Restricted Stock Units (RSUs)
Employer stock granted as compensation, delivered only once it vests.
A restricted stock unit is a promise of shares that converts to actual shares on a vesting schedule, commonly three or four years with a one-year cliff. Nothing is owned until vesting occurs.
The tax treatment surprises people because it does not follow the grant. Vested RSUs are ordinary income in the year they vest, valued at the price on the vest date, and employers typically withhold shares to cover it. Withholding at the 22% supplemental rate can leave a shortfall for anyone whose marginal rate is higher, which is where the unexpected April bill comes from.
The structural point is that salary and equity are exposed to the same company. A decline hits current income and accumulated wealth together, and the correlation between them is close to one. That is the opposite of how diversification is supposed to work, and it is a fact about the position rather than a view on what to do about it.
Worked through
Two years into a four-year grant
A $200k grant vesting over four years, with vested shares retained rather than sold.
- Total grant
- $200k
- Vested so far
- $100k
- Ordinary income tax
- ~$35k
- Share of net worth
- 70%
A 40% fall in the share price would take 28% off net worth while the same employer sets salary. Both exposures move together.
Related in Investments & Portfolio
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