The Smart Guide to Selling RSUs: Balancing Risk & Reward
As a Certified Financial Planner, I have spoken with and educated hundreds of employees who receive Restricted Stock Units (RSUs) as part of their compensation. I've found that this component is often misunderstood, confusing, and regrettably sometimes overlooked due to the complexity of the terms, rules, and associated risks. For some, ignoring their RSUs might have been advantageous, as certain companies have achieved remarkable growth over the past decade. Here are a few examples from October 22nd, 2014, to October 22nd, 2024:
Nvidia shares increase +28,214.53%, annual return of 75.63%
AMD shares increased +5,472.79%, annual return of 49.34%
Tesla shares increased +1,477.28%, annual return of 31.67%
Netflix shares increased +1,141.53%, annual return of 28.57%
Microsoft shares increased +1,069.71%, annual return of 27.80%
Apple shares increased +933.47%, annual return of 26.24%
Alphabet (Class A) shares increased +580.20%, annual return of 21.08%
This brings us to an important point: not all stocks performed exceptionally during this period. Here are some that did not fare as well:
IBM shares increased +60.68%, annual return of 4.84%
General Electric shares increased +56.57%, annual return of 4.57%
Intel shares increased +36.97%, annual return of 3.19%
3M Company shares increased +26.26%, annual return of 2.35%
For comparison, consider the returns of a popular ETF that tracks the S&P 500, VOO, from Vanguard during the same period:
VOO shares increased +248.37%, annual return of 13.26%
Keep in mind, inflation during this period was approximately 2.91% per year. Therefore, 3M shareholders didn't keep pace with inflation, and the others barely stayed ahead.
The purpose of highlighting these examples is to illustrate that the strategy of leaving your RSUs untouched and hoping for growth may or may not yield favorable results. Success heavily depends on your company, industry trends, economic conditions, and a degree of luck. I suggest treating your RSU grants like any other form of compensation, such as your paycheck. You can decide whether to invest those funds back into your company's stock or diversify by purchasing other stocks—like those mentioned earlier—or an index strategy like VOO.
Won't I Have to Pay Taxes When I Sell My Shares?
With RSUs, taxes come in two stages. The initial stage occurs upon vesting, which is when the shares become yours. At vesting, the value of your vested RSUs is treated like a paycheck, and most companies automatically sell a portion of your vested shares to cover the taxes—this is known as automatic withholding. However, not all companies do this, so you'll want to check with your stock plan administrator or human resources department to ensure that taxes were withheld; otherwise, you could be in for a surprise come tax season.
The second stage involves capital gains (or losses) once the shares have vested and your ownership period begins. Capital gains and losses can be unrealized or realized. Simply put, unrealized gains or losses mean that, based on the current market price compared to what you acquired the shares for at vesting, you're either up (made a profit) or down (lost money). However, since you're still holding the investment, these gains or losses are only on paper—the value can change, turning gains into losses and vice versa.
Once you sell your stock, your gain or loss becomes realized. If you made a profit (gain), you'll most likely have to pay capital gains tax. If you incurred a loss, you can add that to your bucket of capital losses, which can be used to offset realized capital gains. If you don't have any realized capital gains, you can deduct up to $3,000 a year against your ordinary income until you've depleted your capital losses stockpile.
Remember, if you hold the stock indefinitely, your gains or losses remain unrealized, and you're not liable for any taxes at this point—it is only once you sell that your gain or loss becomes realized, and you may owe taxes, which would be due on April 15th of the following year.
You may be wondering, what are the tax rates for capital gains? Here's a breakdown:
Short-Term Gains: If you owned the stock for less than 12 months, any gains or losses would be considered short-term, and short-term gains are taxed at your ordinary income tax rates, which could be as high as 37% federally. Remember, state income tax rates apply as well. If you have over $200,000 (single) or $250,000 (married filing jointly) of investment-related income, such as realized capital gains, in one year, then a 3.8% Net Investment Income (NII) tax also applies. Therefore, if you live in California, are in the highest tax bracket, and subject to NII, your short-term capital gains would be taxed at 54.1%.
Long-Term Gains: If you owned the stock for 12 months or longer, then the gain or loss would be considered long-term. Long-term capital gains are subject to either a 0%, 15%, or 20% tax rate, based on your income. Someone in the highest tax brackets would be subject to a 20% capital gains tax rate. Again, assuming you're in the highest tax bracket, living in California, and subject to NII, your long-term gains would be taxed at 37.1%. Although this is still significant, it is 17% less than you would pay in a short-term gains scenario.
An important aspect to keep in mind is that if you sell your vested RSU shares as soon as you can upon vesting—typically the next business day—you may not have much of a gain or loss. However, if something dramatic happens at your company the first day after vesting (which is possible), there could be a major swing in your company's stock price. That's why it's still important to analyze the tax implications of selling and whether your gain would be short-term or long-term.
While taxes are an important factor, they should not be the primary driver of your investment decisions. Focus on company fundamentals, industry outlook, market conditions, and your financial objectives. Holding onto shares solely to defer taxes may expose you to unnecessary risk. Refer back to the earlier examples of top-performing and underperforming stocks for perspective.
Key Points to Remember:
When your shares vest, they first become yours in the eyes of the IRS, and it's at this point that your employer (or you) should consider withholding either cash or selling shares to generate cash so that your expected tax bill is covered.
The vest date is also when your holding period begins in terms of short-term vs. long-term gains or losses.
Short-term gains are taxed like ordinary income (your paycheck), and the highest possible tax rate in the U.S. between federal, state, and NII is 54.1%.
Long-term gains receive preferential tax treatment, with rates of 0%, 15%, or 20% depending on your income level. States also tax long-term capital gains, but some states give preferential treatment to long-term gains. If you're subject to NII (3.8%), this also applies to long-term gains.
What Are Wash Sales?
Earlier, I mentioned that if you sell an investment at a loss, you can use those losses to offset any capital gains. However, the IRS has a special rule called the Wash Sale rule, and you must avoid triggering a wash sale; otherwise, you won't be allowed to claim the loss from your trade. Here's an easy-to-follow example of a wash sale and how it applies to RSU vests:
September 1st, 2024: 100 shares of Apple vest (in the eyes of the IRS, you just bought 100 shares of Apple).
September 15th, 2024: You sell 100 shares of Apple; however, you didn't sell the shares that recently vested because they're at a gain. You noticed that an older lot from a previous vest has a capital loss, so you decided to sell that lot to take the loss and avoid having to sell the shares you recently received, which would trigger a capital gain.
Here's the problem: you just triggered a wash sale.
According to the IRS, a wash sale occurs when you sell or trade a stock or security at a loss, and within 30 days before or after the sale, you:
Buy substantially identical stock or securities.
Acquire substantially identical stock or securities in a fully taxable trade.
Enter into a contract or option to acquire substantially identical stock or securities.
Acquire substantially identical stock in your IRA or Roth IRA.
The vesting that happened on September 1st, 2024, is considered a buy in the eyes of the IRS. If we think about it, that makes sense because your employer used what would have been your cash compensation and instead purchased company stock with it, giving you the stock instead of cash.
Now that a wash sale has been triggered, the loss you tried to realize—which normally would have been a smart move—is now disallowed, meaning you cannot claim the loss. However, that doesn't mean you can't ever claim that loss. The cost basis of the shares that vested on September 1st, 2024, just had their cost basis increased by the amount of the loss you tried to realize, and you could sell those recently vested shares to recognize the loss.
One way to avoid this would be to wait a full 31 days after your vesting date—therefore, until October 2nd, 2024—to sell the older lot that had a loss so you can recognize the loss without triggering a wash sale.
Remember the other bullet points about buying options or shares in your other accounts. Sometimes investors think wash sales are account by account, but it's actually all-encompassing across your portfolio. Be very careful about selling a position at a loss in your taxable brokerage account and then accidentally buying shares in your IRAs, thereby triggering a wash sale. If that happens, the loss is permanently disallowed. This is because IRA accounts are not subject to capital gains or losses; therefore, you can't adjust the cost basis on the position bought in the IRA and try to claim that loss later.
Exit & Reinvestment Strategies for RSUs
You Don't Need to Sell All Shares
The natural instinct is to either keep all the shares or sell them all. However, I often encourage clients to consider their life stage (accumulating wealth or nearing retirement) to help guide this decision. For someone who is accumulating wealth, it may be in your best interest to hold onto some or all of your company stock. However, if you're nearing retirement—let's say, about five years away—you really want to figure out what percentage of your overall wealth is tied up in your company stock. If it becomes too much of a concentrated position, consider strategically reducing your exposure. A CFP® professional can help you determine an appropriate concentration level if you're not comfortable making that determination yourself.
Referencing the historical returns of the various stocks I mentioned at the top of this article, holding onto a sizable portion of the shares could turn out to be a brilliant decision (Nvidia) or a regretful one (3M). Remember to do your due diligence on the company you work for; sometimes we think that, based on the business line we work in, we have a pretty good idea about the company's direction. That could very well be true, but your company may be quite large, and unless you're keeping up with earnings reports, analyst commentary, and reviewing the financials yourself, you may not catch weaknesses in other areas of your company and end up putting a large portion of your wealth at risk.
I typically lead with financial planning (knowing where you are now, where you want to be in the future, your goals, risk tolerance, and understanding your full financial picture), then focus on investment analysis, and end with analyzing the tax impact and strategic ways to reduce your exposure.
Sell and Reinvest into an Index Fund
Index funds, such as the Vanguard S&P 500 ETF (VOO), aim to replicate the returns of the S&P 500 index, which represents the 500 largest companies in the United States and is strongly weighted towards technology. Although quite concentrated, VOO is still more diversified than owning just one stock, and I prefer investing in passive index strategies over actively managed mutual funds.
According to a study by Standard & Poor's called SPIVA (S&P Indices Versus Active), over a 15-year period, more than 90% of actively managed large-cap mutual funds underperformed the index (S&P 500). If you're looking to diversify from single-stock exposure but keep a high exposure to U.S.-based large-cap companies, this is one strategy I would consider.
Sell and Buy a Handful of Other High-Performing Stocks
Let's say you're someone who has a high risk tolerance and isn't thrilled with your company's stock, but you want to reduce your company-specific risk or industry risk while remaining very aggressive in your investment strategy. In that case, you could sell your vested RSUs and buy a handful of other high-performing stocks.
Some things to note here: depending on how concentrated you make this portfolio, this could be just as risky, if not more so, than holding one stock. For example, someone selling their vested AT&T shares and replacing them with a handful of meme stocks would most likely put themselves in a worse position. This is why it's important to consult with an investment professional who can help you analyze and pick high-quality stocks to substitute your company stock with.
Someone who works for Intel may want to sell their vested Intel shares and instead buy Nvidia, AMD, or a handful of other semiconductor stocks. A couple of risk factors to consider here are at the industry level and your individual job level. You're still maintaining high exposure to your industry, which is also the industry that provides you with your primary income source; therefore, clients can sometimes find themselves more exposed to their industry than they realize.
However, I'll note with this strategy that picking stocks is extremely difficult, and the odds of underperforming a simple index fund are high. I do not recommend this strategy for someone who isn't willing to put in the time and due diligence to research, select, monitor, and manage their portfolio of stocks.
Invest in Private Equity
Private equity investments are typically only available to accredited investors and sometimes only to qualified purchasers. The reason I'm an advocate of investing RSU proceeds into alternative investments such as private equity is because it adds value:
Diversifies your portfolio by investing in a completely different asset class. Private equity funds often invest in earlier-stage companies and can diversify your geographic exposure by adding investments in other parts of the world across various industries.
Maintains high growth potential
Reduces portfolio correlation to the overall stock market
With private equity, you can find investments that aim to provide double-digit returns while diversifying your investments into other business stages, geographies, and industries. This can be a great way to reduce your portfolio risk while maintaining or enhancing your long-term growth outlook. The key here is manager selection, so make sure you do your due diligence and select managers expected to execute at the highest level.
Private equity investments are often illiquid, although there are newer strategies that aim to provide quarterly liquidity—however, it's not guaranteed. Additionally, private equity funds tend to charge high fees, but the managers aim to make up for the fees and lack of liquidity by providing high net returns. Private equity investments are not available to all investors, and you typically need to work with a financial advisor, such as myself, to gain access.
Leveraging Your RSUs
RSUs are awarded to you in taxable brokerage accounts, and you can transfer those shares to a brokerage account that either you manage or hire a financial advisor to manage on your behalf. Often, wealth management firms and their custodians offer their clients the ability to obtain a line of credit secured by their investment portfolio.
For example, if you have $500,000 of vested RSUs, you may be able to obtain a line of credit of $300,000–$350,000 (depends on many factors, such as the underlying stock, risk, the issuing bank, market conditions, etc.). Therefore, you could, in theory, remain invested in the market and utilize your line of credit for other ventures, such as buying real estate, investing in a start-up, and more.
Just remember, you cannot use a securities-backed credit line to buy other securities. The specific line of credit used to buy securities is called a margin line and has other rules and requirements. Also, securities-backed credit lines carry the risk that if the underlying stock loses significant value, the bank will issue a margin call. When a margin call happens, you would either have to deposit more funds into your account to get the account balance back in line with what the bank is comfortable lending against, or your stock would get sold and the credit line would get paid off.
Therefore, utilizing a securities-backed credit line or margin line can be risky, and I advise my clients who utilize these types of credit lines not to get anywhere near the maximum limit to further protect themselves from a margin call, and to have a plan in place for paying off their credit line in the future.
As of the time of this writing, in October 2024, interest rates still remain quite elevated, and credit lines aren't utilized as much as they were during the years of near-zero interest rates. However, as rates continue to drop, I expect credit line usage to increase. As an investor, you want to assess the potential returns of your outside ventures relative to the borrowing cost and risks associated with utilizing a securities-backed credit line, and you and your financial advisor should feel comfortable with your decision—this is not something to take lightly.
Options Trading & RSUs
Most employers prohibit their employees from trading options against their company stock. This is mainly done to protect employees from inadvertently committing insider trading violations or at least the appearance of committing an insider trading violation. However, if you're no longer employed at your company—for example, you recently retired and own significant shares of your company stock—then you could start utilizing options strategies.
Options can be used in various ways, such as selling covered calls against your company stock to generate additional income or buying puts to protect some of your downside risk. There are other complex strategies, such as exchange fund replication strategies, which utilize options to protect the downside risk of holding your company stock, and at the same time, use options to recreate the risk and return exposure of an index such as the S&P 500.
The benefit of this type of strategy is that the risk level changes from owning a single stock to being more diversified (S&P 500 exposure), and this is accomplished without selling any of your vested RSUs, thereby preventing any capital gains taxes. If you're not a seasoned options trader, I would not recommend trying to learn or practice on your hard-earned wealth. At Wealthstone, we have access to highly experienced options traders at some of the world's largest asset management firms and partner with them to oversee our clients' options strategies.
Legal & Compliance Aspects to Be Mindful Of
Insider Trading
Anyone who owns stock should be aware of what insider trading is. Insider trading is a criminal offense with severe penalties. It occurs when someone buys or sells stock using material, non-public information. Therefore, employees trading in their company stock are at great risk of accidentally committing insider trading violations.
An example I often give when presenting on this topic is: imagine you're in the cafeteria or break room, and you overhear two employees who prepare the company's quarterly earnings report discussing how the company is about to report a serious flaw in one of your main products, leading to substantial losses for the company. Upon hearing this information, you log in to your brokerage account and sell all of your company stock shares to avoid taking a big loss when the news eventually breaks. Well, you just committed an insider trading violation, and regulators have ways of catching these actions. When they do, you could be facing prison time or serious penalties.
One way to avoid accusations of insider trading is that if you stumble upon material, non-public information—such as news about a major product flaw—you should report this conversation to your human resources and legal department and avoid taking any actions on your investment account until you get further guidance from your company's legal department. Make sure everything is documented to protect yourself.
Another way to avoid insider trading accusations is to establish a 10b5-1 trading plan. A 10b5-1 trading plan involves working with your company's legal and compliance team, and your financial advisor or brokerage firm, to establish a scheduled trading program where your future sales of company stock are pre-determined. A 10b5-1 outlines the number of shares you plan to buy or sell, the timing (dates or intervals) of transactions, and the price targets or other conditions for executing the trades.
By having a pre-scheduled trading plan, you can show regulators that your trades were pre-planned and automatically executed according to a plan established well in advance. This type of plan is commonly established by executives to protect themselves from insider trading accusations. There are many rules associated with 10b5-1 plans, and it would be best to consult with your financial advisor and your company's legal and compliance department to learn more about the requirements for establishing a 10b5-1 trading plan.
Blackout Periods
To further protect you from insider trading violations, executives, directors, and employees are regularly subjected to blackout periods where they are unable to buy or sell company stock during certain periods of the year. Blackout periods typically occur before and after earnings reports and other major disclosures or corporate events. Therefore, it's important to know when your company's blackout period begins or ends so you can plan your trades accordingly.
How Wealthstone & Zak Gardezy, CFP®, Can Help
Having educated hundreds of investors on their equity compensation and company retirement plans, I have the expertise to help you blend your RSUs into your overall financial plan. Whether your goal is to accumulate wealth or to prepare for upcoming retirement, I would be glad to help you plan, invest, and prepare for further financial success. If you would like to request a complimentary consultation, please email me at: zak@wealthstonepwm.com
If you have any questions or would like to discuss this topic further, please feel free to leave a comment or send me an email!
Learn more about Wealthstone at: Founded by Zak Gardezy CFP® | Scottsdale, Arizona-Wealthstone Private Wealth Management (wealthstonepwm.com)
Disclosure: This information is for educational purposes only. Please consult with your financial, legal, or tax advisor prior to making any financial decisions.
