Have You Accumulated Too Much Wealth In RSUs?

True Root Financial is a financial advisor and financial planner based in San Francisco, CA. We serve clients across the globe.

Daniel, a software engineer in San Francisco, has accumulated over $2 million in RSUs, making up 75% of his net worth. While RSUs seemed like a great wealth-building tool, he now faces the risk of concentration and a looming tax bill. His situation is common in tech. But now, RSUs can become a financial burden if not carefully managed.

If you are a tech professional interested in learning how we can help you claim your financial independence by investing wisely, minimizing taxes, and maximizing your equity compensation, please book a no-obligation call here.

If you work at a private company, holding onto your RSUs comes with unique risks so learn what you need to consider before making a decision. And once you cash out, what’s next? Watch the video below for smart strategies on managing your stock and putting your money to work right away.

Key Takeaways:

RSUs are taxed as income when they vest, with additional capital gains tax when sold later
Over-reliance on RSUs creates concentration risk and jeopardizes financial security
A financial advisor can help assess risks, address gaps, navigate RSU taxes, and secure your goals.

What Happens When You Accumulate Too Much Money in RSUs?

The Risks of Concentration

The first thing to consider when you’ve accumulated a large amount of wealth in RSUs is concentration risk. Concentration risk occurs when a large portion of your wealth is tied up in a single asset, like your employer’s stock. While you may feel confident about your company’s future, remember that markets and companies can be unpredictable.

If your RSUs make up a disproportionate share of your wealth, you’re at risk of facing significant losses if your company’s stock price declines. For example, if the tech market experiences a downturn or your company faces a setback, your financial security could be threatened, along with your ability to meet long-term goals like retirement or homeownership.

Why A Gap Analysis is Crucial?

This analysis compares your financial goals with your current equity holdings to determine how much you need to diversify to reduce risk.

As financial advisors, we take a holistic approach to your wealth. We look at goals such as buying a house, leaving your job, starting a business, or retiring early. Then, we take the equity compensation out of the equation to see what shortfall exists. This tells us how much to diversify to ensure your financial plan doesn’t suffer if the stock loses value.

In Daniel’s case, his $2 million in RSUs represents 75% of his total net worth. A gap analysis would clearly show that he’s taking on excessive risk by having such a large portion of his wealth tied to one stock. At this point, it’s important to rebalance by exploring diversification strategies and risk management options.

The Tax Burden of RSUs: What You Need to Know?

Understanding RSU Taxation

One of the most overlooked aspects of RSUs is the tax burden that accompanies them. Unlike stock options, which may allow you to defer taxes until you sell, RSUs are taxed as ordinary income when they vest. This means that you’ll owe taxes on the market value of the RSUs at the time they vest, which can come as a surprise if you’re not prepared.

For example, if Daniel’s RSUs vest at $500 per share and he has 1,000 shares, he’ll have $500,000 in taxable income. With a federal tax rate of 35%, that translates into a $175,000 tax bill. This doesn’t even account for state taxes, which can be significant, especially in high-tax states like California.

California Tax Implications

For California residents, the tax implications of RSUs are particularly steep. California treats RSU income as ordinary income, and it’s taxed in two steps:

At Vesting: When your RSUs vest, your employer is required to withhold state taxes at a fixed rate of 10.23% for California state income tax, along with other required federal taxes.

Next April 15th: If the withholding is insufficient, especially for high-income earners like Daniel, he will owe the remaining balance when filing his tax return the following year. For example, high earners may face a higher effective tax rate due to the progressive nature of California’s tax system, which could push their total liability higher than the default withholding rate.

If you are in Daniel’s shoes, earning over $360,000 as a single filer or $720,000 as a married filer, you may need to pay additional estimated taxes throughout the year to avoid penalties. Working with a tax advisor can help you understand whether estimated tax payments are necessary to stay ahead of your liability.

What Should You Do After Accumulating Too Much in RSUs?

1. Diversify Your Portfolio

Once you’ve conducted your gap analysis and realized that your RSUs represent too large a portion of your net worth, the next logical step is to diversify. The goal is to reduce the concentration of your wealth in a single asset, which lowers your overall risk and provides greater financial security.

Diversification doesn’t mean you have to sell all your RSUs right away, but it’s important to gradually shift your wealth into different asset classes, such as stocks, bonds, real estate, or retirement accounts. This will help cushion the impact of any potential drop in the value of your employer’s stock and protect your long-term goals.

2. Plan For The Tax Impact

Tax planning is critical when dealing with RSUs, especially in a high-tax state like California. If your RSUs are significant, working with a tax professional is a smart move. Here are a few strategies you should consider:

Withholding Adjustments: If the default withholding on your RSUs isn’t enough to cover your tax liability, you might need to adjust your withholding or make estimated tax payments.

Sell to Cover Taxes: Some people sell a portion of their RSUs when they vest to cover the taxes. This can help avoid having to liquidate other investments in the future to meet your tax obligations.

Optimize for Long-Term Gains: If possible, holding onto RSUs long enough to qualify for long-term capital gains treatment (when you sell them) can reduce your tax burden, though this requires careful planning.

Next Steps For You

Like Daniel, you might be wondering what to do with your RSUs. Don’t let them control your financial future, take charge and make your wealth work for you. With the right strategy, you can confidently manage your RSUs and build a diversified portfolio that aligns with your long-term financial goals. Talk to a financial advisor today and start optimizing your wealth. Book a call below!

Have You Accumulated Too Much Wealth In RSUs?

Key Takeaways: