Nowadays, companies are looking for creative ways to attract and keep very talented employees and executives. One way they’re doing that is by offering something called restricted stock units.
If you’re getting restricted stock units—or RSUs—from your company, that means they want you to have some skin in the game. That’s because with RSUs, you are being rewarded with shares of your company stock after working there for a while or hitting some performance benchmarks.
You’re not just an employee anymore—you’re a shareholder too. You’re really invested in the company’s success because the more successful your company is, the more valuable your RSUs will be!
But what exactly is a restricted stock unit? And how do they work? Let’s take a closer look.
What Are Restricted Stock Units (RSUs)?
Restricted stock units (RSUs) are a way for employers to reward their employees by giving them shares of their company’s stock after meeting certain requirements. It’s just another way for your employer to pay you in addition to your salary and benefits.
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It’s important to remember that RSUs are different from stock options. Stock options give you the chance to buy company stock at a discount . . . but you still have to buy them with your own hard-earned money. (And honestly? You’re better off investing in mutual funds instead, which are more diversified.)
RSUs, on the other hand, are basically a gift . . . a way for your employer to say, Thanks for all your hard work and for sticking around! Have some company stock—it’s on the house. The only thing you’re responsible for is paying taxes on the value of the RSUs when you receive them (more on that later).
How Do RSUs Work?
Why are they “restricted”? Because you usually won’t be given those RSUs right away. In most cases, you’ll need to work at the company for a certain amount of time before those company shares are actually yours (which is called a vesting schedule). But sometimes, RSUs are granted based on your performance—it just depends on the company!
Once you’ve met your company’s time- or performance-based requirements, those RSUs will become “vested”—that just means those company shares are officially yours! Those shares will be worth whatever their market value is once they become fully vested.
Let’s say you take a job at a company and, because you’re someone who brings it every day at work, they want to encourage you to stay with the company for a long time. So what do they do? They offer you 2,000 RSUs, in addition to your salary and benefits, and put you on a four-year vesting schedule where you would receive 500 shares at the end of each year. That means you would have to work there for four years in order to receive all 2,000 RSUs.
Your company also might have some rules or limits on what you can do with those company shares, so keep an eye out for those.
But one of the really neat things about RSUs is that they will almost always have some sort of value to you—even if the stock price falls from the time you started at the company to the time you receive those RSUs. That’s because you didn’t have to pay anything for them!
Imagine you bought a TV for $100 and sold it a few months later for $80. You basically lost $20, right? But if you were given that TV as a gift, even if that TV’s value fell, you still come out ahead $80 because you didn’t have to pay anything for it. It’s the same with RSUs!
How Are RSUs Taxed?
Heads up: You’ll have to pay ordinary income taxes on whatever your RSUs are worth in the year you receive them. That’s because the value of your RSUs is treated like regular wages that will show up on your W-2 tax form.
The good news is that most of the time, your employer will sell enough of your shares to cover whatever you owe in taxes beforehand. That way, you don’t have to worry about getting hit with a huge tax bill in April. This is called share withholding, and it’s basically the same thing as regular tax withholding.
Here’s how it works:
- Let’s say your company gives you 1,000 RSUs after you worked there for one year. When you joined the company, those shares might’ve been worth $25 per share. But maybe after working there for a year, the price of those shares has fallen to $20 each.
- That means when your RSUs are fully vested after a year, they’ll be worth $20,000 (1,000 RSUs x 20 = $20,000) and that’s the amount you’ll have to pay taxes on in the year you received them.
- If you’re in the 24% tax bracket, you’ll owe $4,800 in taxes on your RSUs in this case. Your company can sell 240 of your shares to cover those taxes, which will leave you with 760 shares worth a total of $15,200!
After that, those RSUs are yours and you can do whatever you want with them. If you want to sell them right away for a profit, go ahead! Want to hold on to them and watch them grow? You can do that too!
But remember this: If you do decide to hang on to your RSUs and they grow in value, then you will have to pay capital gains taxes on the growth of those RSUs whenever you decide to sell your shares.
The best thing you can probably do is talk things over with your tax advisor to make sure that you have all your bases covered!
What Should I Do With My RSUs?
It’s no secret that we’re not big on buying and selling single stocks. Hinging your retirement portfolio on the success or failure of a handful of companies—even if it’s your company—is just an invitation for disaster.
When it comes to saving for retirement, we recommend investing 15% of your gross income in good growth stock mutual funds inside tax-advantaged retirement accounts like a 401(k) or Roth IRA. Investing is a marathon, not a sprint!
That being said, getting RSUs is a good thing—it’s kind of like getting a bonus! And just like a bonus, RSUs can be useful in helping you reach some of your financial goals a little faster.
When you receive your RSUs, you could hang on to those shares and sell them later. (Again, you’ll have to pay long-term capital gains tax if you sell them more than a year after you receive your RSUs or short-term capital gains tax if you sell them within a year.)
Or you could sell them right away when you receive them and then use the profits to pay off debt, build up your emergency fund, or even reinvest them in mutual funds inside your 401(k) or IRA. It really just depends on your situation and where you are on the Baby Steps!
Talk It Over With a Financial Advisor
Still have questions about RSUs and what they mean for you? That’s where a RamseyTrusted financial advisor comes in! You’ll want someone there to help you figure out how to make the most of RSUs and what strategy makes the most sense for you.
Don’t have an advisor? We can help! Our SmartVestor program can help you find a financial advisor who is ready to walk you through all your investing questions.