Behind the Scenes of an IPO
I heard in a casual conversation that some of my co-workers are holding their RSU shares after the shares are vested. They thought there are some tax advantages in holding the RSU shares.
There is no tax advantage whatsoever in holding the RSUs after they vest.
RSU stands for Restricted Stock Unit.
It’s a form of equity-based compensation. The employer gives an employee a number of RSU.
The employee can’t do anything with them immediately. That’s the restricted part.
These RSU’s vest in batches over a number of years, typically four years.
When the RSU’s vest, the employee receives the employer’s stock. If the employee leaves the employer, all unvested RSU’s are forfeited.
That’s another part of the restriction.
RSU is basically a deferred cash bonus calculated and paid in shares. If the employer’s stock does well, the bonus becomes larger.
RSU is taxed to the employee as a cash bonus when they are vested.
Any gains after vesting can be taxed as a long-term capital gain if you hold it long enough, but you get the same effect if you buy any stock with your own money.
In addition to mistakenly thinking there are some tax advantages to holding RSU shares after they vest, my co-workers also fall for the endowment effect in behavioral economics.
If they get a cash bonus they won’t use it all to buy the stock but if they get shares they don’t sell.
Compare with a regular cash bonus:
Holding the RSU shares after they are vested is the same as the employer giving you a cash bonus and you decide to use the bonus to buy the employer’s stock.
It works only if you believe the employer’s stock will do better than the market and all other alternatives.
Besides the issue of being undiversified and having too much tied to your employer, just from a pure investment’s point of view, if you are going to buy a stock with the bonus, you can buy whatever stock you want.
How Short Selling Works
Is the employer’s stock really the best in a universe of thousands of stocks? Unlikely.
Therefore, always sell RSU shares as soon as they vest. If you are not contributing the maximum already, increase the contributions to the 401k plan, or fund a traditional IRA or a Roth IRA.
Otherwise put the money into a diversified portfolio in a taxable account. Don’t hold the RSU shares.
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categories: Taxes, The Best Of Collectionkeywords: RSU