Should I Hold My RSUs After Vesting?
When deciding whether to hold recently vested Restricted Stock Units or RSUs one needs to carefully consider the pros and cons of doing so.
Also, be sure to read the first part in this series “What are RSUs”?
The Pros of Holding My RSUs?
1. Stock Could Appreciate if RSUs Held
Typically, this is the first consideration when deciding whether to hold RSUs after vesting. The potential for the stock to appreciate can be very attractive, especially if there is belief in a company’s mission and potential to grow. No doubt about it, RSUs create the possibility for net worth to climb.
2. Incentive to Perform Well at Work
Holding onto RSUs may incentivize employee performance on the job. Many employees don’t realize it, but their performance can directly impact the value of the company’s stock. Positive performance can increase the stock value and consequently held RSUs. This results in an increase in net worth for the employee, and perhaps job satisfaction as well.
3. Differentiate Your Portfolio
Diversification is a term we hear a lot in this industry. “Don’t put your eggs in one basket”, is the common saying. In this case, RSUs may provide a portfolio with a type of asset not already owned. For example, if cash and real estate make up most of an individual’s balance sheet, then holding RSUs can provide exposure to stocks.
The Cons of Holding My RSUs?
1. Stock Could Depreciate if RSUs Held
There is potential that the stock value decreases if RSUs are held upon vesting is a risk. Worst case scenario, the stock price could drop to $0. This would leave no profit from the RSUs granted. RSUs act as normal wages upon vesting, so think of them like cash. Deciding to not hold RSUs upon vesting will leave cash which provides a wide array of options.
2. Potential Tax Implications of Holding RSUs
The moment the choice is made to hold onto RSUs a new tax timer starts. This timer is capital gains taxes. Regarding stocks, capital gains come in two forms, short-term and long-term.
Short-Term Capital Gains of RSUs
Short-term capital gains apply to stock held less than 12 months. More often than not, short-term gains will be taxed at a higher tax rate than long-term gains. This is because short-term gains are taxed at an individual’s ordinary income rate, just like wages. For example, 100 shares of stock at a price of $50 equals $5,000 of stock, so $5,000 becomes the “cost basis”. Now let’s say that stock is held for 3 months and then sold at $60 per share for a total of $6,000. Since the stock was held for less than a year the short-term capital gains rate will apply. For example, if an individual’s combined marginal rate between federal and state taxes is 35%, they will pay $350 out of the $1,000 gain in taxes. The after-tax proceeds from the sale are $5,650.
Long-Term Capital Gains of RSUs
To stock held longer than 12 months long-term capital gains. Long-term capital gain rates are different than short-term capital gains because they are set at 15% or 20% depending on your level of income. For this example, let’s use 20%. Using the same scenario above but changing the holding period to 13 months the new after-tax proceeds would be $5,800. Therefore, holding the stock for the long-term can result in a better tax and profit outcome. However, that is not the only thing to consider when deciding to hold RSUs or not.
To learn more about the decisions around holding RSUs:
- Read “What Investment Decisions to Consider with RSUs?”
- Contact Perspective 6 Group.