What to do with Your RSUs (Restricted Stock Units)?
TL:DR; I am writing this article for employees that receive stock units as a part of their compensation.?Full disclosure, I have worked at Google in their Cloud business since 2019, but this article is not affiliated or sponsored by Google.?In addition to the perks like free food, gyms, and coffee, Google uses stock compensation or RSUs as a way to attract and retain top talent.?Many tech firms especially in Silicon Valley offer stock grants as an additional form of compensation.?
If you work for a company that offers restricted stock units as a part of your compensation, I believe you should sell the majority of these RSUs when they vest, and invest or spend the proceeds. ?
In my case, I have invested 40% of my RSUs proceeds in multifamily real estate and earned an ROI of 410+% in 2 short years.
?I am here to:
1) Share what I learned about RSUs; I am ashamed to say I did not understand them as much as I should until I started selling them off to buy multifamily real estate, and
2) Share why I believe multifamily real estate is a great way to invest a portion of the proceeds from RSU sales.
What Is a Restricted Stock Unit (RSU)?
A Restricted Stock Unit is a form of employee compensation.?Companies reward their employees with payment in the form of stock that is transferred to the employee after what is called a vesting period.?Vesting is a fancy legal term that means to earn a right to future payment.?In simple terms, a vesting period is the time between your stock awards grant date, and when you can exercise your ownership over these stock awards i.e. sell them.
Once the stock units vest and are available to the owner, their value represents the current price on the market for these shares.?Another thing to note is that once these stock units vest they are now considered taxable income by the IRS.?In fact, your employer will withhold a portion of the shares you are granted to pay income taxes on your behalf.?As an employee, you receive the net amount of shares total share grants minus shares withheld for income tax purposes.
Examples of RSUs
Suppose you receive a job offer because the company values your skill set and expertise, the company offers you 400 RSUs in addition to a salary and other benefits.
The company's stock is worth $100 per share today, making the?RSUs?potentially worth an additional $40,000. To give you an incentive to stay with the company and receive the 400 shares, it puts the RSUs on a four-year vesting schedule with an equal amount of shares vesting at the end of each year.
The RSUs vest on the following schedule:
Year 1: 100 shares (Current Year)
Year 2: 100 shares
Year 3: 100 shares
Year 4: 100 shares
You receive 100 shares after one year with the company, another 100 shares after the second year, and so on until you acquire all 400 shares at the end of the vesting period.?Depending on the company's stock performance, you may receive more or less than $40,000 after 4 years.
RSU Tax Implications
As soon as the shares in the current year vest, assuming a stock price of $100 per share, you will receive an additional $10,000 of taxable income.?Your company will also withhold shares for tax purposes.?Because RSUs are classified as supplemental wage income according to the IRS regulations, supplemental wage income is withheld at the 22% Federal statutory rate plus whatever your state statutory rate is.?I live in Texas so for simplicity purposes, we will assume you work in Texas and are not subject to state income tax. Please note that the Federal statutory rate is 22%, but you are required to pay taxes on your RSUs at your marginal tax rate, see Federal Income Tax Bracket below. Additionally, if your income exceeds $1MM, the supplemental wage income withholding will increase to 37%. ?
What to do with your RSUs - Correct Answer Sell them as soon as the Vest why?
When I received my first set of RSUs I treated them as a high growth tax-advantaged savings account.?What do I mean by this? Well for one, I incorrectly believed that I was not taxed on the RSUs until I sold them.?As a result of this flawed thinking, I didn’t look at my RSUs for 2 years and I enjoyed the idea that I had thousands of dollars just sitting in my brokerage account growing tax-free, that I could tap into later. ?From a phycological perspective, this is a tempting approach especially if you believe that your company’s stock has a lot of growth potential, but for reasons, I will lay out in a second this approach to RSUs is not the best idea.?So the question remains what should I do with my RSUs?
Correct Answer Sell them as soon as they vest why?
After reading some literature on the subject and chatting with several financial advisors, I now believe it is best to sell your RSUs as soon as they vest.?But why?
None of us have a crystal ball we do not know what the future will hold.?I was doing some reading on the histories of great US companies and was fascinated to find that Sears, now an afterthought when you think of the top retailers in the country, was once one of the most coveted places to work.?Sears was overtaken by Kmart, then Walmart, and now all retailers are being swallowed up by internet retailers like Alibaba and Amazon.?My point here is all kingdoms will fall. The great companies of today will be afterthoughts 10 years from now. You do not want to hitch your financial future to one company knowing that companies are not invincible.
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The best stock market strategy to protect yourself against downside risk and see modest stock portfolio growth is through diversification. ?“Investments that are diversified —spread out over many different stocks or bonds—perform better, on average, than investments that are concentrated in one stock.” Based on this fact, I sell my RSUs as soon as they vest, and reinvest the cash in my 401-k and in multifamily real estate investments.?To make the most rational decisions related to your RSUs, you must imagine that your RSU's are a cash bonus. ?If the RSUs were a cash bonus, would you turn around and buy a huge chunk of your company’s stock??If the answer is no, you should sell the shares and use the cash to pay bills, invest, or achieve a financial goal.
The only exception in this strategy is if you make a thoughtful strategic bet on the future upside of your company stock.?The FOMO on some upside to your stock can be tempting enough for you to hold on to your company’s stock.?To satisfy your FOMO, confirm whether your company offers refresher RSUs grants, which are additional stock units companies grant annually.?If you get a refresher RSUs grant, you can comfortably sell RSUs as they vest. Knowing that with your refresher grant, you still get to participate in any upside your company’s stock experiences in the future years.
Keep Them - Riskiest Options
Do not even consider holding your RSUs unless all of the following conditions apply:
Assuming all of the conditions above apply, and you are in a comfortable financial position to take on the risk of holding your company’s stock long-term please understand that your salary and bonus are already tied up in the future success of your company.
Sell Enough Shares to Cover the Tax
As discussed above RSUs are taxables as soon as they vest and vesting schedules vary from company to company.?In the example above shares vest evenly each year over four years.?Your employer withholds shares to cover the Federal Statutory rate of 22%.?However, your marginal rate is likely higher than this.?For example, if you make $200,000 including your RSUs then your marginal tax rate is 32%.?Assuming all $10,000 of vested shares are taxable at the 32% tax bracket you can expect to pay an additional $1,000 (or 10 shares of your company stock) in taxes on top of the amount your company withholds.?You can sell 10 of the net 78 shares you receive in a calendar year to cover these incremental taxes.
Please see the table below for an example of how to calculate the additional shares to sell to cover taxes:
Why multifamily syndication investment is a beneficial form of diversification and investment for the cash sale of RSUs
Now that we have established that the best solution is to, sell the RSU shares and use the cash to invest in your financial future.?Allow me to share an investment option that has yielded great returns for me and my family.?Since 2020, I have been investing my RSUs in multifamily real estate investments. In that time, I added 117 doors to my real estate portfolio, earned approximately a million dollars in equity, and saved big on taxes by taking advantage of bonus depreciation.
What Is Multifamily Syndication?
Real estate syndications can help investors achieve the benefits of owning an investment property (cash flow, appreciation, and tax breaks) without the work or stress of being a landlord themselves.
Here is why I like multifamily real estate investing:
If you would like to learn more about how to add multifamily syndication to your families investment strategy, grab our free e-book on multifamily investment here and/or book a 30-minute chat with me here.
About the Author
Carl Nnaji is a co-founder of Equicapital Group, a commercial real estate investment firm specializing in multifamily real estate investment primarily in Texas and the Southwest Region of the United States. At Equicapital Group, we partner with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside.
Equicapital Group strategically seeks out value-add multifamily real estate opportunities and executes their business plan to add millions of dollars of value to properties by increasing rent, adding revenue stream, and/or reducing costs. Equicapital Group has a great core team and partners with decades of industry experience.
Carl started his career as CPA working for Hewlett Packard in Houston. Later in his career, he steered business transformational efforts at companies like ExxonMobil and now Google. Additionally, Carl is an experienced entrepreneur commercializing a successful SAAS business.
Carl holds a Master in Finance and Accounting and a Bachelors in Business from The University of Texas at Austin's Red McCombs School of Business.
You can read more about Equicapital Group and Carl Nnaji at www.equicapitalgroup.com
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10 个月thanks for the info! great job
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2 年Fantastic article, Carl! Love the break down on RSU tax implications and your mindset behind the strategy.
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2 年Excellent article!
Corporate Financial Systems Manager at Tokio Marine HCC
2 年Awesome Carl, glad to see you are having much success since our HP days. All the best for continued success ??.
Nicely written and very informative. Thanks for sharing Carl Nnaji