I’m not sure about RSU’s, but for ESPPs I think there are tax benefits to holding them for a year. Something that someone explained to me once about short terms capital gains vs. long term capital gains.
Whether that marginal benefit of lower taxes is worth the increased risk is another question.
I got RSU’s for years. I often sold them when they vested, but it became more of a PITA to do it immediately when I had to request permission first.
When I was getting them it seems like there was an advantage to waiting until 2 years from the beginning of the withholding period (which was ~18 months from the end of the period), but I can’t remember what that was and I’m wondering if that’s because either the rule or the enforcement of the rule changed.
I think it was because then the entire difference between the purchase price and the sale price went down as a long term gain, with none taxed as ordinary income. Whereas if you sold sooner than that the discount was ordinary income. Like if the stock was worth $100 on the day your employer bought the shares in your name and you got a 10% discount so you only paid $90 a share and then you later sold for $115…
Seems like if you waited until 2 years from the beginning of the period (or 1 year from the end… whichever was later, but our periods were roughly 6 months, so 2 years from the beginning) then you got the whole $25 gain as a long term gain. But if you sold before then the $10 discount was ordinary income and the $15 gain was either a long or short term capital gain depending on whether you’d held it a year or not.
I feel like there’s some important detail that I’m forgetting though.
Also, don’t sell appreciated stock… donate it to charity.
I think maybe if you sold too soon the whole $25 is supposed to be ordinary income but if you wait then it’s supposed to be $10 ordinary & $15 LTCG. But it used to be that they didn’t put the ordinary on your W-2 and the Schedule D instructions don’t really address what to do so I would just call it all LTCG (which seemed to be correct based on a very literal reading of the Sch D instructions, but was probably not what was intended) and the IRS never said anything.
Nowadays I think the IRS polices the employers to put it on the W-2, thereby guaranteeing that whatever is supposed to be taxed as ordinary income is in fact taxed as ordinary income.
My compamy caps the amount you can buy. The discount is 5%. You accumlate for 6 months before the purchase. The amount of gain and 3 days of risk or whatever…not worth it for me.
The times I’ve had the ESPPs I was always bullish enough on the company to be willing to accept some risk. And I was getting a bigger discount than 5%, which makes it less risky. If you’re getting a 10% discount you only lose if the stock goes down more than 10%. If you’re getting a 15% discount you only lose if the stock goes down more than 15%.
But I’d sell or donate systematically in order to limit my exposure to my own employer.
I don’t think I was ever allowed to contribute more than 10% of my pay, and I never held the stock for more than 18 months, so I’d never have more than 15% of my pay invested as a basis, although if the stock increased in value then my stock account might have a value higher than 15% of my pay.
I’m self-employed now, so not an issue / not an option. I still have a few shares of various past employers since I stopped systematically selling once I left the company. One is way down (I left and the place went to pot) and one did fantastically well. Fortunately I sold a few shares of the one that’s currently down when it was close to its peak. Unfortunately I didn’t sell ALL of them at that point. But looking at all my ESPP activity I think the net is positive, especially on an after-tax basis.
I’m sensing a pattern here…
Different animal but similar concept: Restricted Stock Awards are pretty common here as a retention device when your company is taken over by a public company. There were many takeovers in both the consulting and insurance industries in the past few decades. I sold the RSA’s as soon as they vested.
Yes this is definitely the case, although it becomes a bit of a risk aversion question. Are you willing to accept an extra year of volatility for $y tax savings, where $y tax savings becomes more significant as your income grows and the difference between your income and capital gains rate grows.
My current company gives just 5% with a 6 month accumulation period (followed by ~2 weeks where the price is locked in but you can’t access the shares yet) so I don’t bother. My prior company gave 10% so I used to max that for the effective raise and the lock out period tended to be just a week.
I wouldn’t bother for 5%, for sure. I get 15% though so I’m all over that.
Yeah you’re accepting some risk, for sure. I deemed it an acceptable risk to hold long enough to maximize the tax benefits and then systematically dump it.
I am just curious if I have a vocabulary misunderstanding.
In my mind, an RSU (Restricted Share Unit) is not a share of stock, but an artificial “account” that mirrors the stock value and, upon vesting, is settled in cash and cash alone.
It seems you are actually awarded real shares, so those would not be RSUs, I think? Like there should be another name for those.
Maybe a valid question to discuss, that addresses the title of this thread, is what is the level at which the value you hold in your company’s stock (or any single stock for that matter) makes you uncomfortable with the risk of having too many eggs in one basket?
I propose that maybe be a number like 5% to 8% of net worth, or 6% to 10% of invested assets or something like that.
Mine are actual shares. Quick google says that is normally the case.
OK, thanks MA. My vocabulary understanding was an inexact match for the reality, tainted by the fact that I have only received my RSU payouts as cash. I technically could then use the cash to buy actual shares, but my company also has common, reasonable restrictions on trading in company stock. That’s more hassle than I want to deal with, so I roll the cash into broad mutual funds or ETFs instead.
I’d think that the percentage might vary depending on net worth or invested assets.
I’d think that guidelines might be based on a layer structure, something like this:
…but such guidance would need to somehow compare what you hold to an individual asset’s share of “the market”. I don’t know that it’s necessarily bad for someone with a $200k portfolio to hold 6-7% of it in AAPL – they’d have that if they just put everything into an S&P 500 based ETF or mutual fund. But if they held 5% in LNC (the lowest-valued insurer in the S&P 500, currently 0.015% of the index)…?
EDIT: Maybe if the percentages were framed as “proportion of wealth invested in individual stocks, assuming the balance is well-diversified” you could come up with a semi-simple rule of thumb.
Interesting ideas, M_S…
But are you suggesting
x > y > z > a > b
or
x < y < z < a < b
or even something more jumbled, like
z > b > x > a > y
all I know is everyone that’s ultra rich around me never sold their RSUs.
But I live in tech central so.
What about the guys you know that got ultra rich on their Enron stock?