Stock Options and RSUs: How to Manage Both
The quick answer
If you receive both stock options and restricted stock units (RSUs), plan for them together, not separately. RSUs are taxed automatically as ordinary income when they vest, while stock options are taxed only when you choose to exercise. Because both add to your income and your exposure to one company, a common approach is to use RSUs for diversification and cash, and to time option exercises around the income your RSUs already create.
How are RSUs and stock options different?
RSUs are shares you receive when they vest. You don't pay anything for them. On the vesting date, the full market value of the shares is taxed as ordinary income and reported on your W-2. Your employer typically withholds tax by keeping some of the shares. After vesting, you own the stock outright, and any later change in value is a capital gain or loss.
Stock options are the right to buy shares at a set price. They only have value if the stock trades above your exercise price. You decide when to exercise, and that decision triggers the tax: ordinary income for non-qualified stock options (NSOs), and potential alternative minimum tax (AMT) for incentive stock options (ISOs).
The key difference: RSU income happens on a schedule you don't control. Option income happens when you decide. That makes options the more flexible tool for tax planning.
Why does holding both make planning harder?
Taxes stack: RSU income is added on top of your salary and bonus. If you also exercise NSOs in the same year, that income stacks on top again, often pushing you into the 32%, 35%, or 37% bracket.
Withholding falls short: Employers usually withhold federal tax at a flat 22% on both RSU and NSO income. For high earners, that gap can add up to a large bill in April. ISO exercises typically have no withholding at all.
Concentration adds up quickly: Every RSU vest adds company shares, and every option you exercise and hold adds more. Without a plan, a large share of your net worth can end up in one stock.
The decisions affect each other: How much RSU income you have in a year changes how much it costs to exercise options, and how much company stock you already own should affect how many exercised shares you keep.
How should you manage stock options and RSUs together?
Consider selling RSUs at vest: Since RSUs are taxed at full value when they vest, selling right away usually creates little additional tax. Keeping them is the same as taking a cash bonus and buying company stock with it. For many people, RSUs are the easiest source of diversification.
Use RSU proceeds to fund option exercises: Cash from RSU sales can cover the exercise cost and tax on options, so you don't have to sell other investments or dip into savings.
Time option exercises around RSU income: Because RSU vests are fixed, look at your projected income for the year before exercising. Spreading NSO exercises across several years, or exercising in a lower-income year, can keep more income out of the top brackets.
Model AMT before exercising ISOs: Your regular income, including RSU income, affects how much ISO spread you can exercise before AMT applies. Run the numbers each year to find that amount.
Set one cap for total company stock: Count vested RSU shares, exercised shares, and the value of your vested options together, and compare the total to a single limit you're comfortable with.
Close the withholding gap: Estimate your true tax on RSU and option income, and set aside cash or make estimated payments for the difference.
Common mistakes when you have both
Treating each grant as a separate decision: Looking at RSUs and options in isolation misses how they affect your taxes and total company exposure.
Holding RSUs out of habit: Many people keep vested shares simply because they never decided to sell, not because they chose to invest in the company.
Exercising options in a high-income year: A large NSO exercise in a year with big RSU vests can push much of that income into the highest bracket.
Double-counting RSU and NSO income on sales: Brokers often report a cost basis that leaves out income already taxed on your W-2. Check and adjust it when you file.
Ignoring expiration dates: RSUs vest automatically, but options don't exercise themselves. Track option expiration dates separately.
Frequently asked questions (FAQs)
Which is better, RSUs or stock options? Neither is always better. RSUs have value as long as the stock is worth more than zero, while options only have value if the stock rises above your exercise price. Options offer more upside and more tax flexibility, but more risk.
Should I sell RSUs as soon as they vest? Often, yes, especially if you already hold a lot of company stock. Selling at vest usually creates little extra tax, since the shares were just taxed at their full value.
Do RSUs affect whether I owe AMT on ISOs? They can. RSU income raises your regular tax, which can change how much ISO spread you can exercise before AMT applies. The answer depends on your full tax picture for the year.
Do I have to pay anything when RSUs vest? No cash is required to receive the shares, but tax is due. Most employers withhold shares to cover it, though withholding at 22% may not cover your full tax.
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About the author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps tech professionals in the New York/New Jersey area, as well as nationwide, plan around stock options, RSUs, and concentrated stock positions.
This article is for educational purposes only and is not tax, legal, or investment advice. Tax rules change, and your situation may differ. Consult a qualified tax professional before acting.
