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The Ultimate Guide To Restricted Stock Units (RSUs)

08.24.2020 by admin // 1 Comment

what are RSUs? Definition of RSUs. Restricted Stock Units, why you need RSUs in your comp package, typical RSU package, rsu compensation

Restricted Stock Units (RSUs) are a popular way of giving company equity to employees at tech startups and large public companies. When you hear about how much money people at tech companies make it’s often because they have equity as part of their compensation package. When looking at your compensation package don’t just look at the salary. Also understand what your benefits are worth. Often we look at benefits like health insurance and retirement options like the 401(k) company match. But, what about equity compensation? Equity compensation is a perk companies use to give you an ownership stake in the company. This includes RSUs, ESPP and employee stock options.

If you don’t have RSU compensation today, you are missing out. If your company offers RSUs as one of their benefits, negotiate for RSUs during your next merit raise cycle or during your next promotion. Or, apply to companies that offer Restricted Stock Units as part of their compensation package. Learn below what RSUs are, what RSUs are worth to you, when you get RSUs, RSU tax considerations and the drawbacks of RSUs.

What Are RSUs or Restricted Stock Units?

RSUs, or Restricted Stock Units, are a form of compensation offered by employers to employees. They are company shares that are restricted, meaning that you can’t sell them right away. Instead, you will be given shares that vest over time. When you accept RSUs, they will come with a vesting schedule. Often, you’ll see vesting schedules that span 3+ years. This schedule will show how many shares will vest on which dates. Typically, there will be one day per year and each of those days will be a year apart. On that date you are given those shares at the price of the stock that day. They have no tangible value until the vesting date. If you leave the company before the vesting date that means you walk away from this future compensation.

What Are RSUs Worth to You?

The value of your RSU package depend on a few things: the number of shares offered, how well the stock is projected to do and the vesting schedule.

How Much Are Your RSUs Are Worth When Granted?

To understand the current dollar amount of your restricted stock options multiply the number of RSUs by the stock price the day it is granted. When considering a job offer with RSUs, they may provide a dollar amount for RSUs. If you are provided a dollar amount, that means your RSU package will originally be worth that amount no matter what the stock price is. The day the RSU package is granted, you’ll know how many shares equate to that dollar amount.

How Well Do You Think The Stock Will Perform?

Consider how well you think the stock will perform during your vesting schedule. Is it a growth stock or value stock? Here, I’ll compare a growth stock (Amazon) to a value stock (Cisco). On January 1, 2019 Amazon stock was worth $1718.73. In comparison, Cisco was trading at $47.29. On August 21, 2020 Amazon traded at $3,284.72 a share and Cisco traded at $42.25 a share. That is a huge difference! If you had accepted a job offer at Amazon your RSUs are worth almost double! If you accepted the job offer at Cisco your RSUs actually decreased in value. Even with the quarterly dividend of $0.35 a share, your RSUs are still worth less. Note, this is one example of past results, and this doesn’t mean either of these stocks will perform similarly in the future.

When comparing compensation packages at two companies, don’t only look at what the RSU package is worth at that moment in time. Consider how you think the stock will perform over the next few years. The lower RSU package may end up being worth more money.

Amount of Time For All Of Your RSUs to Vest

Know how long it will take for your RSUs to fully vest. How long do you have to stay with the company to get the full RSU package? Do you intend to stay with the company for that amount of time?

When Do You Get Restricted Stock Units?

Typically companies offer RSUs at time of employment. Other opportunities to get RSUs include promotions. Similar to annual merit increases, some companies have annual equity awards. Once a year they give RSUs out to select employees. If you’re unsure if your company offers RSUs, go to your internal benefits page and see if it’s one of the benefits listed. You can also ask your manager or HR business partner. When you’re talking to them, ask them the criteria for getting RSUs. It can never hurt to ask.

Do I get RSU Money Right Away?

Usually you don’t get RSU money right away. RSUs typically have a vesting period. A vesting period is a period of time before the shares are owned by the employee. If you leave the company before the end of the vesting period you’ll walk away from those shares.

Cliff Vesting – after a certain amount of time has passed you will receive 100% of the shares all at once. For example, say you are granted 30 shares. 3 years later you get 30 shares all at once. The date you get all of your shares depends on what is in your RSU agreement.

Graded Vesting – you will receive smaller chunks of your RSUs more frequently. For example, say you are granted 30 shares in January 2021. In graded vesting you could get 10 shares in January 2022, 10 shares in January 2023 and 10 shares in January 2024. The dates you receive the small chunks of RSUs depend on what is in your RSU agreement.

Hybrid of Cliff and Graded Vesting – You receive a certain amount at once, and then smaller amounts at regular intervals following that. The dates you receive a certain amount all at once and the dates following depend on what is in your RSU agreement.

How are RSUs Taxed?

RSUs will not be taxed when you first receive them. But, they will be taxed upon vesting. This is because you were given RSUs at $0 and they converted to the value of the company stock when they vest. Even if the stock goes down the very next day, you will be taxed at the total fair market value of your stock grant on the grant date.

When you sell your RSUs your taxes will be calculated based on the strike price. The strike price is the price of the shares when they become vested. Upon vesting, this is when you get to decide if you want to keep the shares or sell them. Whether you decide to keep or sell the shares, you will get taxed upon the shares vesting.

To avoid getting hit with a huge tax bill your company may have an option to sell RSUs at time of vesting to cover taxes. Additional tax withholding options include same day, net shares settlement, sell to cover and cash.

RSU taxes at RSU grant, RSU vest and RSU Sale, rsu package

What Happens if my RSUs go Down in Price After They Vest?

If RSUs go down in price after they vest they will be treated like any other stock that is currently showing a loss. Nothing will actually happen until you sell and the price can continue to go up or down. If you sell at a price that’s below the RSU stock price it will be considered either a short term or long term loss on your taxes pending when you sell.

Do I Have to do Anything When I Get Confirmation I was Awarded RSUs?

Sometimes you do have to do take an action when you get confirmation that you were awarded RSUs. Just because you’ve been told you are getting RSUs doesn’t mean there are no actions on your part. Sometimes you need to accept the RSUs by a certain date or you actually won’t get them! The written confirmation that you get awarding you RSUs should detail out any instructions or next steps you have to take. Make sure you read this written confirmation thoroughly. When you accept the RSUs make sure you know what you are signing, it’s not only about making sure you click accept. Sometimes what you are signing contains a non-compete.

What Are The Drawbacks of Restricted Stock Units?

Non-Compete Clauses

When you are accepting your Restricted Stock Unit grant, do you know what you are signing? You may be signing a non-compete. If you’ve already signed a non-compete for your employer this agreement may be nothing new. Be aware of what you are signing before you sign. After you sign print a copy for your records in case it’s hard to find after the fact.

Leaving the Company

Restricted Stock Units are designed to incentivize employees to stay at a company. Of course, you can still give your notice that you’re leaving at any time when you have unvested RSUs. However, you’re now putting in notice knowing that you’re leaving money on the table. With vesting, you won’t get the full amount of your award until the vesting schedule is complete (usually 3-4 years). If you get RSU awards every year, that can quickly grow to a sizable amount you’re walking away from. If you leave the company you will forfeit your unvested shares. Any shares that have vested that you haven’t yet sold you will continue to keep.

If you are looking to leave your company, don’t forget to negotiate the amount of unvested RSUs you’d be leaving on the table as part of your negotiation for your new compensation package.

High Risk, High Reward at Startups

Early stage or start-up companies (pre-funding or even after series A) tend to have the valuation of shares as quite low. The opportunity for appreciation is the highest, but there is also a chance your RSUs end up being worth $0.

Ability to Sell RSU Shares Once They Vest

If you work for a publicly traded company you should be able to sell your shares upon the RSUs vesting. If your company is private though, they may have restrictions on when you can sell the equity you’ve been awarded at the company. When you are awarded RSUs, read the terms and what the terms outline for selling vested shares to avoid any surprises.

For quick answers to all Frequently Asked Questions about Restricted Stock Units Fidelity has a FAQ guide that is pretty helpful.

How to Generate Passive Income

01.20.2020 by admin // 6 Comments

Generating passive income isn’t always the easiest to start, but it’s a great way to help you build wealth. It’s important to note that most income isn’t passive income. This is because most income requires someone giving their time and effort to generate the income. So, what exactly is passive income and how can you generate passive income?

What Is Passive Income?

Before we get started on how to build a passive income stream, what is passive income? Passive income is income that requires little or no effort to earn, maintain and grow that income. Passive income examples include dividends from dividend stocks, interest from high yield savings account and dividends from REITs.

There are additional activities that sometimes are considered passive income but do require more time and effort. The amount you make driving for Uber depends on how many hours or how many trips you drive for Uber. Flipping items on eBay require some time to find the items, post and price the items and then ship the items once sold. Becoming a landlord takes time to identify the right property, get the right contacts, find a renter and then both maintain the house and the relationship with the renter.

There are other activities which require upfront work but can turn into passive income. A good example is blogging or creating your own e-book. It takes quite a bit of work up front but eventually you can turn it into passive income. What are ways you’ve found to generate passive income streams?

See Also: How to Start Investing

How to Create Passive Income With No Money

Many passive income streams require money to get started. You put your money in a high yield savings account for example and every month you’ll automatically earn interest. In order to invest, you need to have money. What if you want to create a passive income with no money today? Passive income ideas with little money include selling stuff you own that you don’t use or get a cash back or rewards credit card. If these aren’t options for you, you can still start a passive income stream. However, you’ll need to put in a bit more effort to get a little extra money to get started. Starting a side hustle is the best option here.

Sell Stuff You Own That You Don’t Use

Do you have household items, clothing or other stuff you don’t use lying around? Make additional cash by selling it on Poshmark, eBay, OfferUp or another site online. Will you make as much as you originally paid for it? Likely not if you paid full price. But, if you have no use for it anymore you might as well get some cash for it and use that cash to start a passive income stream.

Get A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. Putting every purchase on a credit card will also help track your expenses. Sometimes with cash it’s harder to remember where exactly you spent the money. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Make More Money Than You Spend

It takes money to make money passively. The more money you have, the more money you can make through passive income streams. Luckily you don’t need a lot of money to start building a passive income stream. Whether you increase your income or cut your spending it doesn’t matter, but you need to start saving money to build a passive income stream. Even if you only have enough money to generate $1 of passive income, it’s something. It’ll slowly grow over time, and grow quicker as you save more money to put toward your passive investments.

There are two ways to get the money to start a passive income stream. You can start making more money or start spending less money. You can make more money through advancing your career or a side hustle and eventually through your passive investments.

The other way to get enough money to generate a passive income stream is to spend less money and be smart with your spending. Ultimately you need to do a combination of both but your top focus should be earning more money. Eventually you’ll reach a point where you can’t save any more money whereas with making money the sky is the limit. It is much easier to save money to invest when you have a higher salary.

Put Your Savings in a High Yield Savings Account

The easiest way to start building a passive income stream is to put your cash in a high yield savings account. Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 1.7% APY (annual percent yield). This means if you put $100 in the account in 12 months you will have made $1.70 in interest. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Look for Sign Up Bonuses at Banks

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Invest in Passive Investments

Once you have some money to invest, you can start investing in different types of passive investments. The least amount of effort required for building a passive income stream is to select an investment with a guaranteed return. However, those options with the lowest risk and lowest effort also tend to be the lowest yielding.

There are many different types of passive investments. Passive investment examples include Certificates of Deposit, Stocks, Dividend Stocks, Mutual Funds, ETFs, Crowdfunded REITs, Private Companies and more. Stay tuned for part 2 where I go into detail about the different types of passive investments!

If you’re ready to start generating passive income, check out the ultimate list of passive income ideas to get started.

Roth IRA Rules in 2020

11.07.2019 by admin // 4 Comments

Roth IRA Rules- stack of one hundred and fifty dollar bills

A Roth IRA is a great retirement savings vehicle in the United States. There are many benefits to having a Roth IRA including no minimum distribution and no taxes on any gains. However, there are income requirements which limit who can contribute to a Roth IRA and how much they can contribute. By understanding these Roth IRA rules, you will know if you are eligible to contribute to a Roth IRA in 2019.

What Is A Roth IRA

A Roth IRA is a retirement account that offers you a tax benefit when you retire. Unlike traditional IRAs and 401(k) plans Roth IRA contributions are not tax deductible but you also do not pay taxes when you withdraw money at age 59 ½ +.

Roth IRA Contribution Limits 2020

In 2020, you can contribute up to $6,000 a year to a Roth IRA or a Traditional IRA. If you’re 50 or older you can contribute up to $7,000 a year. These contribution limits remain the same as in 2019. So, if you haven’t contributed to your Roth IRA in 2019 yet, you can still contribute up to $6,000 or $7,000 if you’re 50 or older before April 15th. The amount you contribute also cannot exceed what the IRA defines as “earned income” or taxable compensation. This includes wages, salaries, tips, commissions, professional fees and self-employment income. Charles Schwab shares more details here on what’s considered earned income for a Roth IRA.

The amount you contribute to a 401(k) plan does not impact the amount you can contribute to a Roth IRA but the amount you contribute to a Traditional IRA will affect the amount you can contribute to a Roth IRA. If you contribute to both a IRA and Roth IRA in the same year, the total contributions to both of these accounts cannot exceed $6,000 if you’re under 50, or $7,000 if you’re 50 or older.

Setting Up A Roth IRA For A Child

You can also set up a custodial Roth IRA for your child, subject to the same contribution limits outlined above. This means that contributions for your child’s Roth IRA you control cannot exceed what your child earned in 2019.

Roth IRA Income Limits 2020

There are income limits on Roth IRA eligibility which is why it’s important to start your contributions to a Roth IRA the first year you get a W-2. If you are single, and your modified AGI is $124,000 the amount you can contribute to a Roth IRA begins to phase out. If you are married filing jointly and your AGI is $199,000 or above the amount you’re eligible to contribute begins phasing out. These thresholds did change from 2019. In 2019 the amounts you could contribute started phasing out at $122,000 for single filers and $193,000 for married filing jointly filers.

If you are married filing jointly you cannot contribute to a Roth IRA if you make more than $206,000 in 2020. You cannot contribute to a Roth IRA in 2020 as a single filer if you make more than $139,000. Once you exceed this income you will need to explore options to setup a backdoor Roth IRA if you’re interested in having a Roth IRA. To take full advantage of a Roth IRA, set up a Roth IRA when you first start collecting a paycheck. You never know when you may get to the point where your income makes you ineligible to contribute to a Roth IRA.

Here are the contribution limits by income and filing status for a Roth IRA in 2020:

Roth IRA Contribution Limits 2020 table for married filing status, and single filing status — Source: IRS

When Can You Contribute to a Roth IRA

Contributions to a Roth IRA can occur at anytime during the year. You may contribute the full amount all at once or contribute multiple times during the year up to the maximum. Once a new calendar year starts, you can still make contributions for the previous calendar year up until April 15th (when taxes are due). For example, you can make a contribution for 2019 to your Roth IRA until April 15, 2020.

Roth IRA Withdrawals

Since you’ve already paid taxes on your contributions, you can withdraw your contributions at any time with no restrictions. If you withdraw earnings on those contributions though, you may be taxed or penalized on withdrawing this money.

Roth IRA rules dictate that once you’re age 59 ½, as long as you’ve held the account for at least five years, you can take distributions on all money within the account and do not have to pay taxes on that money.

Roth IRA Minimum Required Distribution

With a Roth IRA there is no required minimum distribution. This means that you don’t ever have to withdraw from this account if you don’t need to, and can pass this money onto your heirs.