A Guide to Restricted Stock Units (RSUs)

A Guide to Restricted Stock Units (RSUs)

Many companies use equity compensation plans to align long-term interests of employees and shareholders. One of the more common structures is called Restricted Stock Units (RSUs).

RSUs can be a powerful wealth-building tool, but they can create tax surprises, concentration risk, and cash-flow planning issues. The key is to understand what they are, when they become taxable, and how they fit into your broader financial plan.

The First Tax Event

When RSUs are granted, there is no tax liability because you do not own the stock; you own an interest in the company’s stock and will receive the shares in the future once vested.

The first tax trigger is when the RSUs vest and are delivered, also known as the settlement date. It is common for vesting and delivery to be the same date, so we’ll presume that here.

The fair market value, determined on the vesting date, is treated as ordinary income.

Going back to our example, after year one, 250 shares vested with the company stock price at $100 which means $25,000 will be reported on your W-2 and subject to income taxes regardless of whether you sell the shares or not. To help offset tax liability, most employers withhold taxes when RSUs vest. They may do this by selling some shares, withholding shares, or using cash withholding through payroll.

The Second Tax Event

After vesting, you own the shares and from that point forward, the stock is treated under capital gain/loss rules.  This means there will be a second taxable event whenever you decide to sell the shares.

If you hold the shares for one year or less, your capital gain or loss is short-term.  If you hold the shares more than one year before selling, your gain or loss is long-term.

Your cost basis is the value of the shares on the vesting date.

Withholding May Not Be Enough

One of the biggest issues with equity compensation like RSUs is that tax withholding is not always the same as your actual tax liability.

RSU income is often treated as supplemental wages. For 2026, the IRS withholding rate remains 22% for supplemental wages up to $1 million, and 37% for supplemental wages above $1 million.

That 22% federal withholding rate can be too low for employees in a higher marginal tax bracket. There are strategies to mitigate the tax impact such as pre-paying estimated taxes, increasing withholding or selling additional shares to raise cash.

Employees of private companies with no public market for their stock often lack the liquidity needed to cover tax bills. Under IRS Section 83(i) certain RSU holders may have the option to defer their federal income tax payments. There are several eligibility rules and moving parts in considering an 83(i) election so consult with your tax and financial professionals to determine what makes sense for your personal circumstances.

Understand the Concentration Risk

RSUs can quietly create a large single-stock position. You receive new grants each year. Older grants continue vesting. The stock appreciates. You avoid selling because of taxes or even just inertia (things are going well). Over time, your net worth can become heavily tied to your employer.

Moreover, your employer also provides your paycheck, health benefits, bonus opportunity and career capital. Holding too much company stock can add even more concentration risk to your financial life.

There is no single right answer regarding concentration levels because everyone is different, but the point is to manage RSUs intentionally and control the concentration risk.

RSUs Vesting – Common Strategies

1. Sell at vesting
This is a clean and simple strategy. When RSUs vest, you sell the shares and redirect the proceeds. This can make sense if you want to:

• Build cash reserves.
• Fund other goals like home improvement, education, travel, etc.
• Reduce single-company risk.
  Diversify across your portfolio.

As discussed above, vesting triggers the ordinary income tax event regardless of whether you sell the shares. Selling immediately after vesting often results in little or no capital gain given your basis is the fair market value at the time of vesting.

2. Sell enough to cover taxes
Some employees hold shares but sell enough to make sure taxes are covered.

This can be useful when employer withholding is too low. Rather than waiting until April and being surprised by a balance due, you can proactively set aside cash or make estimated payments.

This is especially important for employees who receive large RSU vests, bonuses, or other variable compensation.

3. Create a rules-based selling plan
A rules-based strategy can reduce emotional decision making and the temptation to guess short-term stock movements. Some common examples are:

• Set a percentage target to sell at vesting and hold the rest.
• Sell shares until employer stock is no more than 10% of investable assets.
• Sell quarterly to diversify.
• Sell enough each year to fund other investment and retirement savings goals.

4. Use charitable giving strategically
If shares have appreciated after vesting and you are charitably inclined, donating appreciated shares may be more tax-efficient than giving cash.

This strategy is useful when you itemize deductions and have meaningful long-term unrealized gains.

This does not eliminate the ordinary income tax at vesting, but it may help avoid capital gains tax on post-vesting appreciation and potentially allow for a tax deduction.

5. Avoid letting taxes drive every decision
A common mistake is holding employer stock solely because selling would trigger more taxes. Holding a concentrated stock position to avoid capital gains tax can expose you to much larger investment risk. For example, a 15% or 20% tax bill on a gain may be painful, but a material decline in the price of a concentrated position can have a much bigger impact on your financial goals.

Disclosures

Ables, Iannone, Moore & Associates, Inc. (“AIMA”) is an independent, fee-only registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). AIMA, Inc. is not a tax advisor. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is provided for educational and informational purposes only and should not be construed as personalized investment or tax advice. Opinions expressed are subject to change without notice and are not intended as a forecast, guarantee, or assurance of future results. All investing involves risk, including the potential loss of principal. Past performance is not indicative of future results.

For additional information about AIMA’s advisory services, please see our Form ADV, which is available upon request or at www.adviserinfo.sec.gov.