Restricted Stock Units (aka RSUs) are a common form of supplemental compensation for employees of public companies.  If you’re granted RSUs, you get to essentially own company shares without putting any money down (unlike when you are exercising stock options). 

So, when is the best time to sell your RSUs?

If your company is public, the best thing to do is to cash them out as soon as they vest. The reason is that RSUs essentially function like a cash bonus, being taxed at the time they vest. It’s much better to either use the RSU proceeds to meet short-term goals or reinvest into a diversified portfolio to more securely grow your wealth. 

In reality, not everyone will always sell their RSUs immediately. Some may want to hold onto them longer, or at the very least, understand what the other options are.  In the rest of this post I’ll lay out some details on how RSUs work and how to think about the various approaches to selling them.

How do RSUs work?

An RSU is like a cash bonus that you use right away to buy company stock. When RSUs vest, they’re taxed the same way as a cash bonus of the same dollar amount.

Most companies automatically withhold taxes when your RSUs vest. For federal income tax, this typically is the statutory 22%. However, your tax rate is likely above 22%, which means you will owe more tax. Some companies allow you to increase the withholding, and it’s great to take advantage of that if it’s an option. Otherwise, you can work with a CPA and/or financial planner to make sure you’re setting aside enough for both federal, state and local taxes.

An RSU always has value (unless the company goes bankrupt), so it can be almost as low-risk as cash, as long as you sell it ASAP. The longer you hold RSUs after they vest, the more you run the risk of it falling in value. Sometimes, despite your intentions, trading restrictions or trading windows imposed by the company can get in the way of selling them immediately.

Sell Them As Soon As They Vest

Because RSUs are taxed at the time they vest, there’s no tax advantage for holding on to them. Moreover, investments that are diversified—spread out over many different stocks or bonds—perform better, on average, than investments that are concentrated in one stock. 

The only reason you would decide to hold onto your RSUs after they vest is if you’re making a strategic investment decision; mainly, thinking that the company share value will increase substantially over time and perhaps even better than you would imagine a diversified portfolio might perform. But again, statistics give you a better chance of getting superior investment growth from a diversified portfolio over the long run.

The best thing to do is to sell them all as they vest and either use the money for a short-term need as you would with a cash bonus, or boost your long-term savings by reinvesting it into a diversified portfolio.

Hold the RSUs (Don’t Sell Right Away)

As you hold onto RSUs past their vesting dates, a larger and larger portion of your net worth becomes concentrated in one single stock. For this to make any significant positive impact on your wealth, the stock will need to grow more than the broader stock market. Alternatively, it could be disastrous for your net worth if the stock falls in value. 

It’s a big bet to hold onto RSUs (as it is with any individual stock), so you need to know that you’d still be okay if this particular stock were to evaporate at any time. Be sure that your other cash needs are taken care of, for example that you have enough cash reserves (an emergency fund), and that you are still on track to meeting any other financial goals in your life (saving for retirement, kids’ college, etc.). It’s very risky to be overly dependent on the restricted stock (RSUs) share price for meeting future financial goals.

Sell Enough to Cover Taxes and Hold Onto Some

We like to use a “rule of thumb” that no more than 5-10% of your net worth is concentrated in one company’s stock. It comes down to protecting your net worth and prioritizing your goals versus tying your fate to the performance of one company. 

When working with clients who have RSUs, it’s not uncommon to find that 20%, 50% or more of their liquid net worth is tied up in their company’s stock.  It can be a big emotional shock to sell all of that down, especially knowing there’s going to be a big tax bill to follow. In this case, we come up with a plan to gradually sell that amount down in bite-sized chunks. We run some sensitivity analyses to demonstrate what would happen to overall net worth if there were to be an X% swing (up or down) in the market. If you are okay with those risks and your financial situation is protected, then it can be perfectly fine to hold onto the stock.

The ultimate goal is to optimize the risk-adjusted return of your portfolio, meaning you’re taking on no more risk than you need to get the same rate of return. It’s impossible to know the future, but diversification is one way in which we can make sure we’re closer to achieving it.

This all being said, it’s worth repeating: the best and most prudent approach is to sell all of your RSUs as soon as they vest. It’s still a wise choice to sell all of them even if the stock price ends up rising, because you are protecting your wealth from undue risk. If you want to use the funds for investments, reinvest in a diversified portfolio. This allows you to still participate in market growth with a heck of a lot less downside risk.

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