How can engineers optimize their Restricted Stock Units (RSUs)?
As engineers work in the modern world, the total compensation (paycheck) is no longer as simple as a yearly salary amount. Depending on the company engineers work for, the compensation may include things like Restricted Stock Units or RSUs for short. Understanding how these dollars work can help you better Engineer Your Finances.
Let's say we begin working at a company that is publicly traded on a stock exchange. We'll call them company ABC. They want to show engineers like us how much they value the work we do by giving us a piece of the company in the form of company shares. Since we're actively employed, these shares are 'restricted'.
Company ABC gives us an initial stock grant of 100 shares valued today at $1 per share. We have shares, but we can't access them yet.
The company tells us that our stock grant will vest evenly over the next four years, so we'll receive 25 of those 100 shares each year starting one year from our start date.
So we work at our job and get our normal paycheck until that first amount vests.
It's one year later and the first 25 shares are now vested. This simply means we are allowed to do something with these shares, but there's something we have to deal with first.
When shares vest, the value is considered income for tax purposes so most companies will automatically sell 20-25% of our vested shares to help cover the income taxes. If that's not the right percentage for our family's specific circumstances, we'll get the difference back in the form of a tax refund when we file next season.
Let's say the company sold 6 shares to cover taxes. That money is gone and 19 shares remain.
Now we have a choice to make about what to do with those remaining 19 shares.
Option 1 - Do Nothing. If we do nothing, the 19 shares of ABC will continue to be invested and we'll have an investment in company ABC. If the value goes up, we'll see our dollars grow. If the value goes down, we'll see the same.
Option 2 - Sell the Shares. If we sell the shares on the same day as vesting, we can take that cash and do whatever we'd like just like any other dollar we would be paid in our compensation.
If we sell those shares after the vesting day, there are additional taxes that can be incurred on top of the original income tax that the 6 shares covered.
For example, if the shares vest today and we sell them next month, it's possible that the price of those shares have gone up. We owe income taxes on the difference of value those shares have from the value on vesting day and the value we sold them at. This is known as 'short term capital gains' STCG, or income tax as it's more commonly known. If the value of the shares go down, we could have a 'short term capital loss' STCL which can be used to help offset other incomes on our tax returns.
If we sell those shares a while later, let's say more than one year after vesting day, if we sell the shares for a higher value than they were worth on vesting day, we'll owe 'long term capital gains' LTCG on the difference in value. In most cases, this is a lower tax rate than STCG so there could be an advantage. If the value of the shares go down, a similar thing occurs, we can have a 'long term capital loss’ LTCL on our tax return which can help offset other capital gains.
Understanding Restricted Stock Units is a fairly easy thing once we get the basics and those dollars can be used strategically in your family's comprehensive financial plan so you can better Engineer Your Finances.
_______
If you're an engineer and this information resonates with you, we're happy to meet for an introduction on our approach to financial and tax planning for engineers. Best of all, our entire team of advisers and staff are all former engineers!
Visit us at the engineersfinancialgroup.com -> Get Started
This article reflects only the views and opinions of Aaron Gose, ChFC® FSCP® RICP® WMCP® and the Engineer's Financial Group LLC. This article is not a solicitation to buy or sell any securities. Investments involve risk. Consult your financial adviser and CPA for information specific to you.
Aaron Gose, Principal, Financial Adviser with the Engineer’s Financial Group, LLC®, Financial Adviser with Eagle Strategies, LLC, a Registered Investment Adviser, Registered Representative for NYLife Securities, LLC (Member FINRA/SIPC), a Licensed Insurance Agency. Eagle Strategies, LLC and NYLife Securities, LLC are New York Life Companies.
The Engineer’s Financial Group, LLC® is not owned or operated by New York Life or its affiliates. Aaron Gose, The Engineer’s Financial Group, LLC® and its employees, NYLife Securities or its affiliates does not provide tax advice. Please consult your own tax professional regarding your situation.
SMRU 8916410.1