RSUs are assigned a fair market value (FMV) when they vest. RSUs are considered income once vested, and a portion of the shares is withheld to pay income taxes, or you may choose to pay the taxes with cash. For tax purposes, the entire value of the vested RSUs must be included as ordinary income in the year of vesting.
Tax Considerations:
An employee must subtract the original purchase of the stock or its exercise price from the fair market value (FMV) on the date it becomes fully vested. This difference is then declared as ordinary income.
If the stock is sold at a later date (and not on the exercise date), the difference between the sale price and FMV is declared as either a capital gain or loss on the date of vesting.
Example:
- 8,000 RSUs granted
- 4-year graded vesting
- Year 1 = 2,000 RSU vested
- Company share price at year 1 vest date = $10/share
- 2,000 * $10 = $20,000
- Income increased by $20,000
- Federal taxes owed = 22%
- State & local taxes owed = 8%
- May elect to have the taxes paid by reducing the # of shares or pay with cash
- Total bonus = $14,000
In this example, the investor must make a decision whether to immediately sell the 2,000 shares (assuming they paid the taxes with cash) or stay invested. The investor just received a net $14,000 bonus so he/she should ask the question: would I turn around and invest this $14,000 in my company with my brokerage account? If the answer is no, the investor should sell their shares immediately.
If the investor sells on the vest date, there will be no additional taxes due. If the investor continues to hold the company stock, they will be taxed either at short-term or long-term capital gains.
- Short-term = held less than 1 year
- Taxed as ordinary income
- Long-term = held more than 1 year
- Taxed at lower capital gains rate
How to get help with your RSUs
Using a Certified Financial Planner can make understanding your RSUs a much more pleasant experience. Financial Planners can meet with your company’s HR department to better understand the RSUs that have been granted to you. A CFP will help determine the optimal time to exercise your RSUs in terms of the company’s stock price and taking into consideration your specific tax strategy.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
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