Equity compensation is becoming increasingly popular. It incentivizes employees to maximize performance because when the company does well, they do well. Today, we’re going to go through an example of equity compensation in the form of Restricted Stock Units (RSUs). In this week’s video, I’ll go over everything you need to know about RSUs. I use Eli Lilly as an example to further explain how this might work for you in the real world.
Here are the three main things you need to consider when thinking about your RSUs:
Let’s start with the vesting period. This is the period that your shares start to become yours. So, for example, your employer sends over your vesting schedule, it’s a 4 year vest where you are granted 10,000 shares of stock.
What does this mean?
It means that every year, you’ll be granted 2,500 shares. Now, keep in mind that depending on when the vesting period starts, all 2,500, may not fit in the same calendar year. Your schedule should show you the date that the shares vest. This is usually on a monthly, quarterly, or yearly basis.
Now, you’ve got your shares, what happens next?
Well, think of the RSUs like a cash bonus. RSUs, when they vest, they are taxed like ordinary income. You’re going to need to withhold the appropriate amount of cash to make sure you can cover your increased tax obligation. A huge misconception people have is that they need to hold the shares for a year after they vest to get favorable tax treatment. However, if you sell on the date they vest, there is no additional tax.
Next you need to gauge your belief in the company.
If your faith in the company is low or you simply want to diversify, it might make more sense to sell your shares. If you have a more positive outlook on the company, it may make more sense to hold those shares and start the long term capital gains clock - this will reduce your future additional tax burden if your company stock appreciates after one year. A great way to look at this decision is to think about whether you would invest that dollar amount vested in your company stock. If someone handed you $5,000 would you put that into your employer? If not, then selling is most likely what makes sense.
RSUs are a very straightforward variety of equity compensation, but you should always consult a financial professional if you have any questions. If you need help with your equity compensation, you can apply to work with us at allstreetwealth.com.
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