Recently, I had a really nice conversation with one of my friends about RSU, and it turned out we have an absolutely different point of views on RSU and whether should people keep or sell them immediately.
My personal view is you should sell RSUs immediately as you get them just because it is a fancy cash bonus, no more. My friend, from the other hand, thinks you should keep RSU because the price goes up and because of the “tax advantages”. (which is completely wrong statement, but we will get to that)
RSU stands for Restricted Stock Unit. It’s a form of a compensation, in addition to your salary, bonuses and raises, that your employer can give to you. The employer gives an employer a number of RSUs but the employee can’t do anything with them right away. This is when the restricted part comes to the scene…
Usually, RSUs vest over a number of years (the regular practice is 4 years). When RSUs vest, the employee receives the stocks of the company he works for. If the employee decides to leave his employer, all the unvested RSUs will be forfeited; remember the restricted part?
Let’s leave all the fancy words aside and call RSU what it actually is a deferred cash bonus. that’s paid in shares. If the company does well and the stock goes up, the bonus becomes larger. If not, the bonus becomes lower.
All the vested RSUs are subject to taxes; when the employee receives RSUs part of the stockers goes to the Uncle Sam. RSUs are taxed the same a cash bonus. You can read about cash bonus taxation here.
Sell or keep?
As soon as you get your RSUs vested you have two options:
- Sell all the vested stock right away.
- Leave them and wait for the grows.
If you sell the stocks right after they’re vested, you have no, or almost no gain, so you have no extra taxes. But if you decide to keep the shares all the gain will be taxed as a long-term capital gain if you hold the stocks long enough. Exactly the same taxation as you buy any stocks or mutual funds with your own money.
People tend to keep the RSUs and become stockholders by default. Why? Because when people get a cash bonus they don’t use it to buy the company stock. But when they get shares, which is the same bonus as we figured out, they don’t sell them.
This is a really good technique to ask yourself “a reverse question”, which helps a lot, especially in financial situations. Let’s say you have a car which you don’t know what to do, keep it or sell it. Ask yourself a reserve question “Would you buy this car if you had cash lying on the kitchen table?” And if the answer is “Yes”, don’t sell this car, keep it. But if the answer is “No” and you would not buy this car if you had cash on your hands, you should sell this car and don’t even think twice about it.
So… Would you buy these stocks if you get a cash bonus instead?
Holding the RSU shares after they are vested it’s the same as buying the stocks with a cash bonus. It works only if you believe your company’s stock will do better than the market and if you don’t mind to take the risk.
Personally, I don’t like having an undiversified portfolio and having too much tied to a single stock. I like boring long-term and well-diversified investments, that’s why I don’t keep RSUs and sell ESPPs as soon as I get them.
Therefore my advice for you is to sell RSUs and ESPPs as soon as they vest, especially if you not maxing out your retirement accounts such as 401(k), IRAs and so on. And if you are, put the money into a well-diversified portfolio in a taxable account. Don’t hold the RSU shares. But who am I to listen to? 😉