RSUs Are Great… Until Tax Time
Restricted Stock Units (RSUs) are one of the best perks of working at a successful company. They feel like free money—until they vest and suddenly, you owe a chunk of that "free money" to the IRS.
I’ve seen this catch so many people off guard. A client once called me in a full-blown panic after realizing their RSUs had vested, but their employer had only withheld 22% for taxes—and they were in the 37% bracket. That meant they still owed thousands come tax time. And they weren’t happy.
Here’s the thing: RSUs can absolutely help you build wealth, but without a plan, they can also leave you with an unexpected tax bill (or a portfolio that’s way too dependent on your employer’s stock). So, let’s talk strategy.
1. Use RSUs to Max Out Tax-Advantaged Accounts
One of the simplest ways to reduce the tax hit from RSUs? Redirect that income into tax-advantaged accounts.
If your RSUs bump you into a higher tax bracket, you can offset the damage by maxing out your 401(k), IRA, and HSA. Not only does this lower your taxable income, but it also helps you build wealth for the future.
How This Plays Out in Real Life
Let’s say you have $50,000 worth of RSUs vesting this year. Instead of taking that entire amount as taxable income, you:
- Contribute $23,500 to your 401(k) ($31,00 if you’re over 50)
- Put $4,150 into an HSA
- Stash $7,000 in a Traditional IRA (or Roth IRA, if you qualify)
By doing this, you reduce your taxable income by over $30,000, which means you keep more of your money instead of handing it over to the IRS.
Side note: If your company offers a Mega Backdoor Roth or After-Tax 401(k) option, this could be another way to funnel even more of your RSU proceeds into a tax-efficient vehicle.
2. Watch Your Tax Bracket—RSUs Can Push You Into a Higher One
Here’s something people don’t always realize: RSUs vest on a set schedule, and when they do, they count as ordinary income. That means they can push you into a higher tax bracket without you even realizing it.
A lot of times, I see people ignoring their tax bracket until it’s too late. But if you know what’s coming, you can plan for it.
What You Can Do Instead
- If you expect a lower-income year (maybe you’re taking a sabbatical, switching jobs, or starting your own business), consider waiting to sell some shares until that year.
- If you know your RSUs will push you into the highest bracket, look for ways to offset the hit—maxing out tax-advantaged accounts, as we discussed earlier, is one way.
- If you’re getting a big bonus the same year as a major RSU vesting event, work with a tax professional to see if you can shift some income around or defer bonuses to avoid unnecessary taxes.
3. Sell RSUs Immediately to Cover Taxes (A.K.A. Don’t Get Caught Off Guard)
A lot of companies will automatically withhold 22% of your RSUs for taxes. But—here’s the kicker—if you’re in a higher tax bracket (which many people with RSUs are), this won’t be enough.
I’ve seen people assume their employer took care of the tax bill, only to owe thousands more when they file their return. Definitely not fun.
The Sell-to-Cover Strategy
The simplest way to avoid this mess? Sell enough RSUs immediately at vesting to cover taxes.
Most companies will let you do this automatically—it’s called a Sell-to-Cover or Same-Day Sale. This means a portion of your shares are sold off right away to cover the estimated tax bill.
But like anything, there’s a catch: The default withholding (again, usually 22%) might not be enough. If you’re in a higher tax bracket, you may need to sell more shares manually to cover the full tax liability.
Quick Example:
- You get $100,000 worth of RSUs vested.
- Your company withholds $22,000 for taxes (22%), but you’re actually in the 35% tax bracket.
- You owe $35,000 total, meaning you’re short $13,000.
If you don’t plan ahead, you’ll have to come up with that money at tax time. Selling extra shares at vesting ensures you don’t get hit with a surprise bill later.
4. Donate RSUs to Charity and Get a Tax Deduction
If you’re a high earner and looking for ways to offset your RSU tax hit, charitable giving can be an incredibly effective strategy.
How This Works
- If you donate RSU shares directly to a charity (or a Donor-Advised Fund), you avoid paying capital gains tax on the shares and get a tax deduction for the fair market value of the donation.
- This is especially powerful in high-income years, where a large RSU vesting event could push you into a higher bracket.
5. Hold RSUs for Long-Term Capital Gains (But Be Smart About It)
Most people sell their RSUs immediately after vesting, which means they pay ordinary income tax on the full amount.
But if you hold onto those shares for at least a year after vesting, you qualify for long-term capital gains tax rates, which are lower than income tax rates.
Quick Math:
- Selling RSUs immediately? You could pay 37% tax if you’re in the highest bracket.
- Holding RSUs for 12+ months? Your tax rate could drop to 15-20%.
Should You Hold?
That depends. The risk of holding RSUs is that your company’s stock could drop. There is also a risk of selling too fast as the stock may rise. We analyze each stock independently to give the correct guidance.
If your company stock is already a huge percentage of your net worth, it might be safer to sell immediately and diversify. But if you’re confident in the company and can handle the risk, holding for long-term tax benefits could make sense.
RSUs Are a Tool—Use Them Wisely
RSUs are one of the best wealth-building tools out there, but without a strategy, they can also create massive tax headaches.
The Smartest RSU Moves:
- Use RSUs to max out tax-advantaged accounts.
- Be aware of how RSUs impact your tax bracket.
- Sell-to-cover at vesting to avoid a surprise tax bill.
- Donate RSUs to charity to reduce taxes while giving back.
- Hold for long-term capital gains—but only if it makes sense for your situation.
Everyone’s life and financial situation is different, so if you have RSUs vesting, talk to a professional who understands investments and taxes before making big decisions.
And if you’re not sure where to start? Let’s talk. RSUs can be a game-changer—but only if you handle them right.
Schedule a consultation with FSC Wealth Advisors today to discuss your current situation.
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