What to Do with RSUs?
By Kevin Estes
15+ Options for Restricted Stock Units (RSUs)
What should someone do with RSUs when they vest?
The decision isn’t simply hold or spend! Planning ahead can unlock other opportunities.
Some options include:
Build an emergency fund
Max the match
Participate in the ESPP
Pay down high interest debt
Fund a Health Savings Account
Save beyond the company match
Pay in advance
Increase deductibles
Contribute to an IRA
Fund a Mega Roth
Invest in personal development
Remodel
Launch a business
Diversify investments
Do something fun
0. Keep the Shares
The default is to hold onto RSU shares after they vest.
From a tax perspective, keeping the shares is like using money in a checking account to buy company stock. Someone could sell the shares at the price when the RSUs vest and owe no additional income tax.
Employees already have a lot riding on their employer:
income,
retirement saving,
healthcare,
other company stock,
home value,
local business interests…
Employers that offer Restricted Stock Units are usually large enough to impact the local real estate and economy. It’s crucial for households that own real estate or a small business near headquarters to consider their total employer risk.
Holding employer stock compounds that risk. Is that the plan?
For more, check out:
Hold Employer Stock?
How Are RSUs Taxed?
1. Build an Emergency Fund
Another option is to sell the RSU shares and deposit the cash into an emergency / opportunity fund.
Interest rates are higher these days. Many high-yield savings and money market accounts are earning over 4%.
Having ready access to cash can significantly reduce cost. Instead of financing a home or auto repair with high-interest debt, someone could use their savings.
How Much to Have
I generally suggest people keep three (3) to six (6) months’ of living expenses in a high-yield savings or money market account. More may be needed for large upcoming expenses.
Factors which could push a household to the upper end of the range and beyond include:
single income
variable cash flow
real estate ownership
business needs
job uncertainty
For more, check out:
Is Your Cash Starving?
2. Max the Match
Many companies match employee retirement contributions:
100% on the first 3%
50% on the next 2%
If an employee contributes 5%, the employer matches 4%. That’s an 80% increase!
Low to moderate income households may also receive a saver’s tax credit.
3. Participate in the ESPP
Some employers offer employees a chance to buy discounted stock through an Employee Stock Purchase Plan (ESPP).
The plan at a couple of my employers was:
a 15% discount
with a six-month lookback.
The program took 15% off the lower of the price at the beginning and end of six months.
Example:
Mike’s company offers this plan. He maxes his contribution by funding the ESPP with 15% of his gross income each paycheck.
At the end of six months, the company uses the funds to buy stock at a discount. If he leaves the company before the purchase, he’ll instead receive the cash.
What happens if the stock price rises from $100 to $110?
Mike would buy at $85, 15% off $100
However, the stock’s worth $110!
That's a 29% gain ($25 / $85)
What happens if the stock price falls from $100 to $90?
Mike would buy at $76.50, 15% off $90
However, the stock’s worth $90!
That’s an 18% gain ($13.50 / $76.50)
If the company allows an immediate sale, Mike might only hold the shares a day or two.
Participating in the Employee Stock Purchase Plan can offer higher returns and lower risk than holding company shares.
ESPP contributions are limited to the lower of:
15% of gross compensation and
$25,000 a year.
For more, check out:
Own Stock or Participate in ESPP?
Underrated ESPPs?
4. Pay Down High Interest Debt
Paying high interest is painful.
It’s not uncommon for people to pay 20% or more on credit card debt. I think of that as a nearly certain loss.
Paying it off is like buying a bond earning 20% interest. However, it’s less risky since the corporation might default on the bond!
5. Fund a Health Savings Account
A Health Savings Account is triple tax advantaged because contributions:
lower income the year they’re made,
grow tax free, and
can be used tax free for qualifying medical expenses.
The funds can be invested for long-term growth. Also, the list of qualifying expenses is long.
The biggest drawback is that someone can only contribute if they’re on a qualifying High Deductible Health Plan (HDHP). Someone with significant medical expenses might pay a lot out of pocket.
Contribution Limits
The HSA contribution limits are relatively low. According to the IRS, the 2024 limits are:
$4,150 for an individual
$8,300 for a family
For more, check out:
Is an HSA worth it?
6. Save Beyond the Company Match
It may make sense to contribute to a retirement plan beyond the company match to:
lower taxable income and
benefit from tax-deferred growth.
Interesting Opportunity
Contributing to a pre-tax retirement account is especially attractive if someone:
is currently in a high income tax bracket and
will be in a lower tax bracket later.
A good example is a high earner who plans to retire before 60. It may make sense to do things to raise income like Roth conversions during lower income years.
Pushing income from a high income year to a future low income year could both:
reduce lifetime taxes and
delay tax payments.
Contribution Limits
For 2024, the contribution limit is $23,000 for those under 50 years old who participate in a:
401(k),
403(b),
most 457 plans, and
the federal government’s Thrift Savings Plan.
There’s an additional catch-up contribution limit of $7,500 for employees aged 50 and wiser.
These limits aren’t reduced by employer contributions.
7. Pay in Advance
Some businesses offer significant discounts for paying ahead.
Buying flights and hotel rooms months in advance can save 10% or more. They’re also still available!
Auto insurance is another good example. My auto policy offers a 28% discount for paying every six months instead of monthly!
Using Restricted Stock Units to pay ahead could save in the long-run.
8. Increase Deductibles
Another way to use vesting Restricted Stock Units to lower insurance costs is to increase deductibles.
An emergency / opportunity fund can pay these expenses. Increasing deductibles may significantly lower premiums for many types of insurance.
Of course, it’s important to factor in the risk of paying the deductible should an accident occur!
9. Contribute to an IRA
Another potential use of vesting RSUs is to contribute to an Individual Retirement Account.
Traditional IRA
Contributing to a traditional (pre-tax) IRA could:
lower current taxes and
grow tax-deferred.
As with other pre-tax retirement accounts, IRA funds are taxed when withdrawn.
Spousal IRA
There may be an opportunity for a spouse to contribute despite having no earned income. The spouse with income would just need to earn enough to cover the couple’s retirement plan contributions.
Whether contributions lower taxes depends on:
whether the spouse is covered by a retirement plan at work
how much the married couple filing jointly earns together
Contributions can be made for 2023 until April 15, 2024. Below are the income limits for IRA contributions to be deductible:
For more, check out:
Ignoring the Spousal IRA?
Roth IRA
If income or taxes are expected to rise significantly in future years, it may make sense to instead contribute to to a Roth IRA.
With a Roth account, someone pays taxes up front. The funds then grow and can be withdrawn tax-free if conditions are met.
A Roth IRA is also a helpful estate planning tool.
10. Fund a Mega Roth
Many tech workers earn income above the limit to contribute to a Roth IRA directly. They might already max out their pre-tax retirement plan contributions and want to save more.
Two-Step Process
Some employers enable workers to contribute to after-tax (not Roth) accounts. If they also allow in-service distributions, it’s possible an employee could:
contribute to an after-tax account and
convert the funds to a Roth IRA.
Doing so avoids the income restrictions. It’s known as a Mega Roth or Mega Backdoor Roth. Don’t worry. It’s perfectly legal!
Contribution Limits
After-tax contribution limits are higher. For 2024, the limit is:
$69,000
less the employee and employer contributions.
Example:
Jen’s 45 years old and:
earns $250,000 a year,
maxes her pre-tax 401(k) contributions, and
receives a 4% company match.
$33,000 would be deposited into her 401(k) for 2024:
$23,000 in employee contributions plus the
$10,000 company match.
She could contribute another $36,000 ($69,000 - $33,000) to an after-tax account and then convert it to a Roth IRA.
Convert Right Away
There can be tax complications if someone keeps funds in an after-tax account. It’s best to convert the funds to a Roth IRA as soon as possible.
Many custodians (Fidelity, Vanguard, etc.) allow someone to automatically convert after-tax contributions to a Roth IRA. It may take a phone call to set up.
11. Invest in Personal Development
Restricted Stock Unit vests can also fund personal development.
Direct
Stock proceeds can be used to pay for:
books,
subscriptions,
travel,
courses,
certifications…
Many companies offer education assistance up to the federal limit of $5,240 in 2024.
Tuition reimbursement may require an employee to:
pursue a degree in a related field,
receive approval before starting, and
earn a “C” or better in each course.
Indirect
RSU vests can also fund personal development indirectly by enabling someone to hire for some tasks. Outsourcing can help someone do less of what they:
don’t like,
aren't good at, or
both.
Focus
Outsourcing could help someone:
take a lateral role with more upside,
apply for a promotion, or
prepare to change careers.
Wage Arbitrage
If someone can pay $20 an hour and earn an extra $50 an hour, they net $30 an hour!
That’s wage arbitrage. Trade dimes for quarters all day.
Entrepreneurship
While this concept is helpful for working professionals, it’s critical for entrepreneurs.
Everyone has the same 24 hours in a day. How we use them defines our lives.
12. Remodel
Another option vesting Restricted Stock Units affords is to improve real estate.
Energy Efficient Upgrades
Someone’s home may be their largest personal expense.
They might lower costs by investing in:
energy efficient doors and windows,
insulation,
a heat pump,
a water heater,
roofing,
solar panels, and the like.
Qualifying energy efficient home improvements may also receive a tax credit.
Home Remodel
More significant remodels could include:
upgrading appliances,
repainting,
updating floors,
improving landscape,
adding a bathroom,
finishing a basement,
remodeling a kitchen, or
building an Accessory Dwelling Unit (ADU).
Upgrade Benefits
Home improvements may:
lower living expenses,
earn a tax deduction or credit,
lower future taxes,
lift the home’s value, and
improve the living experience.
Save on Transaction Costs
It’s expensive to buy and sell homes! Selling one place and buying another might cost 10% of the home value or more.
Improving the home could extend how long someone lives there, saving transition costs.
Timing
The highest return on investment home improvements may occur just before selling because they’ll be:
on trend and
nearly pristine.
Rental Remodel
Someone may use their vesting Restricted Stock Units to remodel an existing rental.
Relatively minor upgrades like lighting, paint, and flooring can have an outsized impact on rent.
Raise Rent
Homes have appreciated and rents have risen since the pandemic. If a rental is below market, it opens up one of my favorite real estate tactics: charge market rent.
Raising rent is a win/win for the landlord:
If the tenant agrees to the increase, the property becomes immediately more profitable.
If not, the landlord can touch up the home and charge the market rate.
Other considerations
For home upgrades, it may make sense to consult a realtor on the estimated return on investment.
Save the receipts! Money spent improving the property could lower current or future taxes.
For more, check out:
Charge Market Rent
Real Estate: Investing or Betting?
13. Launch a Business
Another option for vesting Restricted Stock Units is to use them to start a side business.
Income
I’m a fan of multiple income sources. If someone’s able to cover their expenses with their day job, they can save what they earn in their side business!
Side income could substantially reduce how long it takes someone to reach financial independence.
A side business may also de-risk personal finances. Losing a job is less devastating if living expenses are partially covered by a side business.
Skills
People develop new skills and perspectives by owning a business or partnership. I believe that makes them even better employees!
Ramp
It can take a while for a business to get traction. I usually assume three years.
Starting a business while working can help it take off faster once someone leaves (or loses!) their full-time position.
Exploration
Finally, a side business is a great way to explore options.
Someone may decide they love it and leave their full-time position on their terms. They may also learn they dislike it and choose to focus on their career.
Risks
There are certainly risks with starting a side business while employed.
Certain industries - especially reputation-based professions - frown on someone starting a business. Some employers restrict employees from engaging in other businesses.
The employer could view the side business as either a:
threat to their business or a
distraction to the employee.
The business would likely need to be disclosed to avoid conflicts of interest.
Finally, a small business is one of the riskier investments someone can make. It could also be the most rewarding.
14. Diversify Investments
One of the simplest things someone can do with RSU shares is to replace them with a more diversified investment.
As mentioned above, holding company shares after RSUs vest is like using money in a checking account to buy company stock. Employees already have a lot riding on their employer!
Average Returns
We love our employers. That’s why we choose to work there!
Unfortunately - on average, they’re average.
I believe in Modern Portfolio Theory and decades of research which suggest it’s nearly impossible to consistently outperform the market.
Single Stock Exposure
There’s additional risk investing in one company:
a competitor could enter the market,
an executive could make a strategic blunder,
someone could cook the books…
Average Risk, Higher Return
An investment with an average return and above average risk is a poor investment.
Sometimes a good bet loses.
Sometimes a bad bet wins.
Diversifying should - on average - maximize returns.
15. Do Something Fun
A final option is to spend vesting Restricted Stock Units on something fun.
A career is a marathon, not a sprint. Burnout is real and self-care is essential.
Paid Time Off (PTO) is given for a reason. Use it!
Schedule Your Paid Time Off
If taking a vacation is the best way for someone to recharge, I’d argue doing so is critical for their long-term career.
Benefits of a Longer Career
Professionally, working longer tends to enable someone to:
deepen their skillset,
build a personal brand,
develop a professional network,
grow earnings, and
expand their options.
Financially, working longer helps someone:
extend the years they save,
give investments more time to grow,
fund more of life’s major expenses,
save on healthcare costs,
pay down their mortgage(s),
increase Social Security / pension benefits, and
limit the years of retirement they must fund.
All of these increase the odds of their money outliving them!
For more, check out:
Vacation + Disaster = Adventure
Are You Ignoring $900,000?
I hope this helps!
If you’re interested in a review of your specific situation…
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.
