Understanding Restricted Stock Units: Terminology, Taxes, and More!

Getting recognition for your hard work is always a great feeling! Your paychecks are starting to come in, maybe a cash bonus here and there, and things are looking good. What more could you ask for? Well, for many employees out there, you may also have been granted restricted stock units, or RSUs, as part of your total compensation package. RSUs can be an exciting addition to your salary and cash bonuses, but this form of stock compensation can lead to more questions than not because it’s so complex.

Below, we’ll explore RSUs in more detail to help you make informed decisions about this type of stock as you navigate your financial journey forward.

What is a restricted stock unit?

Restricted stock units (RSUs) are a form of stock compensation typically granted to employees of public or late-stage private sector companies.

The grant of units represents a promise of a specified number of company shares under certain conditions. However, instead of getting these RSUs immediately on your grant date, you do not actually own them until the first vesting date.

There is a simple way to think of RSUs as if you were receiving a cash bonus. However, instead of depositing cash into your checking account, your employer gives you company stock.

Breaking down the RSU terminology

Before we dive into RSUs, it’s probably best to first understand some of those terms mentioned above, like stock, grants, and vesting.

Stock compensation

Equity compensation refers to non-cash compensation you receive as an employee that gives you a stake in your company through partial ownership of the company and its profits.

By having equity as an employee, you are motivated to do your best in your role. The more successful you are in your role, the better your company will be, and the better your company will be, the more likely your stock will increase in value. And you know what that means? It translates into more potential money for you if you choose to take advantage of those gains.

Sounds great for everyone involved, right?


As part of your offer letter with a new employer, you may have been given or granted a guaranteed number of shares that you will receive in the future if you stay with your company. There is no cost to you when you are granted restricted stock units.

Let’s say you work for XYZ Public Company and the following happens:

  • You have been awarded $100,000 in RSUs
  • The average price of XYZ stock at the time of grant was $25
  • You’ve got 4,000 RSUs ($100,000/$25)

However, you will not have ownership rights or the ability to decide what to do with those RSUs until they vest.

Due schedule

You’ve just been awarded RSUs and of course you’re excited! But, you just read the fine print in your stock award about the vesting schedule. Now, what is this?

Your vesting schedule determines when you can access and actually own your RSUs.

There are two common vesting schedules:

  • Entitlement to the abyss: RSUs are fully allocated after a specified period of time, which can vary, or once a specific goal or milestone is achieved
    • Example: You have been awarded 1000 RSUs. 25% is due after one year and the rest is monthly (1/48 of the original grant). This would be considered a 4-year vesting schedule with a 1-year cliff.
  • Eligibility is graded: A specific percentage of your RSUs will vest each year for a specific period of time
    • Example: You have been awarded 2000 RSUs. Under a 4-year graduated vesting schedule, 500 shares, or 25%, may vest each year.

Once your RSUs vest, their dollar value depends on the market price of the stock on that day. This means that the value of your shares can be uncertain until they actually vest, as share prices constantly fluctuate.

Understand the tax implications of RSUs

In an ideal scenario, you can simply sell your RSUs as soon as they vest, pocket the money, and move on without tax concerns. Well, you know that’s not the case! In order to clearly understand your RSUs, you need to be aware of the tax implications.

Tax considerations when an RSU is due

Once your RSUs vest and become yours at the current market price, you automatically owe taxes at your ordinary income, or ordinary income, tax rates.

The good news is that in most cases, your company will immediately sell some of your shares to cover a portion of the taxes due at vesting. Since RSUs are considered supplemental income by the IRS (just like a cash bonus), withholding is usually at the supplemental withholding rate. This generally looks like this:

  • 22% federal deduction for additional income of less than $1,000,000
  • 37% federal deduction for additional income over $1,000,000
  • Plus Social Security, Medicare (FICA), and applicable state and local taxes

NB: Some companies may allow you to increase your withholding rate to cover a larger tax bill than your supplemental withholding could handle. Simply put, if your RSU and other earned income for the year pushes you into the 32% marginal tax bracket, for example, withholding 22% will not be enough.

As always, an example will help us understand taxes when additional due:

  • You were awarded 10,000 RSUs at ABC Company on 01/02/2023.
  • 25%, or 2,500 units, due on 02/01/2024 when ABC was trading at $28 per share
  • You now have $70,000 of taxable income at ordinary income tax rates
  • Your employer withheld 22% ($15,400) of federal taxes and 7.65% ($5,355) of FICA taxes (no additional withholding occurs because you live in Florida, a state that does not tax income, for example)
  • Your employer will withhold 742 shares to cover taxes and the remaining 1,758 shares will be deposited into your account for you to decide what to do next (hold vs. sell)

Tax considerations when selling RSUs

You’ve calculated taxes when your RSUs vest, but the tax implications don’t end there.

Your cost basis in the shares will be their market value when they vest – the same amount that was previously taxed as income (in the example above).

When you go to sell your shares, any gain or loss (the difference between the fair market value of your stock at vesting and the sale price) is reported on your taxes as a capital gain or loss. For a low long-term capital gains tax rate (up to 20%), you need to hold the shares for at least one year after vesting. Otherwise, if it is sold earlier, it will be considered a short-term gain (or loss) and taxed at your ordinary income rate for that year.

Meanwhile, if you sell your shares immediately after vesting, there will be no (or minimal) additional capital gains tax. In this case, you would only face ordinary income tax when your RSUs vest.

NB: Be aware of the wash sale rule when selling your RSUs.

Address common questions when awarding RSUs

With a better understanding of RSUs and their tax implications, you may want to consider some additional questions when you plan to incorporate your stock compensation as part of your overall financial picture.

What are the possible strategies with RSUs?

When you acquire your RSUs, you now have to make the somewhat difficult decision of whether to keep them or sell them. Let’s consider some of your options here as well as the potential advantages and disadvantages of each:

  • Hold stocks with the expectation that they will increase in value over time and then sell them later for long-term growth
    • forefront: Your company’s stock continues to increase and you have made the best decision!
    • Deceive: Your company’s stock has been declining significantly since vesting, and you would have been better off selling and taking the cash at that time.
  • Sell ​​shares immediately upon maturity
    • forefront: You take future decision making regarding the stock out of the picture, there are no additional taxes to consider, and you can use that cash to direct it toward your financial goals.
    • Deceive: You may have missed the potential for future upside for that specific amount of RSUs. However, if you receive future RSU vests, and your stock continues to increase, you will still be able to reap those benefits through continued vesting.
  • Do a mix of both – sell some shares and hold some shares
    • forefront: From a behavioral standpoint, you don’t feel like you’re missing out on either approach versus an all-or-nothing approach.
    • Deceive: See above for both holding all shares and selling all shares.

NB: A good rule of thumb is to have no more than 10% of your total savings in one specific investment, including your company stock. This may also lead to a lot of decisions being made regarding RSU strategy.

Do you have RSUs and work for a private company? How are things different?

If you work for a public company, you typically have the option to sell RSU shares once vesting criteria are met and you receive them, provided you adhere to your company’s trading policy.

Meanwhile, if you work for a private company and your RSUs will vest, you may owe taxes but won’t be able to sell the shares for the cash you’ll need to pay the taxes.

However, this situation can be avoided thanks to A Provide double trigger Which is often implemented within stock agreements in private companies. If this is the case, you will not have full control over your RSUs and taxes will not be incurred until both occur:

  1. Due date arrives And
  2. Your company is experiencing some type of liquidity event, such as an IPO or acquisition

What happens if you leave your company with RSUs?

When you vest your RSUs, those shares are yours to keep even if you leave the company.

However, if you resign or are terminated from your position, you lose your unvested RSUs.

If you work for a private company and resign before any liquidity event (such as an IPO), you will likely be able to keep the shares vested before you leave.

In either case, you should review your stock documents and agreements for confirmation before making any decisions.

Consolidate your RSUs within your new retirement plan

Although you cannot predict the future of your company’s shares and thus the value of your RSUs, it is still beneficial to include them conservatively as part of your overall financial picture.

You can do this with NewRetirement Planner. Follow these steps to integrate your RSUs into your plan:

  • Step 1: Go to My plan > Income > Work and add a job. Enter the total income received as RSU compensation (generally the FMV price on the day the stock vests) and specify the same start and stop age.
  • Step 2: The stock account model into which your RSUs go by adding a contribution of the value you calculate for the RSUs to an after-tax account with capital gains tax treatment.
  • Step 3: If you want to calculate the capital gain on selling the stock at a later date, enter Funds Flows > Transfer on the date you plan to sell the stock.

For additional details, see NewRetirement Help Center.

Ultimately, restricted stock units are a great incentive to continue working hard at your company and participate in any future growth. Now that you have the knowledge to navigate RSUs effectively, happy planning!

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