6 Tax And Financial-Planning Strategies

Beware. When you receive a grant of restricted stock units (RSUs), do not make the mistake of thinking the tax and financial planning is simple. You recognize income and owe taxes on the shares’ value when the stock is delivered at vesting—whether you’re ready or not! Then, when you sell the shares, how long you kept them separately affects your capital gain or loss for taxes.

In a recent webinar that I moderated, three elite financial advisors who have extensive experience in planning with RSUs, stock options, and ESPPs discussed the various strategies and topics that they review with their clients. This article presents six of their insights.

1. RSU Vesting: Tax Withholding

For webinar panelist Travis Gatzemeier, the founder of Kinetix Financial Planning in the Dallas–Fort Worth area of Texas, tax awareness and planning are the starting points for clients with RSUs. Tax withholding is often the very first topic he discusses.

“The biggest thing I see with RSUs is under-withholding on taxes at vesting,” he stated. Companies withhold taxes on the income recognized at RSU vesting, but often the flat federal withholding rate used for this type of income is not enough to cover all the taxes you owe. The required federal rate is 22% up to $1 million in a calendar year and 37% for amounts in excess of that, though some companies now allow a rate election. “Newer clients especially will come in wondering why they have such a big tax bill.”

“The primary thing that I help my RSU clients with is tax withholding,” concurred webinar panelist Valerie Gospodarek, the owner of VG Financial Consulting in the San Francisco Bay area in California. “I can’t tell you how many people are surprised that they have a large tax bill when they’re doing their tax returns for the year. I help make sure they’ve held enough throughout the year. It does get a little challenging, especially if the stock price has been volatile.”

The higher the RSU income, the more likely it is that taxes on the income will be under-withheld at vesting, observed webinar panelist CJ Stermetz, the founder of the firm Equity For The Win in San Jose, California. If shares cannot be sold to cover the additional taxes, other ways to do so will have to be planned, he said.

One common method is quarterly estimated taxes. However, that’s tricky if the prior year’s income, on which estimated taxes are based, is very different to this year’s income.

The best solution to avoid IRS and state underpayment penalties, Stermetz recommends, “is to be sure we’re running quarterly tax projections or talking with a CPA to keep on track with the safe harbor for federal taxes during the year.”

2. Questions For RSU Planning

RSUs, with their fixed vesting schedules, often seem simple relative to the more complex planning around stock option exercise strategies. However, Stermetz warned that this appearance can be deceptive.

“There’s a lot of organization and a lot of details that can go wrong,” Stermetz warned. That is why it’s important for him to understand clients’ situations long before the specifics of tax planning come into play. These include any intention they may have to move states during the vesting period, which then raises separate mobility tax issues; and dates for ESPP purchases, stock option exercises, and RSU vestings that can cause wash sale issues for company stock sold at a loss.

He noted several questions that he talks through with clients:

• What personal goals do they have?
• How concentrated is their wealth?
• How much needs to be carved away to meet goals?
• Is the spouse fully aware of the concentration? How does he/she feel?
• What’s the ratio of shares held outright versus unvested?
• When are the upcoming vests and ESPP purchases? When are the trading windows?
• What was their income last year? How much did RSUs affect it?

Keep Your Spouse Informed

Stermetz revealed that the issue of concentration in company stock is sometimes particularly difficult, not least because the client’s spouse may not even be aware of the concentration level and the related financial risk.

“I see it all the time that a client is busy working crazy hours at a tech company and has amassed a ton of wealth, but the spouse has no idea that their entire livelihood depends on the performance of this one company’s stock,” he said.

3. Reducing Income In Years RSUs Vest

Both Stermetz and Gatzemeier explained how you can plan around the RSU income to reduce your overall tax hit beyond just harvesting capital losses. They discussed many ways to do this to lower your other taxable income in a vesting year. Ideas to consider include:

• Defer the yearly maximum into your 401(k).
• Fund a Health Savings Account (HSA).
• Defer additional salary or bonus with a nonqualified deferred compensation plan, if offered by your company.
• Donate appreciated company stock or other income into a donor-advised fund to go over the standard deduction amount.

4. Decisions At Vesting: Hold Or Sell?

Once you own the shares, you must decide whether to hold them or sell them. Gospodarek said she routinely advises her clients to sell RSU shares as soon as they receive them at vesting, “before the price has a chance to fluctuate a lot.” This is particularly a concern, she asserted, for clients who already have a lot of wealth concentrated in holdings of company stock. “There’s just no need to take on more risk with that stock.”

Gatzemeier said that he guides his clients through the decision about how many shares to hold and how many to sell after RSU vesting—but the decision that clients reach is often the same. “A lot of times for my clients it is selling immediately to use those proceeds to deploy toward other areas of their financial lives,” he said.

5. Trading Windows Impact Selling Plans

A selling plan for RSUs usually depends heavily on company trading windows, when employees are allowed to sell shares of company stock. That is a big piece of the RSU organization puzzle, said Stermetz.

“When we say ‘sell your RSUs at vesting’ we don’t necessarily mean sell literally when they vest,” clarified Stermetz, building on what Gatzemeier and Gospodarek noted about hold/sell decisions at RSU vesting. “We mean ‘sell when you are able to sell them’ according to the company trading windows,” along with the others rules to prevent insider trading and any Rule 10b5-1 trading plan you may have. It’s important for clients to know that, for example, shares which vest on January 1 may not be sellable until February 1, he said.

“Typically trading windows will happen after an earnings call, and the window is usually four to six weeks,” observed Stermetz. “You can’t necessarily know all the dates exactly for a whole year, but you can estimate according to what’s been done in the past.” Stermetz then takes the client’s RSU vesting schedule for the year and compares it to the set of company trading windows for stock sales that the client is likely to have.

6. RSU Taxes As A Financial-Planning Motivator

While advisors generally tell clients that taxes should not be the primary driver of investment decisions, Stermetz finds that the exigency of paying taxes can make it easier to advise a client to sell company stock from an overly concentrated position.

“Sometimes for clients who are afraid to sell a concentrated position, having a tax rationale for why they should sell is a really good incentive to sell that stock,” he revealed. “If they’re under-withheld and need to sell some of that stock to pay their tax bill, they will be willing to do it.” That, in turn, can help the client stick to a plan of regular sales of shares acquired from RSU vestings.

Gatzemeier echoed the importance of anticipation about taxes and concentrated positions with RSUs, especially in a volatile stock market. “You really can’t do much financial planning until you have done a tax-awareness exercise so you know what’s left.” If you eventually realize you have to sell stock to pay extra taxes on RSU income but by then the stock price has declined significantly, you’re in a lurch. “It’s a bad experience for a client if the taxes are not planned out well ahead of time.”

Further Resources On Restricted Stock Units

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. More advisor views on RSU planning are available through articles from financial planners in the section Restricted Stock Units at myStockOptions.com, which also has RSU planning tools and courses.