By |Published On: Oct 30, 2023|Categories: Financial Planning, RSUs|

In the summer of 2022, I met my good friend Jamie for lunch in NYC. He started telling me an intriguing story about his company RSUs. He owned a large amount of RSU shares and he was waiting for the share price to hit $80.

Once they did, he promised himself that he would sell all of his RSUs and reap a windfall. The price got as high as $78. Didn’t reach $80. He never sold. The shares tumbled to $5. He cost himself $750,000.

He asked what he should do. There wasn’t a whole lot that I could do to help him recoup his losses. What he really wanted to know was how to get the money back. Sure, there is a strategy to get a small tax write off of $3,000 per year, but this measure would never stem the feelings of pain and self-criticism for the mistake he made.

For RSU holders, here are actions you can make today to avoid Jamie’s agonizing experience.

Three Common Mistakes

There are three big RSU mistakes that tech employees commit over and over again. They are expensive and painful. Less money in your pocket and a story of grief are the typical outcomes. Tech employees make these mistakes because they fail to understand RSUs properly.

1.) Large and Surprising Tax Bills

The first RSU mistake is a surprise tax bill. When April 15th rolls around many people are floored about how much they owe the IRS! They may not have that amount of cash available to pay what’s due.

This happens because RSU withholding rates are too low. Although RSU shares are a form of income, the withholding taxes are usually lower than your normal salary.

For example, your salary is taxed according to your W4 form and RSUs are taxed according to supplementary wage rates. Although they are both income, the withholdings are different.

Confusing? You bet! If you don’t elect the proper RSU withholding tax amount, or pay estimated quarterly taxes, you may have a large and unexpected tax bill come April!

2.) Failure to Manage Stock Ownership

Managing stock ownership is another mistake tech employees make. Most, if not all, tech employees have a lot of money wrapped up in the company stock, like Jamie. It can be a very risky and stressful position because the outcomes are wide over time with a single stock.

Keep in mind that most ownership of your company shares occurs within the first four or five years of employment, unless you receive a large promotion. This can further complicate your company ownership.

While you are working for your employer, you will always have an unvested share amount. Don’t let these shares keep you in a job you don’t want or a career path you are unhappy with. When you plan to leave for a new opportunity, unfortunately you will leave the unvested shares behind.

3.) Not Having a Plan in Place

The third RSU mistake is not having a strategy for your RSUs. Some tech employees do not make a plan for their RSUs. A lot rely on inertia and they never make a decision. They keep on accumulating RSUs month after month, quarter after quarter. This is the riskiest strategy because your company stock ownership keeps on increasing.

Others forget about their RSUs. Talk about surprises! They have no idea what’s in their portfolio and are not in touch with their financial position.

Some wait for a certain stock price before selling. Plenty of employees feel like they know the business because they work there. They are overconfident that the business will keep on improving and achieve a target stock price to their liking.

None of these are effective strategies to help you live the life you want, build wealth, and have positive cash flow.

What You Can Do

It’s best to have a plan set up in advance for your RSUs and how they fit into the rest of your financial life. Yes, you read that right! Having an upfront plan will help you avoid costly mistakes in the future.

Typically, a date-based approach works best. Plan to sell a portion of your RSUs as they vest. The exact number and vesting days depend on your situation.

As a benefit, you’ll know what your tax picture looks like throughout the year with no surprises! And you’ll know how many shares of your company that you own. Then you can manage your stock ownership and align it with your lifestyle and career.

Having a plan will prevent you from making a $750,000 (or more expensive) mistake like Jamie.

Need help setting up a plan? Reach out to me!