Should I sell my vested RSUs?
Today’s biggest financial news out of the Treasure Valley is undoubtedly Micron Technology (Nasdaq: MU) crossing the $1-trillion market cap mark after their share price climbed past the $1,000 threshold.
Many engineers might now be asking themselves the same question technology employees have asked for years: to hold or to sell your vested RSUs?
Restricted Stock Units are designed to reward and align you to the growth and success of your company. Many times, when the stock has appreciated enough, employees do feel rewarded, but also trapped by tax-paralysis. At Micron, a $5,000 RSU reward (net after sell-to-cover tax costs) in 2021 has now grown to over $50,000. That is a large capital gains tax bill to be faced with when you are potentially wanting to diversify your wealth concentration. This is where it can be helpful to breakdown the decision into some simpler concepts.
The "Cash" Test
The cash test is the simplest distillation of behavioral finance. Simply ask yourself if you “received the RSU value as a cash bonus instead, would you use the entire amount to buy company stock today”?
If yes, your job is easy. Holding the shares aligns with your personal investment philosophy.
If no, selling some or all of your vested RSUs to purchase more diversified investments might make more sense.
We frequently help clients unpack this decision through financial planning. Often times the decision becomes clearer with a deeper analytical understanding of your whole picture.
Why Financial Planning Helps
Prior to selling vested RSUs, your salary, career growth, and unvested equity are all tied to your employer. Holding vested RSUs furthers this concentration risk. Depending on a multitude of factors, that concentration might be appropriate for your situation. However, a drop in the company's stock price now not only hurts your portfolio, but can also coincide with company layoffs. Taking the time to understand your whole financial picture, and goals, helps to clarify how much of your total net worth should be tied to your company's stock.
Our Recommendation: The Hybrid Approach
Generally speaking, only executives should consider maintaining highly concentrated company stock positions. This is due to their genuine influence over the stock price (and 10b5-1 Plans). Below the C-Suite, many employees should consider a more balanced approach. Rather than going all-in on selling or holding, sell a portion to diversify into other investments or pay off high-interest debt. Keep a small, deliberate percentage, usually between 10%-20% of your RSUs as a percentage of your whole portfolio. This allows you to meaningfully participate in upside opportunity without exposing yourself to outsized single-stock risk. If you want to better understand the blend that is right for you, we at Hoeven Wealth are here to help. Not only is this a key question we answer through financial planning, but we also have spouses going through this very scenario, so we understand the process both personally and professionally.
Disclosure:
The information presented in this article is intended for general educational purposes and should not be interpreted as individualized financial, investment, tax, or legal advice. Any hypothetical examples, scenarios, or illustrative anecdotes are used strictly to demonstrate financial planning concepts and do not reflect all client results. Because each person’s financial situation is unique, the strategies or ideas discussed may not be appropriate for your circumstances. As an investment adviser representative of a registered investment adviser, we act in a fiduciary capacity and provide advice tailored to each client’s objectives only after adequate understanding of the client’s situation. Before making any financial decisions, please consult with your adviser or another qualified professional.
Neither Hoeven Wealth nor XY Investment Solutions provide tax or legal advice. The tax and estate planning information offered is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
