How do I Diversify My RSUs Before Retirement? [Video]

Retirement planning can be complicated if you have Restricted Stock Units. In this video, we explain how ESPPs, Blackout periods, and the Wash Sale rule all shape when and how you can actually diversity your RSUs before retirement.

Video Transcript

Hello, my name is Michelle and I’m a financial advisor here at Financial Design Studio. We help business professionals retire in a tax efficient way. If retirement is getting close for you, we have a free retirement guide that you can download, which is linked below.

Now, in today’s video, we want to talk about the layers of complexity with diversifying RSUs. First, we’re going to talk about what they are, how they’re taxed, and then dive into the specific ways you need to plan for your RSUs before retirement.

What are Restricted Stock Units?

Restricted Stock Units (RSUs) are an additional layer of compensation, in the form of company stock, that employers give to reward valuable executives.

So congratulations, you have received restricted stock units! This means that you are an executive that your company wants to keep around or you play a meaningful part on your team and in your role. This is additional compensation you’re getting with your salary and other benefits you receive.

There’s really three main things that you need to understand with RSUs. They GRANT, they VEST, and then you can INVEST. If you’re looking for more information on RSUs specifically and how they work, check out our other article. But today we’re talking about how RSUs affect your retirement planning.

But the biggest thing that you need to understand is this is real money. These are shares that you’ve been given, even if you need to wait until they vest, this is real money. RSUs are real compensation for you.

How Are RSUs Taxed?

Once the shares vest and are yours, you have to pay tax on the full vested amount, just as if it was income. Like with your paycheck, so your employer will withhold from that vested amount a percentage for taxes.

Now something you want to pay attention to is the percentage of taxes that are being withheld. They might be different than they tax bracket you are actually in. So it’s really important that you know how much will be withheld that way you can actually do tax planning at year end.

After you’ve paid these taxes, your cost basis is established, that is the amount you paid for the shares. So if you sell your stock shares right when they vest, there isn’t any gain or loss. No taxes are due at that point and you can use that cash to fund whatever you would like.

But if you don’t sell them, and keep them invest, you will have taxes due at a future date. If you hold these positions more than a year, you pay long term gains when you sell then. If it’s less than a year, you will pay short-term capital gains.

How Do RSUs Fit Into Your Retirement Plan?

Business leaders with RSUs need to carefully diversify from their employer stock. What we see happen is unvested RSUs create very concentrated portfolios. These unvested share just seems to accumulate in the background. Once they vest though, suddenly your retirement plan is based on the performance of just one company.

After you retire, you no longer work for that company. You won’t have inside scoop anymore. This is too much risk for anyone to feel secure in their retirement plan.

The solution is to sell, or diversify, away from the employer. We wrote an article titled, “Do I Own Too Much Company Stock,” which dives further into this topic.

But before you get start, you need to pause. If you’ve worked at that company for many years, you might actually be selling some of the stock at a loss. And you need to be careful that you’re not triggering the wash sale rule.

What is the Wash Sale Rule?

The wash sale rule is an IRS regulation that prohibits investors from claiming a tax deduction on a security that they sold at a loss, if they buy the same or a substantially identical security within a 61-day window. That window is 30 days before and 30 days after.

So if you are going to sell at a loss, you at the very least want to claim the tax deduction. And you should make sure you aren’t buying that stock back anytime soon.

Example of Diversifying RSUs Before Retirement

Here’s an example of a client who didn’t see the complexity RSUs brought to their retirement plan. They had over $1M in RSUs. To them, it just seemed like extra money. They knew they wanted to diversify their RSUs and thought it was as simple as clicking “sell.”

But we know we’re gonna have some gains and some losses. And we wanted to take advantage of those losses from a tax perspective. Which means, because of the Wash Sale Rule, we know we need to be careful of timing as we’re selling these shares.

The challenge here is, one of the ways this client build their wealth was utilizing the Employer Stock Purchase Program (ESPP). And so regularly, they were purchasing that employer stock at a discount. But according to the Wash Sale Rule, they would be purchasing the stock right back within 30 days before or after.

But additionally, they also had mandated blackout periods. As the employer reports earnings to the public, executives are prevented from trading company stock.

So for this specific client, there was one day in the entire year that we could sell this employer stock, keep their ESPP on track, and deduct these losses. This client had no idea about all these layers of complexity or that these losses would be disallowed if we just sold everything.

Why Planning Matters When it Comes to RSUs

Without careful planning and an expert knowledge of the tax code, the simple task “diversify RSUs” would have created some expensive mistakes. And mistakes are the last thing someone planning retirement wants to see.

In this example, it was the tax planning and the investment planning working together that allowed us to have a plan and to initiate that when we needed to. Business professionals have so many layers that build their net worth. On their own, they seem manageable, but once they start to stack up, you may not realize how the complexity compounds.

This is why we work with business professionals who are within 10 years from retirement. This window of time allows us the opportunity to time out these decisions for the best possible tax outcome. This is how you create a tax efficient retirement.

Your Next Steps

And if you want our team of financial advisors to support your retirement plan, this is what we do best. Our team specializes in tax efficient retirement planning for individuals with executive compensation. So you stay on track all year, every year, reach out to our team at to schedule a 30 minute consultation.

We’ll see you there or in the next video!

Bonus: Our Free Retirement Planning Guide!