Michael Borchert from Avrio Wealth talks us through the importance and implications of Restricted Stock Units (RSUs).
Restricted Stock Units (RSUs) are an important component of financial planning. Companies of all sizes, from start-ups to Fortune 500 companies, use RSUs as part of employee compensation packages to attract and retain talent.
RSUs are appealing because the potential growth can change an employee’s net worth significantly. At the same time, they pose risks as they may drop in value, have tax considerations, affect cashflow, or cause financial uncertainty.
In wealth management, there is a phrase: “concentration builds wealth, diversification preserves it.” However, whether you hold the concentrated stock or diversify is more than a simple yes or no answer. It often requires complex planning. How much of your net worth are the vested shares? Are you awarded new RSUs yearly? Do you feel confident that the company will continue to be successful? Do you want to be concentrated in one stock? Are your financial goals the kind that would be affected by a significant drop in share value in the short or long term? Are there specific periods each year when the vested stock cannot be sold? Can you diversify if your company is private?
If you feel that your shares already make up too much of your total net worth, you may want to consider diversifying; for example, diversify an amount equal to your annual vesting awards. (That’s assuming you receive new RSUs yearly, so you aren’t selling all your shares.) If you have 50K vesting every year, you may consider selling 50K to diversify into other investments. This allows potential growth of unvested and new RSUs, but controls the total exposure in your portfolio as you diversify.
Short-term financial planning
If you have short-term goals like a property purchase, consider selling the amount required and diversifying into low-risk investments to ensure the money is available when needed. In the short term, a loss may be a greater risk than potential gains. If stock value drops significantly, you may not have time to recover the amount needed for your goals.
Diversification or concentration is very much tied to your financial plan. There are other strategies to consider with diversification, but these may be specific to you; more importantly, they may have significant tax implications.
RSUs are taxed upon vesting. In Singapore, the total market value at the time of vesting will be considered income. This will be added to your earnings for income tax calculations that year. If you plan to hold your shares, you will need cash to pay the extra income tax due. Depending on your finances, this extra tax may be affordable; or you may need to budget to cover the additional tax.
Paying tax on RSU gains
For non-US taxpayers, once you pay tax at vesting, you don’t have further capital gains tax on growth from a Singapore perspective. This gives you flexibility to diversify into other investments based on your financial goals and timeline. Keep in mind, if shares vest at a higher price, then the stock immediately loses value; there are no adjustments to the tax due that year.
US taxpayers owe taxes in both Singapore and the US upon vesting. Some companies may offer you the ability to offset your tax liability with “sell to cover”, a mechanism that sells 20 to 30% of the shares as withholding tax for the US. Some companies supply tax documents with the information the IRS requires, others do not. It’s vital to keep good records of your transactions if you’re a US taxpayer.
Diversification for US taxpayers is much more strategic. Once shares vest, any gains on the sale of vested RSUs will be taxed. The length of time you hold the shares will determine whether subsequent sales are either long or short term and what your tax rate will be.
The final thing to consider is a rule in Singapore called “deemed exercise”. This generally applies to non-Singaporean citizens, PRs leaving Singapore, PRs posted to work overseas, or those changing jobs in Singapore. The IRAS will deem your unvested shares as vested and require a single lump sum tax payment. You pay tax on shares that you cannot access as they have not vested. It’s important to plan for this as it can require significant cash to pay for tax.
A final word on Restricted Stock Units
RSUs present many opportunities as well as considerations in your financial plan. Given the values they represent, having a strategy is important for your long-term financial success. Avrio Wealth has sophisticated planning tools to help you make informed decisions.
Please contact Michael Borchert CFP® if you have any other questions.
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