose the price has gone up to $20 per share, great, you will have W-2 income of 250 * 20 = $5,000. The $10 per share price when the RSUs were granted doesn’t enter into the calculation. It’s as if you are getting a $5,000 bonus paid a year later, with more to come down the road. If next year the stock price goes back down to $10/share, your deferred bonus will go down $2,500.

  7. Indu says

    Hi so a lay man ques my RSU/stocks r vesting i got 53 units from my employer on vesting , however schawb say ill get 29 unit, im planning to sell it after 1 yr for 15% tax. My questiuon is why do i get on 29 out of 53 where did rest go

  8. Harry says

    Indu – Taxes. When you get a $1,000 bonus, by the time you get the money in your bank account it’s always less. Same deal when they pay you in shares.

Leave a Reply

Your email address will not be published. Required fields are marked *