The decision of whether you sell or hold the shares depends on various factors. Some of them are under your control.
- Taxes. Shares can be a source of the proceeds needed to pay taxes at vesting, whether through tax withholding, mandatory share surrender, or net share settlement.
- Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting.
- Your cash needs, upcoming life events, and other financial-planning factors, including diversification, dividends paid on your stock, and alternative investments.
- Whether your company is publicly traded or privately held. At public companies, be aware of blackouts when you can't trade or stock ownership/retention guidelines that require you to keep a certain amount of company stock. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales.
Calculations in the Restricted Stock & RSUs Comparison Modeling Tool on myStockOptions.com can help you decide. If you are not comfortable with making these decisions on your own, discuss strategies with a financial advisor. This is particularly useful if you are thinking about holding the stock at vesting and company shares represent at least 10% of your net worth.
Alert: If your company requires formal acceptance of the grant agreement, the delivery of the shares at vesting may be suspended until you accept it.
Whether you sell or hold, you will owe taxes on the value of the shares at vesting, when the shares are delivered into your brokerage account. At least for federal tax purposes, the withholding is required to be at the rate for supplemental wages (usually 25%, though it is 39.6% for aggregate amounts above the level of $1 million during a calendar year). In addition, there will be Social Security tax up to the yearly maximum, along with Medicare (plus any state and/or local taxes on this type of income).
Alert: If this rate is insufficient to cover the tax imposed by your federal and state marginal tax rates, you may need to pay estimated taxes.
As mentioned above, you will need to decide how you will provide the taxes that must be withheld. The choices may include using cash, selling enough shares to cover the taxes (a sell-to-cover), or share withholding (i.e. some of the shares are held back for the taxes). Your company may have a mandatory withholding method, in which case you don't have to make a decision, or it may have a default that it will use if you do not elect your withholding method by the deadline.
Facts And Expertise To Help You Decide
The section Restricted Stock at myStockOptions.com has in-depth articles and FAQs on financial planning with these grants that can help you decide what to do at vesting. Eyes tired? Don't want to read? We don't blame you. myStockOptions.com also has podcasts and videos on restricted stock/RSU topics.