Understanding Company Stock Options

We break down RSUs, PSUs, and ESPP stock compensation so you understand what you own, when taxes hit, and what choices you actually control. We also share a practical framework for deciding when to sell, when to hold, and how to avoid getting overexposed to your employer’s stock. 

• How RSUs and PSUs work and why companies grant them 
• Common vesting schedules and what “vesting” really means 
• Why RSU taxes are triggered on the vesting date and flow to your W-2 
• The two post-vesting choices that matter most, hold or sell 
• Short-term versus long-term capital gains and why the one-year mark matters 
• How your income level and household situation change the best strategy 
• How ESPPs work, including payroll purchases and typical discounts 
• ESPP tax timing, including the one-year and two-year holding rules 
• Concentration risk with company stock and a 10% net worth rule of thumb 

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Transcript

Who Stock Comp Applies To

Speaker 0:16

Hello everyone, welcome back to Stansell Wealth Planning Podcast. I'm your host, Cody Stansell, certified financial planner. Thank you for taking time out of your day to join us for today's episode. Today's episode is actually a two-part series, two-part episode about stock compensation. So, very typical example of if you do not have any kind of stock compensation, RSUs, restricted stock units, stock options, employee stock purchase plans. If you're not, if you have none of those, this may be a very boring podcast episode for you. You may want to skip it, or send it to your friend that does have stock options or restricted stock, any kind of stock compensation at work. But if you do have this kind of compensation, very valuable episode, right? So listen in the two-part series, we will go. There's just so much, all these plans are slightly a little bit different. So today we'll be on restricted stock units, almost like uh performance stock units, so PSUs, RSUs, and then ESPP plans, employee stock purchase plans. So we'll go over those two in this episode. And then next week we'll dive into actual stock options because there's more moving parts there. And so we'll divide these into two. Anybody, even if you don't participate in any of these plans, if you know someone that does, family, friend, coworker, whatever it may be, send this to them. Very valuable. These plans are very confusing. It's like taxes, no one ever teaches you about this. And then one of these days you're in middle management or upper management, and hey, here's some stock options. And you say, Okay, what do I do about this? How do they affect my personal situation? You might have a coworker that says, Oh, yeah, you got to do this and this. And that might be great for what they are doing, but everyone's situation is a little bit different. Your income, your personal situation, spending, cash flow, how much of the company stock you already own. That's a big factor,

RSUs And PSUs Explained

Speaker 2:18

too. So there's a lot of moving parts. Don't this is the world of gray. Don't just take advice from a coworker or a friend that has these stock compensation plans to get personalized advice because everyone's situation is a little bit different. So let's uh let's dive in. The first is restricted stock units. Okay, so RSUs. Some employers call them performance stock units or PSUs. There are some differences, but the concepts is the same. We'll go through this section and I'll cover both of them here. So, what what are they? Your employer wants you to have some skin in the game in the company, right? They want your performance at work to be for the overall company good and for you to benefit. And the stock, if the stock goes up, that you benefit from that, right? So they just want you to be on the same team. There are several terms, different terms used for these types of compensation. I'll use the words like grant, vesting, control shares, expiration. There's a lot of different terms and lingo. Don't get confused, we'll walk through it. And I'll give you some strategies at the end too. What should you do with your shares? How do the taxes work? We'll go through all of it. So with RSUs, restricted stock units, you are granted shares. Okay. And if you stick around the company long enough, those shares will be awarded to you. What is the time frame that I have to stick around, you might ask? This is what's called your vesting schedule. So every company has a little bit different vesting schedule. The most common that we see is usually over a three-year period. So a third, so 33% over those next three years. That's the most common. The next most common is equally over a five-year period. So think of 20% for the next five years is a very common vesting schedule. Once again, check with your company, your particular plan, they're all gonna be a little bit different. So let's say you are granted 150 shares of your company stock, let's say on March 1st, 2026, okay? And you have a three-year vesting schedule. That means you will be awarded 50 shares March 1st, 2027, March 1st, 2028, March 1st, 2029, right? So hear me. RSUs and PSUs, you do not control your taxable event. Okay? When March 1st rolls around, you will be awarded these 50 shares. And whatever the stock price is on that exact day on March 1st determines how much you'll pay taxes on your taxable event. So if there are if your shares could be worth $20 per share most of the year, and just hovering around there, but for some reason on the exact day on March 1st, let's say they're worth $40 per share, then you will have to pay ordinary income tax on $2,000, right? So your 50 shares multiplied by $40 per share in this example that I'm just giving you, whether you're whether or not you want to, whether or not you sell them, whether or not you realize any of that value, that is what your taxable event is going to be

Vesting Schedules And Tax Timing

Speaker 5:30

is March 1st when you're when you're vested in those shares. Okay. So that $2,000 of taxable income flows through to your W-2 at work, and your normal tax withholding, your 401k contributions, all that will be the same. Okay. So let's fast forward. Now you have two options, right? You can keep your shares. Now I have 50 shares of my company stock. You can keep them. You can absolutely do that. Or you can sell them, right? There you really have two options, keep them or sell them. They're yours now. You can do whatever you want with them. Before you vested, aka before March 1st, you can't sell them. You don't own them. They're not yours until you vest on March 1st, in my example. If you keep your shares, now you enter capital gain territory. Meaning if you share your sell your shares within 365 days of the day that you vested. So once again, that's like March 1st of 2027, March 1st of 2028, March 1st of 2029, those are your vesting dates, right? You just owe ordinary income taxes on any growth. So if three months later the shares grew to $50 per share and you sell all 50 shares, you'll just owe regular income tax on the $500 of growth that you had. So let me share my screen. I give you a simple example. Once again, I apologize for anyone that's not watching this on YouTube. If you're just listening to this, you won't see this visual. But let me share it for the people that have. To give you a visual, let's say you were granted these 150 shares on March 1st, 2026. And your particular company's vesting schedule is a three-year-third. Okay, so fast forward March 1st, 2027. You invest, you vest in 50 shares and whatever the stock price was on the exact that exact day, March 1st, 2027. In my previous example, I said $40 a share. So there is your W-2 just taxable income of $2,000. Right? We can all do basic math. $50 shares at $40 per share is $2,000. Once again, let's say three months later, the shares grow to $50 a share. They went from $40 to $50, $50 per share. And then you say, yeah, I want to sell them. Okay. You can sell them. You can also sell all 50 shares. And it basically they grew $10 per share. All right. They grew from $40 when you invested in them to $50 when you're going to sell them. And so you're just going to owe short-term capital gains on $500 of growth, right? That $10 spread between $40 and $50. Okay. I usually recommend for folks, if you are going to keep your company shares, to keep them at least one year. And I'll get into why tax-wise. Or if you're if you do not want to keep them and you venture in them, go ahead and sell them. Okay. Because if you invest at $40 a share, you end up selling them at $40 or $41, your tax situation is not going to be very different, right? Because the sooner you sell it, the less fluctuation, most likely, and the stock price will occur. So either when you venture in your shares, either keep them at least one year, or when you invest in your shares, go ahead and sell them immediately. Take the cash, let's go have fun or buy different diversify your investments. I go through some other examples of what to do with your company stock here in a little bit as well. And reminder, your income, when I say that you will be taxed at your ordinary income rate, I get clients asking all the time, okay, what is the tax rate for these kind of stock compensation plans? Reminder, your other income dictates how much taxes you will pay. So if all of your other income from a job is $50,000 a year, let's just say as an example, you're probably in the 10% or 12% tax bracket. So you would owe 10% or 12% on this $2,000 example that I gave you. Okay. But if you make $500,000 a year, you're probably in the 32 or 35% tax bracket. So you will owe 32 or 35% tax

Selling Versus Holding After Vesting

Speaker 10:05

on this $2,000 or $500 gain, right? So your other income, the IRS rolls this taxable income. Okay, you had $2,000 of stock compensation. They roll it in with all your other income to dictate how much taxes to take out. Okay. So your situation may vary. The strategy that you should employ may vary greatly from your coworker or your neighbor or your friend because y'all might just be in different tax situations. One of you might be married and your spouse has an income, the other person isn't married, so your tax situation could be drastically different. So don't just get advice from your buddy because your situation is going to be different than his. Why? Because you get a better tax rate if you sell your shares and you've waited at least one year. Those are called long-term capital gains. Okay. Most of my clients are in the 15% long-term capital gain bracket. So if your other income from a job or other sources is $99,000 or more if you're married, or $50,000 or more if you're single, you're in the 15% long-term capital gain bracket. If you make more than $600,000 as a married couple or $533,000 single, then you're in the 20% long-term capital gain bracket. But most of my clients are in the 15% bracket. Much better rates than your normal rate, 22, 24, 32. So if you can wait to sell your shares at least a year after you vest, you will have the $2,000 taxable event in my example from earlier. You can't control that. But the okay, how much do I sell my shares for? Either sell them immediately or wait another 365 days, you get a better tax rate. Okay. So your decision on RSUs is only after you bec you become vested in them because everything before that is out of your hands. You don't control your taxable date. Okay. Once you invest in your shares, that's your taxable event. So what you can only really focus on is the real question is once I invest in my shares, should I hold on to them or should I sell them? Okay. That once again, that comes back to your tax situation, your personal situation. Do you need the cash? Do you not need the cash? How much company stock do you already own? Or how much are you entitled to with future RSU grants or stock options? That decision is also affected by your company's particular stock. Is it a volatile stock? Is it not? Is it pretty smooth sailing? So I recommend once you vest, you either go ahead and sell, go ahead and keep them or go ahead and sell them immediately once you vest or hold on to them for at least another year. For the long-term capital gain bracket, once again, let's say you vest March 1st, 2027, in these 50 shares. Okay, I'm gonna reshare my screen if you're listening at home. So for the long-term capital gains, once again, once you vest in your shares, that $2,000 is out of your hands. You can't you don't control that because that's what was the stock price from the day that you vested. But in the future, now you own these 50 shares. If you at least if you wait at least 365 days to sell any or all of these 50 shares, this is where this number you can either decide to pay ordinary income tax,

Long Term Gains And Concentration Risk

Speaker 13:55

which once again is affected by your other income, or if you sell it at least 365 days after you vested, then you will receive you will pay 15% tax on this growth. So once again, in this example, I just said June 15th, later that year, so you haven't owned them at least 365 days, you decide to sell all of your shares and they grew to $50 a share, you are still gonna owe ordinary income tax on this $500 of growth. Whereas if you waited, and it's March 2nd, 2027, or 2028, excuse me, and these shares are worth $70 a share now, let's say, now you can sell all of your shares and you will have a capital gain of $1,500, but you'll only have to pay 15% on that $1,500 compared to 22, 24, 32, just depends on your situation. Okay. So it pays to be patient, it pays to wait, but I do have a lot of clients that have a lot of company stock, right? Because their RSU shares what they've already been invested in, and they know once again, okay, I have another third coming next year, and another third coming after that. And then next year I'm probably going to be granted more shares. And so it starts growing, it starts accumulating, expanding, expounding, excuse me. So if you feel like you own too many shares or you have a lot of exposure already, it might make sense to go ahead and sell them, re-diversify, pay off some debts, pay it towards your mortgage, diversify into some other investments. It really just depends on your personal situation.

ESPP Discounts And Quick Sales

Speaker 15:40

So now that we're past RSUs, now on to ESPP plans, employee stock purchase plans. This type of plan usually has different, slightly different names and titles. Some companies call them employee share purchase plans, some call them associate stock purchase plan. Any kind of purchase plan language will refer to this type of plan that I'm gonna refer to. Also, don't be confused this type of plan with an ESOP, an ESOP or an employee stock ownership plan. That is a different animal, different set of rules. Probably needs its own podcast podcast episode. But for today's sake, I'm gonna go through employee stock purchase plans. So an ESPP is where a company allows you to purchase shares of your company stock at a discount. That discount is up to the company. Most common that I see is 10%, 15%. It's up to the company. So you get to buy your company stock at a discount, and it's usually run through payroll. So you can just sign up, use your own money from your paycheck, buy the company stock at a discount. Yay, all sounds great. Then you can sell your shares whenever you'd like. I have seen some companies that have a holding period, they mandate you wait before you can sell. So check your company's policy directly. But in general, you can sell them, sell your shares right after you buy them. Keep in mind you bought at a discount, though, right? So if you sell pretty quickly after buying them, you're most likely selling them for higher than you bought them for, right? Because you bought them at a discount. And since it's within 365 days after you bought, then you'll owe ordinary income tax on those gains. But if you wait at least 366 days, like we talked about earlier, then they turn into a long-term gain, and therefore at the better rates that we talked about. Also, keep in mind ESPPs come with another timeline caveat. You need to hold the shares at least one year, 365 days after you bought them, and they throw in another timeline rule at least two years after they enter the offering date, the offering period. So not to confuse you, but the 10 to 15% discount is usually set a set price for a certain offering period. Either the beginning or the end of a quarter is most

ESPP One Year And Two Year Rules

Speaker 18:05

common that we see. So let's say the offer period is from is last quarter, January 1st through March 31st. So the company has to decide to make the 10 or 15% discount on what the stock was trading for on those particular days. So you need to wait at least two years after those dates before selling your shares to get the better long-term capital gain rate. And don't get confused, you can sell your shares, you just don't get the better tax rate. So you have to qualify for those two: the one year after you actually bought them, and then two years after the offering date to get the better tax rates. So one thing to keep in mind as well if you have RSU, stock options, ESPP, any other company stock, how much is too much? Right? I brought that up a little bit earlier. Rule of thumb: don't have more than 10% of your net worth or your net investment base in one particular stock. It's just too much concentration risk. So if you're worth a million bucks, don't have more than 100 grand in one particular stock. Okay. Also, this company stock, you work at that company, so your paycheck also comes from this company. So if the company gets in any kind of trouble, the stock price is going to go down and your risk of being laid off or not getting your bonus, your financial situation is more tied up in this company. So that's even more concentration. Okay. So how much existing company stock a client has helps guide okay, you vested in these shares. Should you go ahead and sell them? Should you keep owning them and own them at least a year to get better tax rates when you sell them? It all plays into one another. And once again, I hate to say the world is gray, but it is. Everyone's situation deserves to be to sit down, look at the entire plan and the entire situation before offering advice on what your particular client should do with their shares. So this is definitely not a one size fits all. Um, it's not investing your IRA in an index fund and set it and forget it. It's a lot more moving parts, uh, especially as the years go on and when you're granted shares, the shares are different each and every year, right? So your personal situation could change every single grant date. So hope that helps. I know it was

Personal Advice And How To Reach Us

Speaker 20:22

a lot of information. At the end of the day, if you have any of these types of plans, please reach out. This is what we one of our expertise. I have a lot of experience with stock compensation plans with a lot of my clients. So please reach out with any questions. Once again, Stansell Wealth Planning Podcast. I appreciate your time today. Cody Stansell Azure host, reach out to us 469-606-2040, or you can go to our website, stansellwealth.com. Thank you all. Thank you for listening to the Stansell Wealth Podcast. This podcast is for informational and educational purposes only. It is general in nature and may not apply to your specific situation. Please consult with a professional before acting on any information shared in this podcast pertaining to financial, investment, legal, or tax advice. The views expressed by Cody and his guests do not necessarily represent those of Charles Schwab, Victory Financial Group, or any other organization.