Restricted Stock Units (RSU)

A restricted stock unit is a contractual promise: stay employed (and, at some private companies, wait for an IPO or acquisition) and the company will hand you shares on scheduled dates. Until vesting you own nothing you can sell, receive no dividends in most plans, and forfeit the units if you leave. At vesting the shares are delivered and their market value lands on your W-2 as ordinary income, with taxes withheld by the employer, usually by selling or withholding a portion of the shares themselves. From that point the shares are simply stock you own, with a cost basis equal to the value already taxed.

Two tax points do most of the work. First, RSUs cannot be taxed early by choice: the Section 83(b) election, which lets recipients of restricted stock pay tax at grant, is unavailable for RSUs because no property exists until vest. Second, withholding is usually wrong for high earners. Employers commonly withhold federal tax on vesting RSUs at the flat supplemental-wage rate (22%, with a mandatory 37% on supplemental wages above $1 million in a year), while the income itself may be taxed at 32%, 35%, or 37% at the margin. On a large vest the gap becomes a surprise balance due, sometimes with underpayment penalties, so estimating the true tax and making estimated payments or extra withholding is standard practice.

After vest, the decision is a portfolio decision, not a tax one. Since the full value was already taxed, selling immediately produces little or no capital gain; holding means concentrating in your employer, whose stock price and your paycheck can fall together. A useful test: if the company had paid you the same amount in cash, would you buy its stock with it? For most people the honest answer is no, which is why sell-at-vest and reinvest-in-a-diversified-portfolio is the conflict-free default many advice-only planners start from, adjusting only for deliberate, size-limited reasons to hold.

A hypothetical vest: 1,000 RSUs vest when the stock trades at $50, adding $50,000 of ordinary income to Priya's W-2. Her employer withholds federal tax at a flat 22%, or $11,000, typically by selling 220 shares. But Priya's marginal federal rate is 32%, so the true federal tax on the vest is about $16,000, leaving a $5,000 shortfall she needs to plan for by April (state tax can widen it further).

She keeps 780 shares worth $39,000 with a $50 cost basis. If she sells right away, there is essentially no additional gain to tax. If she holds and the stock rises to $60, the extra $10 per share is capital gain (long-term once she has held past a year from vest); if it falls to $40, she has a loss on paper but still owed full tax on the $50 vest value. Numbers are illustrative only.

Pros

• Real compensation with no purchase decision or exercise cost; unlike options, RSUs retain value even if the stock falls after grant.
• Simple tax basis: value at vest is taxed once as wages and becomes your cost basis.
• Vesting schedules make future income partially predictable, useful for planning around mortgages, sabbaticals, or big goals.

Cons

• No 83(b) election and no control over the timing of the income; a big vest can spike your marginal rate in one year.
• Flat supplemental withholding routinely under-withholds for high earners, creating April surprises.
• Default inertia leads to heavy concentration in employer stock.
• At private companies, shares received at vest may be illiquid, or vesting may wait on a liquidity event entirely.