RSUs 101: What Happens When Your Shares Vest and What Most People Get Wrong

Most people treat RSU vesting like receiving a bonus. It is income, but the way the withholding works can leave you with a surprise tax bill come April and that surprise is almost always bigger than people expect.

If you have RSUs as part of your compensation and you don't have a plan for them, this post is for you.

What Are RSUs, Exactly?

RSU stands for Restricted Stock Unit. Your company gives you shares as part of your compensation, but you don't receive them all at once. They vest over time on a set schedule your company sets.

When a portion of your shares vest, a few things happen:

You now own those shares
The value of those shares on that day is counted as ordinary income
Your company withholds taxes (22% usually) before delivering the remaining shares to you

That third point is where most people run into trouble.

The Withholding Problem

When your RSUs vest, your company is required to withhold taxes. The default withholding rate for supplemental income is 22%, which sounds reasonable until you realize that if you are a high earner, your actual marginal tax rate might be 32%, 35%, or higher. The math on that gap is not small.

For example, if $100,000 in RSUs vest and your company withholds 22%, you have had $22,000 set aside for taxes. This sounds like a good amount, but if part of your income should be taxed at the 35% marginal rate, then you could owe more than what was withheld. Multiply this across multiple vesting events in a year and you can see how people end up writing large, unexpected checks come tax filing time.

This is not a loophole or a mistake. It's how the system works. Your company is doing exactly what they are supposed to do. The problem is that most employees do not know the withholding rate rarely matches their actual tax liability.

The Three Decisions Most People Skip

When RSUs vest, there are three decisions you need to make.

1. What to do with the shares - Sell immediately, hold everything, or sell a portion and hold the rest. There is no universally right answer here. It depends on your overall financial picture, your tax situation, and how much exposure you already have to your company's stock.

What I will say is this: defaulting to holding because you believe in your company is not a plan. It is a hope. More on that in a future post.

2. How to plan for the actual tax bill - If your company's withholding is not going to cover what you owe, you need to account for that gap. That might mean making an estimated tax payment during the year, setting aside cash in a high-yield savings account, or adjusting your strategy to offset the income, because waiting until April to find out what you owe is a choice and from my experience it is usually an unexpectedly expensive one.

3. Whether holding the shares makes sense for your broader financial picture - This is the question most people never ask. You are already receiving a salary and bonus from this company. Your career, your income, and potentially your retirement are tied to its performance, so adding a growing stock position on top of that can mean one bad quarter affects your compensation, your portfolio, and your job security all at the same time.

What I will say is this: Selling all the vesting stock and diversifying is the easy recommendation. We have clients that hold 10 to 20% of their investments in their company stock. It is not a bad thing, but what can hurt you is holding 80%+ and not realizing the risks.

What a Plan Actually Looks Like

You do not need anything complicated. You need to know three numbers before your next vesting event:

What will vest and when
- Check your equity plan documents or your company's equity portal
What your actual marginal tax rate is or your effective tax rate
- Not the withholding rate, your real rate based on your total income
What the gap is
- The difference between what is being withheld and what you will actually owe

From there, you can decide what to do with the shares and how to handle the tax liability before it becomes a problem. If you have RSUs vesting this year and you do not know these three numbers, that is where you should start.

The Bigger Picture

RSU planning does not exist in isolation. It connects to your tax strategy, your investment portfolio, your retirement timeline, and your overall financial plan. How you handle vesting events can have a real impact on your long-term wealth, not just your April tax bill.

If you have questions about your specific situation, we are happy to talk through it.

About Legacy Financial Designs

Legacy Financial Designs is a fee-only financial planning firm located in The Woodlands, TX, serving clients in Greater Houston, TX, College Station, TX and virtually across the United States. We provide comprehensive financial guidance and wealth management to families across the country. If you are interested in working with us, click here to schedule an introductory phone call or feel free to call us anytime at 832-510-0175.

This content is for educational purposes only and does not constitute personalized financial or tax advice. Please consult a qualified professional regarding your specific situation.

David Wanja, Jr., CFP®