Should you sell your RSUs when they vest? That’s a great question that you and many people have. Let’s say that you had an extra 10 G’s lying around. Would you use the $10,000 to buy more shares in your employer?
What’s the Right Answer
If your answer is “yes” then you should hold onto your RSUs. However, chances are you answered “no.” Typically, most people do. The answer is pretty clear cut. You should sell your RSUs right away.
Remember that RSUs are taxed as ordinary income when they vest. This is no different than a cash bonus. Remember, that these taxes include Social Security tax, Medicare tax, federal income tax, and state and local taxes, where applicable.
When sold right away, there is no capital gain tax. However, if you hold the shares beyond the vesting date, any gain or loss is taxed as a capital gain or loss.
To sum up, there is no tax advantage holding RSUs past the vesting date.
Investing Perspective
From an investing perspective, the odds aren’t in your favor either. Most individual stocks underperform the indices.
In fact, according to a Morningstar study, only one in five of the 1,000 largest US-based stocks outperformed the Morningstar US Stock Market Index from 2011 – 2020.
You may think that because you work at the company you have a better pulse on what’s happening. Belief in the business is one thing, but belief that the shares will outperform is another. This is known as endowment bias and it can be misleading
So What Should You Do With Your RSUs?
There’s no tax advantage to holding RSUs. Additionally, it’s unlikely that your company shares will outperform the S&P 500. Furthermore, price declines are a lot less common across 500 stocks than your individual company stock.
Most of the time you are better off selling your vested RSUs right away. You will simplify your taxes and clarify your investment strategy.
If you’d like to chat with an objective third party about getting clarity and having a straightforward RSU strategy, you can set up a free consultation.