Have you ever purchased an extra car, boat, or even vacation home? If you have, you may know that most experts recommend having an exit or selling strategy in place before making the purchase. As a top-level executive, you’ve likely experienced this on a corporate level too. For example, you might have allocated funds to purchase a corporate asset with the selling strategy in place for the future, whether the company no longer needed the asset or the company is able to make a profit on the asset.
Regardless, the concept of a selling strategy is not foreign to any corporate executive, and it’s one that applies if you hold restricted stock units (RSU). While more traditional retirement and equity compensation plans for employees don’t really require any type of sales strategy until after age 60, you can benefit greatly by developing an RSU selling strategy with the help of an experienced executive financial advisor. Once your RSUs vest and convert to shares of company stock, having a plan for what you’ll do with them can ensure you fully take advantage of this type of compensation.
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The Tax Impact of Selling Your Vested RSUs
When developing an RSU selling strategy, the first thing to do is ensure you understand how RSUs are taxed.
When RSUs vest, they are considered income and you are required to pay income tax on the value of those shares. There are strategies, such as filing at 83(b) election or withholding shares to cover the income tax owed, to minimize your tax bill when your RSUs vest. This is one reason why we recommend working with a financial advisor when you’re granted RSUs, so you can fully optimize your RSU tax strategy from the start.
Regardless of your tax strategy at vesting, however, if the value of the stock goes up in the time between when the RSU vests and when you sell the share, you can expect to pay either short or long-term capital gains tax on the profit you realize. Accounting for this tax impact in the context of your unique financial situation is why having an RSU selling strategy is so crucial.
Questions That Drive Your RSU Selling Strategy
The RSU selling strategy you choose should reflect your financial needs, as well as take into account your future plans. When developing your strategy, there are a few basic questions to ask:
- Why are you selling? Your motive for selling will affect the strategy you employ. Are you looking to diversify out of a concentrated stock position? Is there a specific asset you’re looking to reinvest in? This is the first and most basic question we ask executives when guiding their RSU selling strategy.
- What is your company’s outlook? Your company’s anticipated success and stock price will play a large role in your strategy, particularly in terms of when you sell your shares.
- Does your employer require you to hold company stock? Some employers require top-level executives to hold a certain amount of company stock in their portfolios. If you plan to stay employed at your company past when your RSUs vest, it’s important to know these requirements to ensure you comply.
Once you’ve answered these questions, there are several RSU selling strategies to consider.
RSU Selling Strategy Options
Realistically, you have several options when it comes to your restricted stock units, due to the nearly unlimited amount of alternative investments you could shift your shares into after selling. For example, you could sell half of your vested shares and diversify your portfolio by investing in a hard asset, such as rental income properties.
You should also know that your selling strategy may have some parameters due to section 16(b) of the Securities Exchange Act. This affects executives officers, directors, and stockholders with large positions, typically 10% or more. It essentially says that the previously mentioned individuals are not allowed to profit from the sale of stock units that vested within the past six months. Your company will have informed you if you fall under the 16(b) guidelines, but as a precaution, top-level executives should expect to hold their shares at least six months after vesting before selling.
With this in mind, here are five basic selling strategy options:
- Sell all shares ASAP. This is a strategy that would fit anyone that does not have a favorable outlook on the share price on their company stock. If you believe the share price will fall, you might consider selling your shares and reinvesting in another asset or sitting on cash until you decide what to do. It’s important to note that if you sell between the six-month and one-year period, you will be subject to short-term capital gains tax, which would be the same as your ordinary income tax rate, up to 39%. If you wait until after the one-year mark, you can expect to pay long-term capital gains tax on any gains, which could be up to 22%.
- Sell a portion and keep a portion: Another selling strategy is to sell off a portion of your shares and keep a portion. This strategy allows you to stay vested in the company but also diversify your equity holdings as well. You can choose to invest the money made from the sale of shares into other equities or even other asset classes, like real estate. This is a good strategy for executives looking for diversification but who also want or need to stay vested in their company.
- Hold onto your shares: If you have an optimistic, long position of your company stock, you could consider holding onto the stock for as long as you like. The goal would be for the stock price to rise over time, generating wealth for you as well as eliminating the need to incur taxation from the sale of your shares right away.
- Sell shares systematically: A strategy often used by top-level executives, with the help of an experienced executive financial advisor is implementing an index proxy strategy that systematically sells off your shares. This is an especially effective selling strategy when you have a large concentrated stock position that you want to diversify for risk management reasons. You can work with your advisor to set parameters around when the stock is sold and how it is reinvested. For example, if you wish to minimize taxation, the program can sell when the share prices are both up and down, allowing you to gain as well as harvest losses to offset capital gains tax.
- Exchange fund strategy: Lastly, if your goal is to diversify your concentrated position but you’d rather not sell your shares and incur capital gains taxation, you can opt for an exchange fund strategy. This is effective for executives with a large concentrated stock position as it allows you to pool your stock with other large positions to offer diversification to the group. In exchange for your large number of company shares, you are given shares of the overall fund that is typically comprised of 50 different stock positions. When you work with an experienced executive financial advisor to implement this strategy, it can be very effective for your portfolio.
Working with an Equity Compensation Planning Expert
No matter what RSU selling strategy you choose to implement, you need to be sure that it aligns with your goals and unique financial situation. As mentioned, your equity compensation plan should include an exit strategy that meets your needs. An experienced advisor who has walked countless executives through this very same process can guide you to make an educated decision.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for equity compensation planning.
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