Everything You Need to Know About Restricted Stock Units

Susan Kelly

Jul 27, 2022

This kind of remuneration is known as a restricted stock unit (RSU) and is used to reward workers. It is important to note that, unlike stock options, restricted stock units do not expire unless the underlying stock of the corporation is worthless. Depending on your client's situation, RSUs may play a significant role in their remuneration. Your financial adviser may help a client make the most of this perk by guiding them in the right direction.


What is an RSU or Restricted Stock Unit?


This kind of remuneration is known as a restricted stock unit (RSU), and it is given to employees by their employers in the form of company stock. In exchange for achieving certain performance milestones or staying with their firm for a predetermined period of time, companies give restricted stock units to workers who meet certain requirements. There is no actual value to RSUs until their vesting period is through. As soon as the RSUs become exercisable, their fair market value (FMV) is determined. Once the shares have been vested, they become taxable; thus, a part of the proceeds is set aside to cover the tax bill. The remaining shares are given to the employee, who has the option to sell them at any time.


How Restricted Stock Units Work




Using an RSU plan, the business provides its employees a stake in its equity, beginning at a predetermined amount. However, the employee does not get the stock right away; rather, it is delivered at a later time following the employee's successful fulfillment of a predetermined objective or upon the employee's achievement of a certain date. To put it another way, the RSU plan provides the employee with a "vested interest" in the stock, which means that the employee will be entitled to receive the shares at a certain point in the future, in accordance with the plan's vesting schedule. When RSUs have met the requirements for vesting, which typically occurs after a period of five years, their value is determined based on the current market, and they are either converted into shares of stock or paid out in cash. RSUs don't pay dividends until they've been converted to stock; therefore, they don't have a dividend history.


Trials of Diversifying


There are no strict guidelines for asset allocation; however, many financial consultants advise against investing more than 10% of the portfolio in shares of a single business. It's perilous to have a large number of shares in a single firm, but it's riskier if that company is in financial trouble. An employee's loss of employment may be due to a decrease in the value of their RSUs as well as any other shares they own. Together, these factors might result in a significant loss of income. For RSU holders, financial advisers should advise their clients on how effectively to utilize the stock they receive as compensation. When considering RSUs, think of them as a cash bonus that you may either use to "purchase" company shares or invest in other assets for a broader portfolio.


When Should You Sell Your Restricted Stock Units?


As previously said, the decision to sell or hold relies on your long-term financial objectives. Selling the stock with the greatest cost basis, which is often the stock that has just been granted vested dividends, is a common strategy. As another example, you can consider selling newly-vested shares to lock in a loss that can be deducted from your ordinary income or used as a credit against a capital gain generated elsewhere in your portfolio if the stock's value drops sufficiently between October 15 and December 31.


Having invested in a firm over a lengthy period of time, your stock has accumulated a lot of value. You'll owe a lot of money in taxes if you decide to sell it. As a result, donating your first firm shares to charity is often a wise decision. If you have a heart for charity and would normally give, this is a terrific way to do so while also saving money on your taxes.


Are RSUs a Better Investment Than Stock Options?




Employees who get restricted stock units (RSUs) don't have to pay for them, and they have been worth as long since this stock's market price stays above zero. Stock options have no value until the market price exceeds the strike price, which must be purchased by the employee.


Conclusion


It is possible for us to play an essential role in a client's pay package. Having a financial expert on your side may be invaluable in determining the best way to handle a bonus.


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