How Restricted Stock Units (RSUs) Actually Work

Restricted stock units (RSUs) are one of the most common forms of equity compensation used in today’s world, especially at large public companies. On the surface, they seem straightforward. Shares vest, stock shows up in your account and you decide whether to hold or sell.

In practice, RSUs introduce a series of tax, risk and behavioral decisions that are very easy to underestimate.

Taxes … Again?

RSUs represent a promise by your employer to deliver company stock once certain conditions are met, most often based on time. Nothing is taxed when the grant is made. The moment that matters is the vest date.

Each vest is a taxable event based on the stock’s value on the day the shares vest. The grant-date price is irrelevant for tax purposes.

For example, if you are granted 1,000 RSUs when your company’s stock is trading at $50, that price does not matter. If, one year later, 200 shares vest when the stock is worth $65, you are taxed as if you received $13,000 of ordinary income (200 shares x $65), regardless of whether you sell the shares or continue holding them.

Withholding ≠ Covered

Many companies automatically withhold a portion of vested shares to cover taxes. If 200 shares vest, you might see 80 shares withheld (40%) and 120 shares deposited into your account.

The most important detail here is how much is actually withheld. In the example above, 40% was withheld and for most people, that is going to be enough to cover their tax bill. But the default federal withholding is typically around 22%, not 40%. For higher earners, especially those in high-tax states like NY, NJ & CA, this often leads to unexpected tax bills.

Even when the amount withheld seems aggressive, it may not match your true marginal tax rate, which will leave you owing the IRS more at the end of the year.

One simple way to avoid unexpected tax bills is to address this by adjusting your W-4 to withhold a bit more from each paycheck, smoothing the tax impact across the year.

The Most Important Reframe

RSUs should be thought of as compensation, not as an investment. They are effectively cash compensation paid in stock. Once shares vest, holding them becomes an active investment decision.

A helpful question to ask is whether the potential after-tax upside is worth the additional risk and concentration. An even more revealing reframe is this: if instead of receiving stock, you were given the same value in cash, would you choose to invest that cash in your company’s stock today?

If the answer is anything other than “yes,” holding RSUs by default deserves a second look.

Familiarity Can Distort Risk

Employees often feel more confident holding a stock in a company they know well. They understand the business, work alongside capable colleagues and see internal momentum that outsiders do not.

That familiarity can create comfort, but it doesn’t eliminate market risk or concentration risk. Selling employer stock can also feel emotionally difficult. It may feel disloyal. Recent performance may also play a role - if the stock is hot, it can be extremely difficult to sell.

Holding large amounts of employer stock can make sense when it is done intentionally. Holding because you don’t know what else to do is not a strategy.

Real-World Constraints

In some cases, if you don’t want to sell any of your company’s stock to cover your tax bill, you can elect to pay your tax bill with cash and preserve your stock position. Doing so is a deliberate choice, and exposure to your company’s stock remains higher.

RSU decisions can be constrained by trading windows and blackout periods, especially around earnings. This isn’t usually a major issue, but it can affect some timing decisions around selling RSUs. Some high-level executives use Rule 10b5-1 to pre-schedule sales and reduce timing risk.

RSUs can also interact with wash sale rules. Say you own your company’s stock in your personal brokerage account at a loss and decide to sell it to harvest the tax loss. If you have RSUs that vest within 30 days of that sale, the IRS may treat the vest as a purchase and disallow the loss.

These are the types of nuances that often go unnoticed but can add real value to a financial plan when addressed proactively.

Bringing It All Together

RSUs are a powerful form of compensation. They can create immense value and wealth for the holder. But they can also cause problems if they’re not deliberately managed. And the problems they create rarely happen all at once. They create risk gradually through taxes, concentration, timing constraints and decisions made by default rather than design.

Helping clients navigate these decisions intentionally, and in the context of their broader financial life, is a core part of the work I do. If you are dealing with equity compensation and want a clearer framework for how it fits into your overall plan, let’s have a conversation.

This article is for general informational purposes and may not apply to every individual situation. If this is a question you’re actively considering, a personalized conversation can often bring clarity.