What Are RSUs?
A Restricted Stock Unit is a promise from your employer to give you shares of company stock on a set schedule. Unlike a cash bonus you receive all at once, RSUs are delivered in installments — a process called vesting.
There are two key moments in every RSU's life:
- Grant date — your employer promises you a number of shares (e.g., 400 shares over 4 years). You own nothing yet.
- Vest date — shares actually land in your brokerage account. Now they're yours, and you owe taxes on them.
If you've heard of stock options, RSUs are simpler. Options give you the right to buy shares at a set price — if the stock drops below that price, options can be worthless. RSUs always have value as long as the stock is worth anything, because you receive shares outright.
Most public tech companies use equal quarterly vesting — the same number of shares vest every quarter over four years. Some use a cliff, where nothing vests for the first year and then a large chunk lands at once, with the rest vesting quarterly afterward.
Meet Priya
To make this concrete, let's follow a fictional character through her RSU decisions.
Priya, 32
Senior Software Engineer at a public tech company
Single filer • 4-year equal quarterly vesting • California resident
Priya's $60k annual RSU grant vests in equal quarterly installments — $15,000 per quarter. Let's walk through exactly what happens when those shares land.
How RSU Taxes Work
RSUs trigger taxes at two distinct moments, and confusing them is one of the most common mistakes people make.
Tax event 1: At vest — ordinary income tax
The moment RSU shares land in your account, the IRS treats their value as ordinary income — the same as your salary. For Priya's $15,000 quarterly vest, taxes are withheld immediately:
- Federal income tax: ~22% (her marginal bracket) = $3,300
- California state tax: ~9.3% = $1,395
- FICA (Social Security + Medicare): ~7.65% = $1,148
After all withholding, Priya keeps about $8,400 of that $15,000 vest — before she's made any decision about selling or holding.
Where Your $15,000 Vest Goes
Tax event 2: At sale — capital gains (or losses)
If Priya holds her shares and sells later, any gain above the vest-day price is a capital gain. The rate depends on how long she held:
- Held < 1 year: Short-term capital gains — taxed at her ordinary income rate (~31%+ combined)
- Held > 1 year: Long-term capital gains — preferential rate (~15–20% federal)
And if the stock drops below the vest-day price? That's a capital loss — which she can use to offset other gains, or deduct up to $3,000/year against ordinary income. This is actually a useful tax-planning tool, sometimes called tax-loss harvesting.
The Overlap Effect: Why RSU Income Grows Fast
Here's something that catches many people off guard. Most companies give a new RSU grant every year (called a refresher). Since each grant vests over four years, the grants start to overlap:
- Year 1: Only Grant 1 vesting → $15k
- Year 2: Grants 1 + 2 → $30k
- Year 3: Grants 1 + 2 + 3 → $45k
- Year 4: All four grants overlap → $60k (steady state)
- Year 5: Grant 1 exhausted, Grants 2 + 3 + 4 → $45k
At steady state, Priya has $60k/year in RSU income on top of her $165k salary. That's significant — and it means a lot of company stock is flowing in. If she doesn't actively sell, her portfolio quickly becomes concentrated in a single company.
Overlapping RSU Grants Over 5 Years
Each annual $60k grant vests $15k/year over 4 years. By year 4, all four grants overlap.
Sell or Hold? It's Not Black and White
You'll often hear “just sell your RSUs and diversify.” That's reasonable advice, but it's incomplete. Here's a more nuanced view.
The case for selling
- Concentration risk: Your salary already depends on this company. If the stock drops and layoffs follow, your income and savings take a double hit.
- After-tax shares are just “any stock”: Once you've paid the vest-day tax, the shares are no different from any stock you could buy on the open market. There's no special advantage to holding.
- Diversification reduces risk without sacrificing expected return: A broad index fund has the same expected return as any single stock — with far less volatility.
The case for holding
- You believe in outperformance: If you genuinely think your company will beat the market, holding is a rational (if risky) bet.
- Long-term capital gains rates: Holding for 12+ months means paying 15–20% on gains instead of 30%+. That's real tax savings.
- Tax-loss harvesting: If the stock drops, you can sell at a loss and offset other gains — a tool unavailable if you sell at vest.
The middle ground
Most people don't need to go all-or-nothing. A common approach:
- Sell enough to cover taxes and avoid a surprise bill
- Sell enough to fund priority goals (max out Roth IRA, pay down debt, build emergency fund)
- Hold the rest if you're comfortable with the concentration risk and want long-term cap gains treatment
To see how much the sell-vs-hold decision matters, let's look at four scenarios for Priya's existing $45k in company stock over 10 years:
Priya's $45k in Company Stock After 10 Years
Key insight: The first two scenarios produce the same return—but only the diversified one eliminates single-stock risk. Holding is a bet that your company will outperform the entire market, while your salary already depends on that same company.
How MoneyOnFIRE Handles RSUs
MoneyOnFIRE doesn't treat RSUs as a side note — they're integrated directly into your FI simulation. Here's the three-step allocation the engine runs on each vest, using Priya's numbers:
Taxes first
~$26,400/year is earmarked for federal, state, and FICA taxes on $60k of vesting income. This happens automatically — no surprise tax bills.
Priority goals
After taxes, the engine checks whether selling additional shares can fund high-priority goals. For Priya, that might mean selling $7,000 to max her Roth IRA contribution for the year.
Retain or diversify the remainder
Whatever is left after taxes and priority goals follows the user's chosen strategy — either hold as company stock or sell and reinvest into a diversified portfolio. MOF models both paths so you can see the impact on your FI timeline.
Key Takeaways
- RSUs are taxed twice — as ordinary income at vest, and as capital gains (or losses) at sale. Understanding both events is essential.
- Overlapping grants compound fast. With annual refreshers, your RSU income can reach steady state (4x one grant) within a few years. Don't let company stock accumulate unintentionally.
- After-tax vested shares are just stock. There's no special reason to hold company stock over a diversified index — unless you're making a deliberate bet on outperformance.
- Concentration risk is real. Your salary and your stock shouldn't both depend on the same company unless you're comfortable with that exposure.
- Cover taxes and goals first, then decide. Sell enough to avoid a surprise tax bill and fund your priorities. The rest is a personal risk decision.
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