If you work in the tech industry or at a start-up, you probably got restricted stock units (RSUs) as a part of your compensation package. Restricted stock units are company shares that are gifted to employees with a specific vesting schedule. This vesting schedule can be based on the length of time the employee has worked at the company or when certain performance goals are met. Once you reach the vesting date, you now own the shares outright. You can then decide if you want to hold, sell, donate, or gift the shares.
RSUs can be a complicated piece when it comes to your financial planning, especially retirement planning. Keep reading to learn about retirement planning with RSUs.
No matter at what point you are at in your career, you should be considering retirement. The financial decisions you make when you’re young can determine what age you can actually retire and how much income you will have to live off of in retirement. If you did not start retirement planning at the beginning of your career, you should at least have 10 to 15 years to plan prior to retiring. However, it is best to start planning as soon as you can to allow compound interest to work its magic.
With most retirement assets, you can look at your account balance to see where you stand. However, restricted stock units can fluctuate in value. Also, if a majority of your investment portfolio is made up of restricted stock units, that is a concentrated stock since it’s with one company. It is best practice to keep a diversified portfolio so if one industry or company takes a turn for the worst, you won’t completely suffer.
Restricted stock units provide a level of security that stock options don’t; RSUs always maintain some worth even if the stock value decreases. This security becomes even more important the closer you get to retirement. Also, if your company pays out dividends, you will receive dividends while holding the stocks or at vesting.
At retirement, any restricted stock units that have been vested are yours and you can choose what you want to do with them. If you have unvested RSUs, you will have to see what the plan and your company dictates. If you’re at risk of losing RSUs with significant value due to the vesting date, it might be a good option to continue working until the restricted stock units vest.
Another aspect you need to consider is taxes. Restricted stock units are taxed using federal income and state income tax rates once they are vested. If you plan on vesting them close to retirement and are already taking Social Security benefits or other withdrawals from retirement accounts, you need to plan for this tax bill. While your company must withhold taxes using a rate of 22% when RSUs are vested, your actual income tax bracket might be higher. In this case, you must pay the additional taxes beyond what was withheld. To ease your tax burden, look at ways to defer some income and increase deductions, such as increasing 401(k) contributions, donating more to charities, or increasing your salary tax withholdings.
If you need assistance planning for retirement with your restricted stock options, our advisors at Eagle Grove Advisors are happy to help. Give us a call to get started today.