Minimizing Tax Impact of RSUs

Minimizing Tax Impact of RSUs

March 28, 2024

Restricted Stock Units (RSUs) are a popular form of equity compensation, especially among publicly traded tech companies like Apple and others. As Sierra Pacific Financial Advisors is listed as a financial advisory for Apple employees, we have numerous clients with AAPL and equity compensation from other Bay Area tech companies (META, GOOGL, MSFT, WDAY, TXG, etc.). 

Minimizing the Tax Impact of RSUs: Tax-wise Strategies

Managing the tax implications for RSUs and other equity compensation is crucial. Here are some strategies to help you minimize the tax impact:

  1. Max Out Your 401(k):

    • Contribute the maximum allowed amount to your 401(k) on a pre-tax basis. For 2024, that’s $23,000 (or $29,000 if you’re over 50).
    • While this won’t directly reduce taxes on your vesting RSUs, it lowers your taxable income, keeping your tax bracket in check.
  2. Utilize Health Savings Accounts (HSAs):

    • If you have a high-deductible health plan, set up an HSA. Contribute pre-tax money that grows tax-free.
    • After age 65, you can withdraw from the HSA penalty-free (taxes still apply).
    • A family can contribute up to $8,300 in 2024.
  3. Dependent Care Flexible Spending Account (FSA):

    • If you have daycare expenses for a child, contribute to a Dependent Care FSA.
    • It indirectly reduces taxes on RSUs by lowering your taxable income.
  4. Understand RSU Tax Timing:

    • RSUs become taxable upon vesting. The full vested amount is taxed as ordinary income in the year of vesting.
    • Plan ahead for the tax bill when your RSUs vest!
    • Keep track of the cost basis (usually the fair market value at vesting) for calculating capital gains when you eventually sell the shares.
  5. Consider Long-Term Capital Gains:

    • When possible, hold onto your RSUs after vesting to benefit from long-term capital gains tax rates.
    • Selling shares after holding them for over a year can lead to lower tax rates.

Remember, proper tax planning can optimize the value of your RSUs and minimize your tax liability but has to be done ahead of time. So, plan ahead! Everyone's financial situation is different so consult your financial advisor/tax professional.

Also, once you own the equity it is not only compensation but it becomes part of your overall investment portfolio, so diversification is crucial for managing risk. Typically, no more than 5-10% of your investment portfolio should be concentrated in a single company's stock. Again, seek professional advice, such as from a fee-only NAPFA member, if needed to secure your best financial future as there are many options/considerations for diversifying concentrated stock positions; learn more about managing concentrated stock positions here.