Restricted Stock Units (RSUs): What They Are, How They’re Taxed, and What To Do With Them
- Holzberg Wealth Management
- Sep 25
- 10 min read
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Receiving Restricted Stock Units (RSUs) as part of your compensation package is a milestone worth acknowledging. It signals that your employer sees you as a valuable contributor and wants to give you a stake in the company’s future. That is exciting and potentially very rewarding. But with that opportunity comes important decisions: What exactly are RSUs? How will they be taxed? And what should you do with them?
These are not just technical questions. The choices you make about your RSUs can have a real impact on your taxes, your overall investment portfolio, and your long-term financial security. Without a clear plan, it is easy to end up with surprise tax bills, too much of your wealth concentrated in your employer’s stock, or missed opportunities to put that value to work elsewhere.
This guide will break down what RSUs are, how they work, and how to approach the decision of whether to hold onto them or sell and diversify. We will also walk through practical tax strategies and real-world scenarios so you can see how to integrate RSUs into your broader financial plan.
What Are Restricted Stock Units?
To understand RSUs, it helps to break down the name itself:
Restricted: The stock does not fully belong to you right away. It is subject to restrictions, usually in the form of a vesting schedule.
Stock: When the restrictions lift, you are given actual shares of your company’s stock. At that point, they can be held, sold, or transferred.
Units: Until vesting, you do not own the stock itself. You hold “units,” which represent your employer’s promise to give you the shares later.
When your employer “grants” you RSUs, they are essentially promising you stock in the future. The grant date is when you receive this promise. From there, the vesting schedule dictates when the shares actually become yours.
There are a few common types of vesting schedules:
Cliff vesting: None of your shares vest until a certain date (e.g., after one year). Then they vest all at once.
Graduated (or graded) vesting: Shares vest gradually, such as monthly, quarterly, or annually, over a multi-year period.
Suppose you were granted 1,000 RSUs with a four-year graduated vesting schedule. That means 250 shares vest each year until all 1,000 are yours. If you leave the company before the four years are up, any unvested shares are forfeited. In contrast, under a “cliff” vesting schedule, none of your shares would vest until a specific date – say, after one year – at which point the 1,000 shares vest all at once.
How RSUs Are Taxed
To understand RSU taxation, it helps to separate the process into two key stages: the grant date and the vesting date.
On the grant date, your employer awards you a certain number of units. This does not create taxable income, because you do not own the stock yet – you have only been promised it if you meet the vesting requirements. In other words, there is no taxable event at grant.
On the vesting date, the situation changes. When RSUs vest, they become yours, and that triggers a taxable event. The taxable income is equal to the number of shares vested multiplied by the stock’s fair market value on the vesting date. For example, if 250 shares vest and the company’s stock is trading at $40 per share, you will recognize $10,000 of income.
This income is treated as ordinary earned income, just like a cash bonus, and is reported on your W-2. That means it is subject to federal income tax, state income tax (where applicable), and payroll taxes such as Social Security and Medicare. Most employers automatically withhold some of the shares to cover taxes through a “sell-to-cover” method. For federal withholding, the default rate is 22% if your RSU income is under $1 million in a given year, and 37% if it is over. These rates often do not match your actual tax bracket. If you are in a higher bracket, you may end up underwithheld and facing an additional tax bill when you file.
After vesting, if you hold the shares, any price change is taxed as a capital gain or loss when you sell. If you sell in one year or less of vesting, any gain is treated as a short-term capital gain and taxed at your ordinary income tax rate. If you hold for more than one year before selling, the gain qualifies for long-term capital gains treatment, which is taxed more favorably at 0%, 15%, or 20% depending on your income level.
RSU Tax Treatment Timeline
In short: RSUs are like a cash bonus that your company delivers in stock. The bonus is taxable the moment you receive it, and anything that happens afterward depends on how long you hold the shares.
Should You Keep RSUs or Sell and Diversify?
Once your RSUs vest, you face the critical decision of whether to hold onto the shares or sell and reinvest elsewhere. One of the biggest factors to consider is concentration risk. If your income, career, and investments are all tied to the same company, a downturn could hit you on multiple fronts. Research shows that while the overall stock market has delivered strong long-term returns, most individual stocks underperform the market, and many lose value entirely.
Between January 1987 and March 2025, the Russell 3000 (an index that benchmarks the entire U.S. stock market) increased over 4,000%. While the market posted sizable gains and recovered from downturns, individual stocks experienced a more unpredictable ride. Over that same 38-year period, two-thirds of the stocks in the Russell 3000 index underperformed the benchmark, including almost 40% that actually lost money.
Return breakdown of the individual stocks inside the Russell 3000, 1987-2025*
The data used is from January 1987 through March 2025. The data includes all companies listed in the Russell 3000® Index, except for those with noncontinuous return histories, approximately 9% of the data. End dates correspond to bankruptcy, termination, delisting, acquisitions/mergers, or the end of the study period. The Russell 3000® Index was used due to the size and scope of its holdings. The timeframe reflects the longest historical performance based on MSCI data at the time of analysis. Investment fees may reduce investment returns. Past performance is not indicative of future results. Source: Aperio, MSCI. Chart created by BlackRock.
For many people, selling at least some of their vested shares and reinvesting in a diversified portfolio provides a better balance of risk and return.
A useful way to frame the decision is to ask: If I received this value as a cash bonus, would I choose to invest it in my company’s stock? Or would you prefer to use it for other priorities, like paying down high-interest debt, funding a home purchase, or investing in a diversified fund? Thinking of RSUs in this way often clarifies whether holding company stock aligns with your financial goals.
Your personal circumstances also play a role. If you have significant upcoming expenses, liquidating RSUs may be the most straightforward way to generate cash. On the other hand, if your financial foundation is already strong and you believe in your company’s long-term prospects, holding some shares may fit within your broader strategy.
Finally, taxes matter. Selling shares immediately after vesting ensures you owe no additional tax beyond what is due at vesting. Holding introduces the potential for capital gains treatment if the stock appreciates, but also exposes you to market risk. For many people, the best solution is a balance – selling some shares to secure value while keeping others to capture future growth.
Common Mistakes to Avoid with RSUs
Because RSUs can feel like “free money,” they are easy to mishandle. A frequent mistake is assuming that your employer’s withholding fully covers your tax bill at vesting. This often results from a misunderstanding about which tax bracket you fall into from the outset, as well as potentially being pushed into a higher bracket due to the increased income from the vested shares. Since the standard rate is 22% (or 37% for high earners), employees in higher brackets often find themselves underwithheld and facing penalties.
Another misstep is letting shares accumulate without considering how they fit into your overall portfolio. Without action, your wealth can become dangerously concentrated in one company. Others go too far in the other direction—holding shares longer than they should purely for tax reasons, hoping to qualify for long-term capital gains treatment, only to watch the stock price decline and erase more value than the tax savings.
Finally, many people fail to connect their RSUs to their broader financial goals. Without an intentional plan, you can miss opportunities to use vested shares to build savings, reduce debt, or fund major life milestones. Treating RSUs as part of your overall compensation, rather than just “extra stock,” helps you make better decisions.
Advanced RSU Strategies
Once you understand the basics of RSUs and the decision between keeping or selling, you can explore more advanced strategies to fine-tune your approach. Each method has advantages and trade-offs, and the right choice depends on your tax bracket, liquidity needs, and risk tolerance.
One common approach is the sell-to-cover method. In this arrangement, your employer automatically sells enough of your vested shares to cover the estimated tax withholding, and the remaining shares are deposited into your account. The benefit of this strategy is its simplicity – you do not need to come up with cash out of pocket to cover the tax bill. However, the drawback is that the withholding rate is often set at the default 22% (or 37% if RSU income exceeds $1 million). If you are in a higher tax bracket, this can result in underwithholding, which means you may face an additional tax liability and possibly penalties when you file your return.
Another option is the same-day sale strategy. Here, all vested shares are sold immediately on the vesting date. This approach eliminates concentration risk and ensures that you do not face any additional tax obligations beyond the ordinary income due at vesting. It is a clean way to treat RSUs like a cash bonus that you then reallocate according to your goals. The downside, of course, is that you give up any potential future appreciation in the company stock. If your company’s stock price climbs significantly after the vesting date, you will not benefit from that growth.
A third method is the cash cover strategy, where you use your own funds to pay the taxes due at vesting so that you can keep all of the vested shares. This can be attractive if you are bullish on your company’s future and want to hold the stock, but it carries a higher risk. Not only are you taking on greater exposure to your employer’s stock, but you are also tying up more of your personal cash flow in the process. If the stock underperforms, you have increased your risk without securing a meaningful tax advantage.
Beyond these core strategies, you may also consider maximizing deductions to help offset the taxable income created when your RSUs vest. Increasing contributions to retirement accounts like a 401(k) or IRA can help reduce your taxable income, as can making charitable contributions. Donating appreciated shares to a donor-advised fund, for instance, can reduce your tax bill, lower the amount of overconcentration you have, and allow you to support causes you care about (to read more about donor-advised funds, check out our post Donor-Advised Funds (DAFs): Give More, Pay Less, Keep Control). The trade-off here is that you are committing resources to savings or philanthropy that you might otherwise use for other purposes, so it requires careful alignment with your broader financial goals.
Finally, it is worth noting that certain employees (particularly executives or insiders) may be subject to trading windows or blackout periods, which restrict when they can sell their company’s stock due to access to privileged information. In these cases, proactive planning is essential to avoid liquidity crunches or missed opportunities. Additionally, keep an eye on the wash sale rules: if you sell RSU shares at a loss and then buy your company’s stock again within 30 days, even in a different account, the loss may be disallowed. Coordinating your trading activity across all accounts is key to avoiding unintended tax consequences.
Conclusion
RSUs are a valuable form of compensation, but without a plan, they can also create tax headaches and concentration risk. Treat them like you would a cash bonus: ask yourself how best to use the value to serve your long-term goals. Sometimes that means holding, but often it means diversifying, reducing risk, and putting the proceeds toward other priorities.
The bottom line? RSUs should be integrated into your full financial plan, not left to chance. With a thoughtful strategy, you can turn them into a powerful engine for financial security.
Ready to make a plan for your RSUs? Let’s build a strategy to make them work for you. You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.
