Restricted Stock Units (RSUs): Why Holding Vested Shares is a Tax-Neutral Gamble
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Result: Selling changes your risk, NOT your tax bill. It’s a free move.
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Restricted Stock Units (RSUs): Why Holding Vested Shares is a Tax-Neutral Gamble
CORE INSIGHTS
- Income, Not Investment: RSUs are a cash bonus paid in shares. Upon vesting, the full value is taxed as Ordinary Income. There is NO tax advantage to holding.
- The Cash Test: Ask yourself: “If I got a cash bonus, would I use it to buy my company’s stock?” If the answer is “No,” you should sell immediately.
- Concentration Risk: Holding RSUs doubles your risk. If the company fails, you lose both your job and your savings. Diversification is the only free lunch.
A common myth is that holding RSUs saves taxes. False. The IRS treats vesting as a paycheck. By keeping the shares, you are making an active decision to bet your post-tax money on a single stock—often the same one that pays your salary.
What-If Scenario: The “Sell All” Strategy
| Action | Tax Event | Risk Profile |
|---|---|---|
| Hold Shares | Vesting Tax (Paid) | High Concentration |
| Sell & Diversify | Vesting Tax (Paid) | Low (S&P 500) |
Visualizing Concentration Risk
*Figure 1: Portfolio Exposure. Holding RSUs (Red) creates dangerous overlap. Diversifying (Green) separates job and asset risk.*
Strategic Action Steps
1
The “Sell All” Rule
Adopt a policy: Sell 100% of RSUs the moment they vest. Treat the proceeds as cash and allocate to your diversified plan.
Adopt a policy: Sell 100% of RSUs the moment they vest. Treat the proceeds as cash and allocate to your diversified plan.
2
Check Your Withholding
Brokers withhold 22%. If you are in the 35% bracket, you are under-withheld. Save extra cash or pay quarterly taxes to avoid a surprise bill.
Brokers withhold 22%. If you are in the 35% bracket, you are under-withheld. Save extra cash or pay quarterly taxes to avoid a surprise bill.
3
Diversify Immediately
Take the cash from the RSU sale and buy VTI/VOO (#120). If your company crashes, your portfolio survives.
Take the cash from the RSU sale and buy VTI/VOO (#120). If your company crashes, your portfolio survives.
The Bottom Line: Who Should Choose What?
- Sell Immediately: 99% of employees. Tax certainty and risk reduction are mathematically superior.
- Hold Shares: Only if you have “Insider” constraints or want a lottery ticket with <5% of your net worth.
Frequently Asked Questions
When do I owe taxes on RSUs?
You owe taxes on the day they vest. The entire value is taxed as Ordinary Income. Holding longer does not change this initial bill.
What is ‘Sell-to-Cover’?
A default method where the broker sells ~22% of shares to cover withholding taxes. You get the remaining shares. Note: 22% is often too low for high earners.
Should I hold for capital gains?
Misconception. You only pay capital gains tax on growth after vesting. The base value is already taxed. Holding is identical to buying new shares.
Disclaimer: This content is for informational purposes only. Consult a CPA.