Restricted Stock Units (RSUs), otherwise known as stock awards, can be a powerful component of your compensation package, offering the potential to build wealth over time. But, without proper planning and understanding, they can also lead to unintended financial consequences. If you’re not careful, RSUs can become a tax trap, expose you to too much risk, and cause you to miss out on financial strategies that work for you.
In this post, we’ll cover four critical mistakes corporate executives, directors, and employees make with RSUs—and how you can avoid them.
RSU Mistake #1: Not Having an RSU Strategy — Why Planning Your Stock Awards Matters
Receiving RSUs is just the first step. Having a strategy for managing them is crucial to ensuring your stock awards align with your financial goals. Many corporate executives fail to fully understand the specifics of their RSU grants, such as the vesting schedule, conditions for vesting, and the tax implications. These details are important because:
- Vesting Schedules: RSUs typically vest over several years (e.g., 25% annually), but the timing varies by company. Some may require continued employment, while others may involve performance or liquidity milestones.
- Liquidity Events: Private companies may require a liquidity event (such as an IPO or acquisition) before the shares can be sold, which could affect your ability to access the value of your RSUs.
Without understanding your grant, you may miss out on opportunities to optimize your wealth-building strategy or accidentally forfeit shares by leaving a company before they vest.
How could you avoid this mistake?
- Understand your grant terms in detail.
- Create a comprehensive plan that aligns with your financial goals and tax minimization strategy, whether it’s saving for retirement, purchasing a home, or funding college education.
- Work with your financial advisor to incorporate your RSUs into your broader investment strategy.
RSU Mistake #2: Surprise Tax Bills
Taxes on RSUs can be tricky and are often misunderstood. When RSUs vest, the value of the shares is considered ordinary income, which means they are taxed at your regular income tax rate. This income is typically included on your W-2 form.
However, the default withholding rate may not be enough to cover your actual tax liability. For example, the federal withholding rate for RSUs is often 22%, but if you’re in a higher tax bracket, you may owe more when you file your taxes.
For high-income earners, RSUs can significantly impact your annual tax liability if you don’t plan ahead. In addition to the ordinary income tax, any gain you make from selling the RSUs after they vest is subject to capital gains, either short-term or long-term, depending on how long you hold the shares before selling them.
How could you avoid this mistake?
- Work with a tax advisor who understands equity compensation to ensure that you are withholding enough taxes.
- Estimate your tax liability before selling any shares to avoid any surprises during tax season.
- Consider the timing of your sale: Holding RSUs for over a year could qualify you for long-term capital gains treatment, which is taxed at a lower rate than ordinary income.
RSU Mistake #3: Overexposure to Company Stock: How to Avoid RSU Concentration Risk
While receiving company stock can be exciting, it can also expose you to concentration risk—where a large portion of your wealth is tied to a single company. This is especially risky for corporate executives when your income (salary and RSUs) is already dependent on that company’s performance.
For example, if the company faces financial trouble, both your job security and your investment could be at risk. Diversification can help reduce this risk.
How could you avoid this mistake?
Consider the following strategies to reduce concentration risk:
- Diversify your portfolio by selling a portion of your RSUs and reinvesting the proceeds into other assets like diversified low cost ETFs, index funds or bonds. Of course, we recommend working with your financial advisor if you proceed with this strategy!
- Create a strategy for selling RSUs as they vest. One strategy could be to sell a set percentage of vested shares each year on a set date to gradually reduce exposure to your employer’s stock and the temptation to try and time the market. Again, working with your financial advisor is key!
- Review your overall financial situation to ensure that you’re not overconcentrated in one asset class. For example, if your financial plan relies on your stock awards or RSUs to secure your future and fund your retirement goals, you may not want to hold any more than 2-5% of your portfolio in one company’s stock.
On the other hand, let’s assume you have a higher tolerance for risk, and your financial plan is fully funded without your stock awards; in this scenario you might be comfortable with a higher limit of exposure to one company such as 5-10%.
RSU Mistake #4: Letting the RSU Tax Tail Wag the Investment Dog
Unfortunately, some investors will let a tax bill dictate their decision to delay exercising their stock awards and selling their company stock. Delaying diversifying company stock can lead to increasing concentration risk which we addressed in Mistake #3.
Letting a tax bill dictate decisions to delay selling company stock can be a very risky strategy, especially if an investor has a higher level of exposure to one company and they need money from the value of their stock fund short, mid, and long-term lifestyle goals.
It’s not uncommon to see even very large companies’ stock price decline in value. For example, in 2025 some large companies experienced declines of -17.3% (Amazon), -33.5% (Tesla), and -51.6% (Deckers Outdoor Corp) as seen below:
Not letting the taxes dictate your investment decisions is simple:
Create a plan to manage concentration risk associated with your company stock.
FAQ: Common RSU Questions
What happens when RSUs vest?
When RSUs vest, you receive shares, and their value is taxed as ordinary income. You can choose to sell or hold shares, depending on your financial strategy.
Do I pay taxes on RSUs twice?
Yes. When RSUs vest, the value is taxed as income. Then, when you sell the shares, any gain is taxed as a capital gain. If there is no gain, then you will not have a tax due when you sell your shares.
Should I sell RSUs right away?
It depends on your financial goals. Some people choose to sell immediately to avoid concentration risk and diversify their portfolio, while others may hold the shares for a one year period to benefit from long-term capital gains tax rates.
Final Thoughts: Make the Most of Your RSUs with Smart Financial Planning
Managing your RSUs effectively requires a clear understanding of the terms of your grant, smart tax planning, and careful diversification of your investments. By avoiding these common mistakes, you can better control your financial future and optimize your equity compensation.
To recap:
- Have a strategy: Know when and how your RSUs vest and integrate them into your long-term financial goals.
- Understand your tax liability: Work with a tax professional and your advisor to ensure proper withholding and plan for capital gains taxes.
- Reduce concentration risk: Don’t put too much pressure on your company stock to perform if your financial future relies on the value of your company stock diversify and balance your investments.
RSUs are a valuable tool for wealth-building, but without proper planning, they can become a financial burden or stressor if you’re worrying daily about the price of your company stock. Consult with a financial advisor or tax professional to make the most of your RSUs and create a strategy that fits your goals.
If you’re a corporate executive interested in learning about additional tax minimization strategies, we discuss that topic a lot on our blog. Feel free to check it out.
If you don’t have a financial advisor, or would like a second opinion, or are just curious to learn more about One Life’s proactive wealth management process, we would love to talk. Schedule a no-cost consultation at this link or tap the button below.