When is the perfect time to sell an RSU? An RSU, or restricted stock unit, is a form of stock-based compensation. They are typically issued to employees through a vesting schedule. If you receive this form of compensation, then you will probably be asking when you should cash them in. Here is a look at RSU compensation.
What is an RSU?
A restricted stock unit is a form of compensation issued to employees by an employer. They are typically issued through a vesting schedule whereby you must achieve certain milestones or tenure. The RSU will be assigned a fair market value once they vest. At this point they are considered income. A portion will be withheld to pay taxes, and the remainder will be issues to you to do as you please.
This form of compensation gained in popularity in the mid 2000’s, as there were incidents of scandals involving traditional stock option compensation at the time. Once only reserved for upper management, this form of compensation was gaining popularity for other employees, as companies became increasingly sensitive to tax compliance.
Taxation on an RSU is quite different than other forms of stock-based compensation. You can find a more in-depth definition here.
RSUs have some of the same incentives as traditional stock options, in that they encourage employees to stay with a company long-term and to be a top performer. There is also now out of pocket expenses with an RSU as there are with stock options. There are some disadvantages like a lack of dividends and voting rights, however.
When Should You Sell an RSU?
Now that you have a brief overview of what an RSU is, you may be asking when you should sell your shares should you receive this form of compensation. Well, the most common advice that you will here is to sell them as soon as they vest. In other words, you should sell them immediately. The reasoning is that RSUs are treated and taxed like a cash bonus and are taxed at the time they vest. Selling can help satisfy short-term goals or can be used for other investments.
The only reason that you may want to hold an RSU beyond the vesting is that you believe that the company’s stock will continue rising in the future. This may or may not be the case.
You can do any combination of the above that you choose. You can hold onto some of the stock in hopes that the rest will increase in price in the future. Since you own the shares, it is entirely up to you how you handle your investments. A good rule of thumb is to not tie up more than 5% to 10% of your nest egg in any single stock. If you follow that rule, then you can hold a portion of your RSUs if you believe they will rise in price.
Conclusion
When is the perfect time to sell an RSU? The most common answer, and the most conservative advice, is to sell them all as soon as they vest. They are yours, so you can sell or hold onto any portion of them that you like. Just be mindful to not tie up too large a percentage of any single company stock in your portfolio and do as much research on your employer as you can. Remember that holding onto an RSU assumes that you believe that the share price will increase substantially in the future.
Read Also:
Doing Your Due Diligence When Buying a Stock
5 Tips For Managing Your Investment Portfolio
Great Non-Stock Investment Options for the Risk Averse
Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.
