If you are reading this, congratulations! You’ve received a valuable form of compensation from your employer in the form of RSUs, or Restricted Stock Units which carry unique tax consequences. Employers use RSUs to reward and incentivize employees to stay with the company. This is typically done by granting shares of company stock that vest, or officially become yours, over a specified period of time. In some cases, vesting may also be tied to performance milestones.
RSUs are often misunderstood, and many financial advisors lack deep experience with the nuances that matter most to high-net-worth individuals and families. I hope the information below brings clarity and answers many of the common questions I hear.
The Mechanics Behind RSUs are Worth Noting
Typically, your employer will grant you a total number of shares and reference key terms such as a “1-year cliff” and a “4-year vesting schedule.” For example, assume you were granted 10,000 shares with a 1-year cliff followed by a multi-year vesting schedule. After the first year, 2,500 shares may vest, with the remainder vesting monthly or quarterly over the remaining years, depending on the company’s plan. (For more on cliff vs. graded vesting structures specifically, see Understanding RSU Vesting Schedules.)
How RSUs Are Taxed – or Why the Mechanics Matter
From a Tax Standpoint, a Vesting Event is a Like a Cash Bonus
This is one of the biggest areas of confusion – or – opportunity for planning, if you understand.
Taxes are triggered the moment RSUs vest. The fair market value of the shares on the vesting date is treated as ordinary income (similar to a cash bonus) and reported on your W-2.
Companies typically sell a portion of your shares automatically through a “sell-to-cover” to pay the required taxes. Some plans allow you to pay the taxes in cash instead of selling shares, but many employers require a sell-to-cover. Most employers withhold at the supplemental wage rates: approximately 22% federal if your total supplemental income for the year is under $1,000,000, and 37% on amounts above that threshold.
These rates frequently under-withhold for higher earners, so proactive tax planning is essential. These are withholding rates—not the final tax owed—which is determined by your marginal tax bracket.
It is wise to run tax projections to determine exactly how much will be owed and whether you need to make estimated tax payments or adjust withholding elsewhere. Remember: with RSUs, taxes are due in the year the shares vest. Treat each vesting event like a cash bonus that requires advance planning.
But Wait, There’s More to Understand
Decisions, Decisions
Once your RSUs vest and you gain full ownership of the shares, you face important choices. You can sell the shares immediately or continue holding them. Holding the shares gives you continued exposure to the company you work for, but it also carries additional tax and concentration implications.
The fair market value on the vesting date becomes your cost basis. In other words, that value will not be taxed twice. If the stock price later rises (for example, by another 10%) and you sell, you will owe capital gains tax only on the appreciation above your cost basis.
- If you hold the shares for more than one year after vesting and then sell, the gain qualifies for long-term capital gains rates.
- If you sell within one year of vesting, the gain is taxed at short-term capital gains rates, which align with your ordinary income tax bracket.
For most people receiving significant RSUs, you are likely in a higher tax bracket. This creates several strategic decisions:
- When the RSUs vest, should you sell the shares and address the tax liability immediately?
- Should you hold for potential upside in a company you know well?
- How does this fit into your overall financial plan?
- What other tax implications will you incur in the year the shares vest?
- Do you have other investments with upcoming capital gains or losses that could be used for tax offsetting?
- If you already have a high concentration in your company’s stock, what is the risk to your family’s financial plan?
Have a Game Plan
I wish I could offer one-size-fits-all answers, but the truth is that the right strategy depends on your unique situation, risk tolerance, and goals. That’s not a cop-out, it’s reality.
The best advice I can offer is this: plan ahead.
When you are granted RSUs,
- Begin thinking through whether you will sell, hold, or use a combination of both.
- Know your projected tax bill in advance.
- Decide on a clear approach for each vesting event.
- And if you do sell, have a plan for where those proceeds will go so they can continue working for you and your family.
Last but not Least, Congratulations!
Receiving RSUs means your company truly values you and hopes you will be part of its future for a long time.
Frequently Asked Questions about RSUs
These are the questions we hear most often from executives and high-income professionals with equity compensation and complex financial lives. If yours isn’t here, the first conversation is a good place to start.
Should I sell company stock when RSUs vest?
There is rarely a single correct answer. A systematic, multi-year approach that considers taxes, concentration, and overall portfolio balance is usually more effective than an all-or-nothing decision.
My income spiked this year from RSUs. Will this affect my Medicare premiums in retirement?
It can. High-income years can trigger IRMAA (Income-Related Monthly Adjustment Amount) surcharges on Medicare Part B and Part D premiums two years later. Because IRMAA uses a two-year lookback, a single large vesting year can create higher premiums for multiple years. We help you model the impact and explore planning strategies to manage the long-term effect. Learn more about our Retirement Income & Medicare Premium Modeling work here.
My RSU income pushed me over the threshold this year. Will I owe the 3.8% Net Investment Income Tax?
You may. The 3.8% NIIT applies to net investment income once your modified adjusted gross income exceeds certain thresholds. Large RSU vesting years can trigger this tax even if you don’t have significant investment income otherwise. We model your full-year income early and identify strategies to manage or reduce exposure where possible. Learn more about our High-Income Roth & NIIT Coordination work here.
How do RSUs get taxed when they vest — and what should I do before vesting?
Restricted stock units are taxed as ordinary income at vesting, based on the fair market value of the shares on the vesting date. Because the standard withholding rate (usually 22%) is often lower than your actual tax rate, planning before vesting is critical. Depending on your situation, this can include adjusting estimated tax payments, timing other income or deductions, or coordinating with Roth conversion planning. Learn more about Understanding RSU Vesting Schedules here.
Who does Chris Krzus typically work with?
Most of Chris’s clients are professionals and executives in their late thirties to mid-forties — people who are earning well, have equity compensation or RSUs they’re not sure they’re handling optimally, and feel like their finances have gotten more complicated than their current plan accounts for. They’re busy. They’re paying more in taxes than they’d like. They haven’t updated their estate documents in years. And somewhere in the back of their mind is the question: am I actually on track for where I want to be? Chris also works with clients navigating bigger transitions, including death in the family, business liquidity events, and retirement.
About the Author
If you live in the Chicago area, (or beyond) and you’d like a second opinion on your current RSU plan, schedule a complementary call with Chris at 630-640-3582
