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RSUs are a decent way of aligning company success with employee success. But there's plenty of pitfalls with RSUs too. 1) From an investment risk perspective,
by matmann2001 7y ago
RSUs are a decent way of aligning company success with employee success. But there's plenty of pitfalls with RSUs too.
1) From an investment risk perspective, your personal livelihood is already significantly tied to the company because you rely on the company for a salary. Holding a significant chunk (relative to your total investments) of stock in your company as well adds to that risk.
2) Unless you're a C-suite exec, your actions will likely have no direct impact on the stock price. And obviously, insider trading is illegal. That means holding your own company's stock has no fundamental advantage over holding stock of a company you don't work for. If that's the case, you're better off picking stocks based on actual performance and eliminate the personal bias.
3) You can sell your RSUs once they vest in order to diversify, but you have to wait a year after vesting or short term gains tax will apply to any gains post-vesting. So, it might be advantageous to wait a year if you don't plan to sell immediately upon vesting. Also, with some companies, a portion of your shares will be surrendered back to the company to cover income tax on the shares.
4) From a tax filing perspective, RSUs and ESPPs can be a PITA. In my experience, tax software and general tax filing services often don't know how to correctly record the cost basis, which means you end up getting taxed twice if you don't know what you're doing.
5) When cash is tight, companies might lean more heavily on RSU-based compensation if they can't afford raises or cash bonuses. You need to make sure your company is giving you what you need.
6) The golden handcuff effect. You want to leave for a better job, but you've got a nice chunk of RSUs that haven't vested yet and could be worth quite a bit in just a couple more years. Is that new job worth the opportunity cost of giving up those shares? For companies that award RSUs as part of yearly performance reviews, you're pretty much always going to have some RSUs that are 3 years out from vesting. It's just difficult weighing the potential value of RSUs vs a new job's salary/benefits and whatever reasons you wanted to jump ship in the first place. It's very personal math and ultimately you have to determine an answer for yourself.
- mcfunk 7y agonicely explained!
- alex_young 7y ago> 3) You can sell your RSUs once they vest in order to diversify, but you have to wait a year after vesting or short term gains tax will apply. This is incorrect. RSUs, once vested, are taxed as income, and any gains or losses from the day they vest are treated as any other stock would be from that day on. There is no tax benefit in holding on to them rather than selling and diversifying. This detail makes RSUs equivalent to income from an employee's perspective, and offers no incentive alignment post vesting IMHO.
- matmann2001 7y agoI meant that short term gains tax applies post-vesting. I'll try to make that clearer. Of course, you're right in that selling immediately incurs no additional tax, as you'd be paying short term gains tax on essentially $0.
- klipt 7y agoRight, but if you sell immediately on vesting those gains will be ~0, so there's no major tax downside to selling immediately and e.g. buying an index fund instead to diversify.
- darkarmani 7y ago> I meant that short term gains tax applies post-vesting. I'll try to make that clearer. Of course, you're right in that selling immediately incurs no additional tax, as you'd be paying short term gains tax on essentially $0. That's still wrong. They purchase date of the RSU is on the issue date. Vesting is unrelated. You are thinking of "exercising" an option. This is not an exercise. 1. You get a RSUs. They are actual stock, but they are encumbered by the vesting schedule. 2. When they vest, you are now allowed to trade them, but your ownership start date is from #1. If you had a 180 day vest, you'd have to wait until a full year is up to avoid short-term gains, but if vesting took longer than a year, you've already held them for longer than a year.
- mrbonner 7y ago#3 is incorrect. If you choose to “sell all” when vested instead of “sell to cover” then the RSU award will be just ordinary income. If you sell to cover and then sell the remaining vested RSU within a year (sans insider trading rule) any profit will be taxed as short-term gain.
- darkarmani 7y agoIf the vesting period is longer than a year, you shouldn't have a short-term gain. Secondly, you only make profit when you sell the stock, not when it becomes vested.
- fatnoah 7y ago>4) From a tax filing perspective, RSUs and ESPPs can be a PITA. In my experience, tax software and general tax filing services often don't know how to correctly record the cost basis, which means you end up getting taxed twice if you don't know what you're doing. Oh boy, this is a thing I have to watch out for every year. Even better are the inserts that come with my tax statements from the brokerages which state things in a very confusing way.
- toast0 7y agoThere was a time where some brokerages would report ESPP correctly and some wouldn't. Thankfully, the IRS stepped in and mandated consistent reporting; unthankfully, they mandated that brokerages consistently report ESPP incorrectly.