Broker Check

Our experienced team is here to offer you ongoing guidance and planning.

RSU Stock | McGrath Advisors Inc.


McGrath Advisors Inc.

Our experienced team is here to offer you ongoing guidance and planning. At McGrath Advisors Inc., we help you learn how to navigate what is possible. Our fiduciary promise is to uphold the highest standards of integrity, honesty, and commitment to do what is right for our clients, no matter what. Client education is a top priority. We pride ourselves on helping you make informed financial decisions. Retirement planning services are one of our specialties. The team at McGrath Advisors Inc. is focused on being responsive to client needs and providing innovative solutions to help you achieve a life well planned.

Restricted Stock Units

Restricted stock units (RSUs) are a kind of employee compensation that is stock-based. RSUs are restricted during what is defined as the vesting period. The vesting period may last several years. During which RSUs cannot be sold. RSUs give employees interest in the stock of their company. However, there is no real tangible value in RSUs until vesting is complete. Once vested, RSUs are assigned fair market value and are considered income. Once the employee receives the remaining portion of shares after income taxes are paid, they can decide what to do with them.

In the past, stock options have been a more popular choice among companies. Still, with various scandals and tax issues within companies in the mid-2000s, companies have been considering other kinds of stock rewards for their employees. RSU, which were previously intended for key executive positions, began to make their way into compensation packages for all levels of employees. RSUs give employees an incentive to stay with a company for an extended period of time, thus helping with employee retention and performance.

How do RSUs Work?

In and of themselves, RSUs are a form of equity-based compensation. Your employer is promising to give you company stocks under certain conditions. The stock shares become yours after a vesting period. There are various vesting schedules, including cliff vesting, graded vesting, and hybrid vesting. With cliff vesting, all granted shares are delivered at once. In graded vesting, you become vested in portions of the granted shares over intervals of time. Hybrid vesting is a mix of cliff and graded vesting.

RSUs are a small cog in the machine of your overall investment portfolio. They have value in and of themselves, but their value depends solely on the company stock’s performance. To have a diversified investment portfolio, sometimes selling RSUs after they are vested, and taxes are paid, is a smart decision. A financial advisor can help you to understand the best way to handle all pieces of your financial investment portfolio, including your RSUs.

RSU vs. Stock Options

When considering the differences and similarities between RSUs vs. stock options, it is important to remember that selecting one or the other will depend widely on personal preference. There are, of course, outside factors that play a part. Consulting a financial advisor to assist in making informed decisions regarding RSUs vs. stock options is your best bet. Some important points are:

Stock options are when a company gives an employee the option to purchase stock at a set price and time.
RSUs are grants of stock given to employees without purchase.
Both can have their own various kinds of vesting schedules with different requirements.
Both are dated upon issuance.
Stock options pricing is based on full market value.
RSUs tend to be considered less risky.
RSUs do not require out-of-pocket spending to receive the stock.

RSUs Tax Rate

RSUs are considered supplemental income. Many companies withhold federal income taxes on RSUs at a flat rate of 22% or 37% for amounts over one million dollars. These percentages do not account for state income, social security, or Medicare tax withholdings. Like any regular income, RSUs are taxed accordingly. Some states will withhold higher tax percentages, and your federal income tax bracket plays a part in the amount of taxes owed on RSU income. A financial advisor can help explain the complexities of RSUs tax rates and help you make informed financial decisions regarding your RSUs.

Key Takeaways

When considering restricted stock units, how they work, and looking at the differences between RSUs vs. stock options, it can feel a bit overwhelming. With many companies making RSUs and stock options available to more employees, there are many questions to be answered. At McGrath Advisors Inc. are here to help you navigate the waters. Call us today.