Hi Everyone, and welcome to the Wiser Financial Advisor Show with Josh Nelson,
where we get real, we get honest, and we get clear about the financial world and your
money. This is Josh Nelson, Certified Financial Planner and founder and CEO of
Keystone Financial Services. Let the financial fun begin!

Josh: Today I’m speaking with Jen Walenter. We are two of the wealth advisors here at
Keystone Financial Services and really excited about the topic today. This is something
we run across daily because of who we deal with, right?

Jen: Absolutely.

Josh: You and Michael are in the process of becoming Certified Financial Advisors
(CFPs). This is a relevant topic, right? Not only because of who we deal with, but also
because of the body of knowledge we need to have as wealth advisors.

Jen: Absolutely. The hot topic of today is RSUs, Restricted Stock Units. And we know
there are a lot of questions around that. We have clients in the tech industry who get
things called RSUs and we get questions about, “What are they? What does this mean
for me?” So we want to dig in deeper as to what we know about them.

Josh: Yeah, so RSU stands for Restricted Stock Unit (for those of you who aren’t
familiar). If you work for a company and you’re getting them, I’m sure you know what it
stands for because it usually ends up being a significant part of people’s compensation.
Sometimes they’re called other things. Sometimes PSUs or Performance Stock Units where they could be tied to the performance of the company or even a person’s job performance or department performance. Way back when I started in this career 27 years ago, more often people got company stock or options in their stock purchase
plan, if they got anything. Most companies now have pivoted to Restricted Stock Units.
What they are is the company giving you shares. But as you can tell from the name of
the RSU, restricted means there’s some sort of a restriction on it, which typically involves time. The advantage comes with what clients sometimes call golden handcuffs
because they’re restricted over a period of time. Usually when you leave the company,
you lose whatever has not vested. Let’s say for example, you might get 1000 shares of
your company’s stock. Right off the bat, if it’s a Restricted Stock Unit, that probably
means it’s worth nothing initially. There’s nothing you can do with it right away, but
there are what’s called vesting periods. Those would be, say, quarterly or annually. It
usually will be over a certain number of years. The reason it gets called golden handcuffs is because if you jump ship and go to another company, you lose those
shares. They’re trying to prevent people jumping into the competition, right? Or in some
cases, trying to get people to keep going instead of retiring because there’s so much
money they’d be leaving on the table. Especially if the company stock has been a rocket ship, like Broadcom or Google for example, the stocks have done so well it does end up being significant to make the decision to leave.

Jen: So it’s essentially like a promise of “We are going to give you these shares but we’re not giving them now.” And so there’s usually something called a vesting schedule
where they are granted to you. What can you tell me about how that affects taxes?
Because that’s a big question we get regularly: “I am given these shares. How does it
affect my tax situation?”

Josh: Yeah, that’s a big consideration for people, although it’s nothing you can control, because it gets treated as ordinary income. Let’s use a simple example of what
happens when those shares become unrestricted. We’ll say somebody received 1000 units or 1000 restricted shares. Maybe the first 12 months they’re completely restricted and you can’t do anything with them. And then they may vest over a four-year period
after that, let’s say annually. So each year, one fourth of those shares or 250 units
become yours. But what ends up happening is that they’re treated as ordinary income then, so it runs right through your payroll. You see it on your pay summary. You see it on your W-2 at the end of the year. You might wonder, well, how do you pay those taxes?
The way most companies handle that is to withhold some of the shares you would have
received. Simple example, somebody receives 250 shares that have now become vested. The company may end up withholding 50 of those shares, and using that money to pay, say, the federal government or state income tax or maybe payroll taxes. Social
Security and Medicare taxes do apply to that situation because it’s treated as ordinary
income.
Something to be aware of is that you may see a hypothetical value of what those are
going to be valued at when they become unrestricted, but you need to be aware you’re
not going to get all of that. Not all of that is going to hit your checking account because
of the withholding. Different companies have different policies on this. Sometimes
people can control how much is withheld, sometimes they can’t. And so if you can’t control it, could be that whatever they’re taking out is way over-withholding, and you’ll
get money back from the IRS. More often we see cases in the other direction where it’s
not enough. They end up withholding a bunch and then you still owe more, especially if you fall in the higher tax brackets or you live in a high tax state like California.

Jen: Right, Well, that leads to people saying, “If these might affect my tax situation, maybe I should hold on to all of them. Maybe I shouldn’t do anything, let it affect my taxes as low as possible, and let the stock grow.” What are possibly some downsides to holding a lot of this company’s stock in someone’s portfolio?

Josh: Yeah, well, the upside, of course, is if your company’s stock does really well and beats the rest of the market, then you’re way ahead on that. We’ve seen a number of
circumstances where that’s worked out well. We’ve seen others where it hasn’t worked out so well because somebody kept accumulating shares when those shares became
unrestricted. That’s when you have a choice of what to do with them instead of starting to sell them off, right? And people will hold them. They build up. Early in my career at Hewlett Packard was my entrance into the tech financial industry. For years and years,
the company’s stock did way better than the S&P 500. They did phenomenally well. The
company kept doubling and splitting. If you were an employee, you never sold your shares unless you had to. A lot of people were planning on that to fund their kids’
college education or to retire on or to pay off a mortgage or something like that. It worked out well until it didn’t, right? Then things went bad. Some of you might
remember the buildup of the tech stocks through the late 90s, early 2000s, and then the
tech bubble burst and the stock went down 70, 80%, something like that. There were a lot of people employed with companies that don’t exist anymore, companies that went bankrupt. Many of the dot coms, for example. So the challenge is that people can get
emotional about this, right? Money can be an emotional topic.

Jen: Yep, absolutely. And like you were saying with your ties to HP, there is an emotional piece tied in to that stock doing well, wanting to hold on because of the
potential growth. The emotional side comes in saying, “I worked for HP and they gave me the beginning of my career.” So that dynamic is one that people battle all the time when they’re deciding on what to do with these stock options.

Josh: Yeah, and there’s some confirmation bias in there too, because if that’s what everybody around you has been doing; let’s say all your coworkers have been doing
that for years, the stock keeps adding up, and you’re seeing people pull up in fancy sports cars in the parking lots and so forth. It can seem like, why would you ever sell?
But then as we’ve seen, you can end up with 90% of net worth is in that one company stock. Everybody has a different risk tolerance, certainly, right? So if that’s what you’re
doing and you’re willing to absorb risk, just recognize that it could go the other way.
Right now we can use Broadcom stock as an example. We have quite a few clients who
work there. And where we sit right now, the stock is down quite a bit. If you look back a
year, the S&P 500 would have done better than that one stock. Usually, that hasn’t been the case. Looking over the last 10, 20 years, that’s almost never been the case.
But if you needed money right now, that’s the key. If you were planning on using money to send your kid to college or something like that, the stock may be down 20% and yet you’re forced to sell to fund what you planned. So, be mindful of what your true time horizon is, number one. And do you have the risk tolerance to go through the type of swings that any single stock can have?

Jen: So if you are granted RSUs, the question comes up, “How do I effectively plan for
my immediate needs, potentially planning for five years, 10 years, 20 years out? What
would be a good strategy approaching RSUs within my portfolio moving forward?”

Josh: And of course it’s an individual journey for each client, each family. That’s why it’s
important to have someone you trust to work with you. Having a fiduciary you can trust to talk through this, who’s looking out for your best interests. It depends on the client, but many go ahead and sell when the stock becomes available. Companies are smart
and they want people to stay, so they continue to give you new rewards every year with a new vesting schedule. Then whether you’re quarterly vesting or annually vesting, it becomes painful to jump ship and go to another company. That company will have to
write a massive check to give that new employee the incentive to move. The same applies to retirement. Some of our clients have been able to retire for years but they
don’t because it’s like, “Gosh, if I worked another three months…”

Jen: Those golden handcuffs you mentioned earlier.

Josh: Exactly. So it’s a good problem, a really good problem to have. For many of our clients, a conservative way to handle this is: as each vesting comes up, the company will withhold taxes, so you turn right around, sell the shares, and do something else with the money. Something else could be getting your financial house in order. We always
recommend having an emergency fund of three to 12 months’ worth of living expenses.
We recommend you get all your debt paid off and sometimes even pay off the mortgage early. After that, we start talking about wealth accumulation, being more diversified,
probably putting money into funds or a bunch of stocks instead of just the one stock, to
spread out the risk. Also we recommend being mindful about time horizons. Do we
need to be funding college accounts or funding a non-retirement investment account?
Restricted Stock Units are outside of a retirement account. That’s why we’re talking
about tax implications. Many of our clients would want to have the choice to pull money out if they wanted to retire before age 59 and a half, which is the magic age when you
don’t get penalized once you start drawing out of your retirement funds. Retirement funds are great because of tax incentives, but one of the downsides is you really can’t access that money until you hit age 59 and a half or above. So let’s say somebody has
a goal of retiring at 53, we’ve got to have other money that sits outside of retirement accounts, a taxable brokerage account building up, not just one stock.

Jen: And so is there anything else you can say about the current clients we assist with RSU planning? Any other pain points people have brought up with RSUs that they wish they’d known about before selling or keeping them?

Josh: Yeah, what jumps out is people who have let the shares accumulate over the years. If the stock price has done great, somebody might be looking at a situation where they’ve got 20%, 50%, 90% of their net worth in that one company stock. It’s a lot of
eggs in one basket. Sometimes a lot of eggs in one basket can be lucrative, sometimes
not. If someone is at that point of trying to decide, ”What do I need to do here to reduce
my risk and get diversified?” know that there will probably be some tax implications

because when the Restricted Stock Units vested, that gets treated as ordinary income.
Whatever the value of the stock was on that day, it was treated as ordinary income.
Anything that happens after that is going to be at a capital gain or loss. So, if the stock
price goes down from then, you would be able to claim a capital loss. There are rules
around that which are beyond the scope of our talk today. And of course, if the stock
price continues to go up, then you’ve got capital gains taxes to look at. So, the nice thing about capital gains rates is they’re much lower than ordinary income rates in most circumstances, but it requires thoughtful planning around taxes. We spend time on that,
especially this time of year. We’re doing a lot of tax planning for clients.
We don’t do your taxes. We’re not like filing them. But Jen, you and Michael have been
working on tax projections and so forth. Coming up with a plan is a good idea to take
the emotions out of it and set targets for how much exposure to keep in any one stock.
That’s an individual journey depending on risk tolerance, but probably no more than 10,
15, maybe 20% in one company’s stock, then diversify the rest, have it spread out. If
you want to keep the stock for opportunity’s sake, it may be that you end up selecting a
percentage. There are some tax-aware ways of doing that, also beyond the scope of today’s talk. There isn’t really a way to avoid the taxes completely unless you die with that stock, because then there’s a step up in basis unless you have an estate tax issue
or if you donate it. In some cases we’ve used donor advised fund investments to reduce
or eliminate capital gains tax.

Jen: Absolutely. We’ve had a couple clients in the past say, “I don’t really need this
money and I am of a charitable nature. So I would love to donate the shares with a low
basis. How can I do that?” And we help them figure out a plan to donate those either
every year or as a one-time thing.

Josh: And from a charity standpoint you can say, “I don’t want to die with this, so I do need to start selling it off.” It’s a matter of doing tax projections, looking at what does
this mean, how is this going to affect my tax situation now and in the future—and set targets. The other thing you can look at is some strategies available that have limits, higher dollar limits typically than a normal portfolio. For somebody with millions of dollars in one stock, there are strategies that can help reduce that or ways to use tax loss harvesting with losses in other parts of the portfolio. Doing that might mean it takes time over years to sell off the stock.

Jen: Okay, thank you. This information has been super helpful. I feel like we’re all walking away understanding RSUs better. So what would be the natural next steps for somebody who isn’t sure what to do at this point.

Josh: I think the most important thing is to have a plan. You might be doing this on your
own. Most of our new clients have never used an advisor or fiduciary before. You might
be comfortable with that at this point. If you would like somebody to partner with, certainly we would love to sit down with you. The one thing I would caution people on is to make sure whoever you’re going to be partnering up with as an advisor has your best
interests legally in place as well as having the tools, knowledge, and background to assist with what you want to do. It is important to look at the CFP. In my opinion, that’s the gold standard in the financial planning industry. There are a bunch of other designations and degrees and things like that, but the CFP is comprehensive and the most widespread to look for and ask about. You want to know you’re partnering with
somebody who knows tech as well, if you have a tech employer. Maybe you work for some other company that has restricted stock, but make sure an advisor has
experience working with those types of investments and that they do tax planning.
That’s a critical part of this whole thing, understanding employee benefits. If you’re self-
directing, you’re going to need to get good at this and do your own homework and strategizing.
In the broader context, it’s always good to go back to the big picture. What are we here to accomplish? So when we sit down with somebody for the first time, or if you’re doing this on your own, it’s important to go back out to the 30,000 foot view and then before
getting tactical, ask what are we trying to do here? “Is this for my own financial freedom
someday or retirement? Is this to pay for college education? Have we done the math on those goals? Do we know?” Let’s set some targets. Obviously, nobody knows what they’re going to spend in retirement. No crystal ball, but it’s possible to set reasonable
targets. We can ask: “If it was today, how much would I want to be able to spend? Will I still have a mortgage at point? Will I need to think about health insurance because maybe I’m not old enough to get Medicare?” Coming up with a comprehensive plan
looking at all the aspects of your finances including RSUs or any other employee
benefits is just a smart way to approach this. Whoever you’re working with or if you’re on your own, you need to understand the ins and outs of how the tax rules work from a practical standpoint. A benefit of working with an experienced fiduciary, somebody who’s been around for a while and has seen good stories as well as bad, can point you in the right direction, not just in theory. Then once we figure out what the overall plan is,
come up with a strategy around these benefits. Set up what you’re going to do as an actual habit so that if you’ve got quarterly investing or annual investing on your RSUs, you’re not sitting there thinking, I don’t know what to do this time. That’s not a good
answer. Let’s have thought it through ahead of time so you don’t have to think about it. You just do it. So, for example, if you have quarterly investing, every quarter you sell the shares that become available, then set the money aside for taxes and clean up any financial stuff if the stock fell.
Sometimes this can all be fun. There’s no shame in going out and buying a nice car or going to Hawaii or something like that if you’re in a position where some of the money could be used for fun. In the longer-term planning, we set those targets. How much do we need to put aside each year to be able to do what we want to do? Getting that money diverted, having a portfolio strategy, we know where it’s going to get invested. The key is having a thoughtful plan. For the people who come to us, the one thing that
tends to be the scarcest thing in their life is time. They don’t want to screw things up, so
they want somebody who knows what they’re doing. It’s a time machine, right? When you pay somebody else to do something, especially something time-consuming, there’s value in that.

Jen: There is absolute value in that. Well, thank you, Josh. This was helpful.

Josh: Yeah, it’s been fun. My last word is to recommend that you start planning as soon
as possible. Sometimes people think, “I don’t have enough money to plan; it’s too early.”
It’s not too early. I was in college when I did my first Roth IRA contribution and it felt like a lot of money at the time, right? Because I didn’t have a lot. But I had a part-time job
and put some money in a Roth IRA. So glad I did. One thing we hear repeatedly especially from people further down the path as advice to the younger generation: Start
as early as possible.

Jen: I wish I had started earlier. We hear that quite often.

Josh: So yeah, wherever you’re at, we’re happy to help. We’re here as a resource. I appreciate you listening today and have a wonderful week. God bless.

We love feedback and we’d love it if you would pass it on to me directly at
josh@keystonefinancial. com. Also, please stay plugged in with us, get updates on episodes, and help us promote the podcast by rating us 5 stars and subscribing to us at Apple Podcasts, Spotify, or your favorite podcast service.
The opinions voiced on the Wiser Financial Advisor show with host Josh Nelson offer
general information only and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you,
consult with your attorney, accountant, financial or tax advisor prior to investing.
Investment advisory services offered through Keystone Financial Services, an SEC
registered investment advisor.