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A CFP who was rated as one of America's top financial planners in 2021 explains why employees who get restricted stock options should sell as soon as their lock-up ends

woman looking at stock portfolio on phone
Colin Overweg, CFP, never recommends that clients hold onto vested RSUs. wera Rodsawang/Getty Images

  • Restricted stock units are shares in your company that become your assets after a vesting period.
  • Colin Overweg, a CFP, recommends that you liquidate RSUs ASAP and invest the money in index funds.
  • Keeping large sums of money in your employer's stock is risky, and can be counterproductive.
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If you've received a job offer that includes equity-based stock options, you may have been offered something called restricted stock units (RSUs). Restricted stock units are different from regular stock options in a couple of ways. 

Stock options are more commonly offered, and involve the company giving employees the ability to buy company stock at a discounted price, usually referred to as "strike price" or "exercise." 

When you're offered RSUs, it means that your company is offering you stock in the form of units (specific agreements can vary, but one unit is usually worth one share). The RSUs are not tangibly worth anything until you've completed the "vesting" period and have the ability to collect dividends. RSUs are also taxed differently than stock options, and will not be considered capital gains.

It's for this reason that financial planner Colin Overweg, who in 2021 was named one of Investopedia's Top 100 Financial Advisors in the Country, says that employees should treat RSUs like they would standard income — because it will be taxed the same way during the year the RSUs vest.

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"The federal, state, and payroll taxes will be almost identical to your paycheck — it really is just ordinary compensation," Overweg said.

Overweg then went on to say that there is one thing he suggests to all clients who have RSUs that just vested: Cash out, and reinvest the gains in an index fund. There are two big reasons why he suggests this.

Diversification reduces risk

The biggest reason why Overweg tells clients to reinvest RSUs into index funds is because of how heavily concentrated a position it is to keep money invested in just one company. He gave an example of an employee who had RSUs vest and now has $10,000 in company stock.

"If you're holding $10,000 in cash, would you like to go and invest $10,000 into your company?" Overweg said. "The answer is usually 'No, that's a bit too much'."

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He added that he thinks a lot of clients feel differently about RSUs than they do about the idea of investing large sums of money into company stock because they feel that they have already made a "decision" by holding onto their units. 

However, Overweg believes that this is an emotional position rather than a logical one, and refers to holding onto RSUs as "a return on entertainment, and an effort to avoid investor remorse."

"When you're holding cash, in my opinion, you can now make a much better behavioral decision," Overweg said. 

He added that when he approaches this topic with clients, he reminds them that he is "not a stock picker."

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"I am not a guru, or able to answer whether or not your company's stock is going to go up or down," Overweg said. "But what I am able to do, is to apply that level of risk into my clients' real lives and financial plans."

Given that RSUs are taxed like regular income, it's also possible to lose them if the company's stock goes down. 

"For example, if a client loses $50,000, I assess how that will impact their ability to accomplish their goals," Overweg said. "Do you want to risk being able to buy the house you want in one year? If that's not a risk you're willing to take, I think you've answered your own question."

Overweg added that specifically when it comes to RSUs, employees should consider just exactly how much risk they're taking by being invested in the company that they earn a living from. 

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"If their company underperforms due to a completely unpredictable event such as a global pandemic, inflation, interest rates, or new competitors — they could lose their income along with their investment account," he said.

Index funds have demonstrably better long-term returns

Overweg said that the most important thing that you need to assess whenever you're making an investment decision is how that decision fits in with your overall goals for your money, and when you'll be needing it.

"For life goals that are 10+ years into the future, I help my clients build investment portfolios with the highest probability for the greatest long term returns," Overweg said. "Research has shown that this is best achieved by receiving market performance via low cost index funds."

Index funds are passively managed, low-cost investment funds that places the investor's assets to a portfolio of stocks that are meant to mimic a particular financial market. Index funds are popular with a lot of people striving for early retirement due to their consistency and the longevity on those returns. 

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Index funds are usually available through major financial firms like Vanguard and Fidelity, but you can also invest in these funds through a robo-advisor platform like Betterment and Wealthfront. 

When someone decides to keep their RSUs instead, Overweg said that "they are inherently making the investment decision to purchase that stock, and therefore believe the company is going to outperform the market," adding that this expected outcome is "unlikely, and random at best."

"Most teams of professional investors with virtually unlimited resources cannot successfully pick stocks that outperform the market," he added.

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