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Restricted Stock Units: The Basics & Taxes - YouTube
Channel: Java Wealth - Personal Finance for Tech Employees
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Hey guys! Today we are going to聽
talk about Restricted Stock Units聽聽
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or otherwise known as RSUs. We'll talk聽
about the basics of how they work,聽聽
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how they are taxed, and a couple of big聽
questions to think about whenever you get RSUs.
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So first just doing a quick breakdown of what聽
this is if we just break down the actual term聽聽
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so restricted stock units. First from the聽
restricted perspective, it's restricted聽聽
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because they have strings attached to them.聽
So that means that whenever you get it then聽聽
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there's actually things that you have to do聽
before they become yours. That's usually tied聽聽
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to a vesting schedule that could either be an聽
amount of time to keep working at the job or聽聽
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it could be performance-based or it could be聽
a combination of both. Then the other part of聽聽
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it the fact that it's a "stock unit" so that聽
means that it is tied to stock in your company聽聽
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but it's not actual stock yet. It's just a聽
promise that they are going to give you the聽聽
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stock at a future date as soon as you satisfy the聽
restrictions. Let's do this through an example:
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Let's say that聽聽you've just started a new job聽聽
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and you're working for ABC Company and聽
then ABC Company has said "hey as a聽聽
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bonus for you coming on then we are going聽
to grant you 8,000 RSUs in the company."
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Then in this example let's say that the聽
restriction is that it's going to be on聽聽
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a four-year graded vesting schedule. All聽
this part is saying is that in order to get聽聽
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the 8,000 RSUs and turn them into shares聽
of stock then you have to stick around for聽聽
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four years. The fact that it's graded means聽
that you get a certain amount every year. So聽聽
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if you stick around one year then you'll get聽
2,000 and then another year you'll get another聽聽
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2,000 until you're there for four years. Now聽
let's look at this from a timeline perspective
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First, whenever you think about the grant date. So聽
you got 8,000 shares... sorry 8,000 RSUs granted聽聽
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to you and then at that time then the company is聽
going to be trading at a certain... it'll have聽聽
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a certain stock price. But the thing is this聽
the price whenever it's granted doesn't matter聽聽
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because they're just RSUs and since nothing has聽
vested then there's really nothing for you to do聽聽
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here really. The only thing that this matters聽
is just seeing the potential of what these聽聽
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things could be valued at as you go along. So in聽
our scenario if you've stuck around for a year聽聽
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then 1/4 of your shares are going to vest on this聽
date and so you're going to get 2,000 shares of聽聽
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stock on this date. Then this is where it really聽
does matter what the price of the stock is on聽聽
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that vesting date. If you have 2,000 shares that聽
vested here and then it's at ten dollars a share,聽聽
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then from a tax perspective then what just聽
happened is that you just got a $20,000 bonus.聽聽
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Just like a cash bonus, what that聽
means is that this $20,000 is subject聽聽
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to federal taxes, state taxes, medicare and social聽
security. Then also just like with your paycheck聽聽
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then that means that taxes聽
will need to be withheld聽聽
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from this dollar amount. A very common way that聽
that the company will withhold those taxes for you聽聽
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is that they'll take a portion of these shares聽
and they'll surrender them and sell them in order聽聽
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to withhold the taxes from them. So for example聽
in our scenario, if there are 2,000 shares that聽聽
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vested then they would withhold 500聽
of those shares to pay for the taxes.
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Then the end result of all of that is that you聽聽
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now become the proud owner of 1500聽
shares of stock in your company.
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Then there are two main questions that聽
you need to answer and the first one聽聽
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is "do you need to withhold any more taxes?" Kind聽
of ran out of room there but that's all right so聽聽
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just saying more tax withholding and so what we're聽
really talking about so your company has withheld聽聽
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a certain amount but it's very common for your for聽
the company to just withhold a standard 22 percent聽聽
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from a federal tax rate. So if for example you're聽
at the 32 percent tax bracket, there's actually聽聽
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another $2,000 that you should withhold in聽
order to pay taxes on this $20,000 bonus.
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Okay so what we did in order to withhold聽
more taxes, to hold another $2,000聽聽
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is that we sold 200 shares and so now聽
we're left with 1300 shares. The second聽聽
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big question to answer is "what should you do聽
now with the rest of the shares that you have?"
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The way that I like to pose this question聽
to clients of whether to sell or not is to聽聽
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imagine the scenario of instead of your company聽
doing the stock bonus that they actually gave聽聽
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you $13,000 as a cash bonus and then the question聽
is would you then take that $13,000, go to your聽聽
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brokerage account and buy shares of stock in聽
your company. If the answer to that is "No",聽聽
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then that's just another way of saying to go ahead聽
and sell the rest of them right here. If you sell聽聽
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them the date that they vest then there's no聽
additional taxes due to it because we've already聽聽
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figured out this bonus income tax and once it聽
invests here then any taxes afterward is just聽聽
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the same as if you bought it and you had to think聽
about capital gains and capital losses. Another聽聽
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thing to think about is this idea of... the fancy聽
term is called "Concentration Risk". That's just a聽聽
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way of saying that you have part of your net worth聽
tied to your company in the form of stock and then聽聽
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also your paycheck is tied to that company because聽
you're also working for them. So if you're wanting聽聽
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to diversify away from that then the idea would be聽
to sell the shares of your stock and put that into聽聽
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other investments. You'd still want your stock聽
price to go up because remember in our example,聽聽
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2000 shares have vested, but there's still聽
6000 left that are going to vest in the聽聽
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next three years. I hope you guys found this聽
helpful. RSUs have become more and more common聽聽
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and I don't see them going anywhere聽
anytime soon so I think it's really聽聽
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important to understand the way that they聽
work and how valuable that they can be.聽聽
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If you like what you see then please subscribe聽
to my YouTube channel or go to javawealth.com聽聽
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and check out more information there and聽
I will talk to you guys later. Thanks!
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