The Case for Early NSO Exercise: Why Planning Now Could Save You Big Later

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“When should I start planning around my stock options?” It’s a question I get all the time from startup employees. And my answer is usually simple: Right now. Waiting for liquidity often means missing your best shot at tax savings. In this article, we will focus on Non-Qualified Stock Options (NSOs). If you have Non-Qualified Stock Options (NSOs), one move to consider is exercising them before a liquidity event, usually when your "spread" is tighter.

Why exercise before a liquidity event?

When you exercise NSOs, you’ll owe ordinary income taxes on the “spread” between the strike price and the fair market value (409A) at the time of exercise. If you wait until the company IPOs or offers a tender, and the FMV has grown significantly, when you purchase those shares you're locking in much higher income taxes. But if you exercise when the valuation is still low, you can pay tax on a smaller spread, start the clock on long-term capital gains, and potentially cut your tax bill by tens of thousands.

Case Study

Assume you work at a growing startup, and the rumor mill is swirling about a potential IPO in the next 2 years. You've currently vested 20,000 NSOs at a strike price of $3, and the company's current 409A valuation is $5 per share.

For the first time, it hits you…these options might actually turn into real wealth.

The first question on your mind? What will my after-tax proceeds look like if I exercise today versus waiting until the IPO?

*For the sake of this example, let's assume you've maxed out Social Security taxes for the year. Also, assume that in the "Exercise Early" scenario, you hold the shares longer than a year and a day to qualify for long-term capital gains treatment.

Thats a $34,265 difference of in your pocket proceeds!

Think Net, Not Gross

Too often, people focus on the potential upside of their stock options and ignore the actual after-tax value. What matters most is what ends up in your pocket, not the headline number on paper. By exercising early, you may unlock access to long-term capital gains treatment instead of ordinary income tax. That difference, which is often 12–15%, can mean thousands more in net proceeds when you eventually sell.

This strategy isn’t for everyone

I’ve walked this road with many clients. More often than not, those “life-changing equity grants” end up as a nothing-burger. Most people won’t see an IPO or even a meaningful tender offer. And that’s why this decision should always be made through the lens of your bigger financial plan. You have to be honest with yourself when it comes to purchasing your private stock. You’re buying an illiquid asset.

Okay, Brett, now that you've crushed my dreams why would i consider exercising shares earlier?

I'm glad you asked! As I mentioned before, these purchase decisions need to be based on your financial situation and also include non-quantifiable items like:

• If you believe in your company’s trajectory upward

• If IPO or liquidity rumors are swirling

• If your company occasionally offers tender events(never guranteed)

• Or you’re planning to leave and want to own what you helped build

Then it may be worth considering.

Here’s what you potentially gain by purchasing shares earlier:

• Tax planning control—pay tax on a smaller spread

• Long-term capital gains—the tax benefit hero

• Equity ownership—even if you leave the company

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If you want to understand how this might work in your specific situation, Book an Intro to get started.

This article is for informational purposes only and does not constitute tax advice. Please consult with a qualified tax professional for advice specific to your situation.

Don't Pay Taxes on Your RSUs Twice: A Common Tax Season Pitfall

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As we find ourselves in the midst of another tax season, let's address a common mistake I come across year after year: double taxation on Restricted Stock Units (RSUs). If you're one of the many professionals who receive RSUs as part of your compensation package, you might be unknowingly paying taxes twice on the same income when you sell those shares.

It's remarkably easy to make this mistake. Your RSU income typically appears on your W-2, but it often doesn't have a separate line item telling you exactly how much of that W-2 income came from RSUs. When you later sell those shares, the connection between your previously taxed income and the stock sale isn't automatically made, leading to potential double taxation.

To avoid this costly error, it's crucial to gather the following information before preparing your taxes:

• Which specific shares you sold from which grant

• Which shares vested from which grant

• The exact vesting date of each share

• The sale date of each share

• The fair market value of the shares on the vesting date

• Your Stock Plan accounts supplemental forms

Armed with this information, you can properly account for your RSU sales and avoid paying taxes twice on the same income. This costly error affects countless taxpayers each year, but with proper understanding, you can avoid it and potentially recover taxes you've overpaid in previous years.

RSUs are taxed at two distinct points in your investment journey. First, when your RSUs vest, the shares' market value becomes taxable as ordinary income. This income appears on your pay stub and is reported on your W-2. Your employer typically withholds taxes by selling a portion of shares to cover the tax obligation. Later, when you sell the shares, you're taxed only on the difference between the sale price and your cost basis (the value of the shares at vesting). This is where things often go wrong. The issue stems from the fact that RSUs are considered "non-covered securities" by custodians, meaning they aren't required to report the cost basis on Form 1099-B. This key detail is often overlooked by both tax preparers and individuals filing their own returns.

Case Study

Michael works at a tech company and received 500 RSUs that vested when the company's stock price was $200 per share, resulting in $100,000 of ordinary income. This $100,000 was properly reported on his W-2 and taxed as regular income. A few months later, Michael sold all 500 shares for $240 per share, receiving $120,000.

Michael's true capital gain is only $20,000 ($120,000 sale proceeds minus his $100,000 cost basis). He should pay capital gains tax only on this $20,000.

However, Michael's 1099-B from his brokerage showed his sale proceeds of $120,000 but listed his cost basis as $0 in Box 1e. If his tax preparer transfers this information directly to his tax return without making any adjustments, the entire $120,000 would be treated as a capital gain, even though $100,000 had already been taxed as ordinary income on his W-2.

Let's calculate the financial impact:

If Michael is in the 37% marginal tax bracket and the sale was a short-term capital gain (also taxed at 37%), the double taxation would cost him an additional $37,000 ($100,000 × 37%) in unnecessary taxes. That's tens of thousands of dollars that should rightfully stay in Michael's pocket.

Here’s what should have happened on Michael’s tax return:

If Box 1e on Form 1099-B has no cost basis (as is common with RSUs):

1. Report the $120,000 in proceeds as shown on his 1099-B on Form 8949

2. List the correct cost basis ($100,000) directly in column (e) on Form 8949

3. Check Box B (or E for long-term gains) at the top of Form 8949

4. No adjustment or code is needed in columns (f) or (g)

This would ensure Michael only pays capital gains tax on the actual gain of $20,000, avoiding double taxation on the $100,000 that was already reported as income on his W-2.

How to Check Your Situation

To check if you've made this mistake in previous years, review your past three years of tax returns, specifically Form 8949 (Sales and Other Dispositions of Capital Assets). Compare the cost basis shown on your tax return with the information from your broker's supplemental information. If the numbers don't match, you likely have an error on your return that caused you to pay more tax than necessary. If you discover you've paid double tax in previous years, you can amend returns that are within the three-year statute of limitations by filing Form 1040-X, Amended U.S. Individual Income Tax Return.Consider attaching documentation that shows the correct cost basis to make it easier for the IRS to process your amendment. Be aware that the IRS may take 6-12 months to process amended returns.

Understanding the taxation of RSUs is crucial to avoiding double taxation. When you sell RSUs, remember that your cost basis is the value of the shares when they vested, which has already been taxed as ordinary income. Don't rely solely on the 1099-B form from your broker. Instead, look for supplemental information that shows the correct cost basis, and make the proper adjustments on your tax return.

If you believe you may have fallen victim to this error in past tax returns, there's still hope. You can file an amended return (Form 1040-X) with a corrected Form 8949 following the steps outlined in this article. The IRS allows you to amend returns filed within the last three years, potentially recovering thousands in overpaid taxes. For someone in Michael's situation in the 37% tax bracket, that could mean recovering $37,000 for just one year's mistake and potentially more if the error occurred across multiple years.

The Bottom Line: Get Professional Guidance

If you feel like you could benefit from a second set of eyes on your tax situation, especially if you have RSUs or other equity compensation, feel free to reach out to me. I’ve helped many professionals simplify their equity and tax situations.

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Need a second set of eyes on your tax situation? Book an Intro to get started.

This article is for informational purposes only and does not constitute tax advice. Please consult with a qualified tax professional for advice specific to your situation.

Maximize Your Equity Compensation: The Power of the 83(b) Election

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Equity compensation can be an incredible tool for building wealth, especially for startup founders and employees in fast-growing companies. But with this opportunity comes a complex tax landscape that can significantly impact your financial outcomes. One powerful strategy to manage taxes effectively is the Section 83(b) election.

Filing an 83(b) election at the right time can save you thousands, if not more, in taxes. It allows you to pay taxes on the value of your stock when it's granted, not when it vests—helping you lock in lower tax rates while the stock’s value is still low.

In this guide, we’ll explore how the 83(b) election works, who should consider it, and how to decide if it’s right for you. We’ll also compare two scenarios—using the 83(b) election versus not using it—so you can clearly see the potential savings.

What is the 83(b) Election?

The 83(b) election is a choice you can make when you receive restricted stock or stock options as part of your compensation package. Without the election, you would pay taxes on the stock’s value when it vests—usually when the stock’s value is much higher.

The 83(b) election allows you to pay taxes upfront on the stock’s current value, at the time of the grant. If the stock grows in value, you pay less in taxes overall because the appreciation is taxed as long-term capital gains rather than higher ordinary income rates.

In short, the 83(b) election lets you lock in lower tax rates by paying taxes now instead of later when the stock’s value could be significantly higher.

Who Should Consider Filing an 83(b) Election?

Filing an 83(b) election can make a lot of sense for:

• Startup founders who are granted stock when the company is just starting and stock values are low.

• Employees receiving restricted stock units (RSUs), restricted stock grants (RSGs), or stock options as part of their compensation.

• People exercising incentive stock options (ISOs) or non-qualified stock options (NSOs) early, allowing them to benefit from potential long-term capital gains.

However, the 83(b) election isn’t for everyone. If the stock doesn’t grow in value, or worse, if the company fails, you’ll have paid taxes on a higher value than the stock is eventually worth. This is why careful consideration and professional guidance are essential.

Filing the 83(b) Election: Timing is Everything

The IRS gives you 30 days from the date you receive your stock to file an 83(b) election. Miss this deadline, and you lose the opportunity to make the election.

Once you decide to file, here are the steps:

1. Fill out IRS Form 83(b): This form must include details such as the number of shares, the date of grant, and the value of the stock.

2. Send it to the IRS: You’ll need to send the form to the IRS within 30 days of receiving the stock.

3. Send a copy to your employer: They need to have a record that you’ve made the election for tax reporting purposes.

4. Keep a copy for yourself: Always keep a copy of your 83(b) election form in case you need to refer to it later.

If you miss the deadline, there is no extension and no way to retroactively file an 83(b) election. In this case, you will be taxed on the stock’s value at vesting, which can result in a much larger tax bill if the stock appreciates.

Why the 83(b) Election Can Save You Money: A Real-World Example

Let’s look at a simple example to illustrate the potential savings from filing an 83(b) election. Imagine you’re granted 10,000 shares of stock at a value of $1 per share. Three years later, when the stock vests, it’s worth $10 per share. Here’s how the numbers break down in two different scenarios: one where you file the 83(b) election, and one where you don’t.

Scenario 1: Filing the 83(b) Election

1. At the time of the stock grant:

• You decide to file the 83(b) election and pay taxes on the stock’s value at the time of the grant.

• Total taxable income = 10,000 shares × $1 per share = $10,000.

• You pay ordinary income tax on this amount. Assuming a 37% tax rate, your tax bill is $10,000 × 37% = $3,700.

2. When the stock vests:

• Since you’ve already paid taxes on the stock at the lower $1 per share value, you owe no additional taxes when the stock vests.

3. When you sell the stock:

• After the stock vests, you sell it at $10 per share.

• The difference between the sale price and the value you paid taxes on is considered a capital gain.

• Capital gain = (10,000 shares × $10) - (10,000 shares × $1) = $90,000.

• You pay capital gains tax on the $90,000 at the long-term capital gains rate of 20% ($90,000 × 20% = $18,000).

4. Total tax bill:

• Tax paid upfront: $3,700.

• Capital gains tax: $18,000.

• Total taxes paid = $21,700.

Scenario 2: Not Filing the 83(b) Election

1. At the time of the stock grant:

• You don’t file the 83(b) election, so you don’t pay any taxes upfront.

2. When the stock vests:

• You are taxed on the stock’s value when it vests, which is now $10 per share.

• Total taxable income = 10,000 shares × $10 per share = $100,000.

• You pay ordinary income tax on this amount at a rate of 37% ($100,000 × 37% = $37,000).

3. When you sell the stock:

• Since the stock’s value hasn’t increased after vesting, there’s no capital gain, and no additional tax is owed.

4. Total taxes paid = $37,000.

The Big Difference: $15,300 Saved

By filing the 83(b) election, you saved $15,300 in taxes. The reason? You locked in the lower tax rate on the stock when it was worth less. Without the election, you had to pay taxes on the higher value at vesting.

What if You Miss the 83(b) Deadline?

If you miss the 30-day deadline to file the 83(b) election, there’s no way to retroactively file. However, this doesn’t mean you’re out of options. There are still other tax strategies to explore that can help reduce your tax burden, such as:

• Maximizing capital losses: If you have other investments that have lost value, you can use those losses to offset some of the taxes owed on your stock gains.

• Strategic stock sales: If you don’t file the 83(b) election, you may want to consider selling your stock over time to spread out the tax liability.

In any case, missing the deadline should prompt a larger conversation with your financial advisor about the best way to manage your stock compensation moving forward.

The Bottom Line: Get Professional Guidance

Filing a Section 83(b) election can significantly reduce your tax liability, but it’s a decision that shouldn’t be taken lightly. While it can save you a lot of money if your stock appreciates, it also comes with risks. If the stock decreases in value or the company fails, you’ll have paid taxes upfront on an overvalued stock.

To make the best decision for your situation, it’s important to work with a financial planner who understands the complexities of equity compensation and taxes. At Wysopal Wealth, we specialize in helping equity-compensated individuals and startup founders navigate these decisions. We’ll help you determine whether the 83(b) election is right for you and create a plan that aligns with your long-term financial goals.

Key Takeaways:

1. 83(b) election: Lets you pay taxes on stock when granted, locking in a lower rate.

2. Who should consider it: Founders, employees with restricted stock, and those exercising options early.

3. Missed deadline: No retroactive filing, but other tax strategies can help.

4. Consult a professional: Work with a financial advisor to make the right decision.

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Think an 83(b) election may be right for you? Book an Intro call to find out.

5 Strategies for Exercising Private Company Stock Options

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Are you a startup employee or at a private company holding stock options? If you have stock options as part of your equity compensation, deciding when and how to exercise them can be complex. This guide breaks down five strategies to help you make an informed equity decision.

What Are Stock Options?

Stock options give employees the right to purchase shares of their company’s stock at a set price, known as the exercise price. The goal is to eventually sell those shares for a profit if the stock price increases. However, there are various strategies for when to exercise these options, each with its own benefits and drawbacks.

1. Exercise at Liquidity

One common strategy for startup employees is waiting until a liquidity event—such as an IPO or acquisition—before exercising their stock options. This strategy appeals to those who want to minimize risk or avoid upfront costs.

Benefits of Exercising at Liquidity:

• Lower-risk: You avoid holding illiquid shares for an extended period.

• No out-of-pocket costs: Often, you can exercise without paying upfront.

• Time to assess the company’s future: You gain a longer window to evaluate the company’s performance.

Drawbacks:

• Higher tax liability: Exercising and selling shares on the same day may result in ordinary income tax, even when holding Incentive Stock Options (ISOs).

Restricted career mobility: Post-termination exercise provisions can limit your ability to switch jobs without forfeiting your options. If you’re somebody who “enjoys the next adventure” and wants to move companies quickly, that can be an issue here.

2. Forfeiting Your Stock Options

Unfortunately, forfeiting stock options is more common than many employees realize. In my experience, this can happen due to a lack of education about equity compensation or simply missing key deadlines.

Reasons for Forfeiture:

1. Lack of understanding: Employees might not fully grasp the value or mechanics of their stock options.

2. Expired stock options: Stock options typically expire 10 years from the grant date(varies, so check your grant documents). If you fail to exercise within that window, they become worthless.

3. Post-termination exercise period (PTEP): After leaving a company, you generally have only 90 days to exercise your stock options, or they are forfeited.

4. Exercise costs: Many employees are unable or unwilling to cover the costs of exercising private company options. If the cost is to much for your liking, you may simply need to walk away. Or, if you’d like to buy your shares, you may need to look at financing or other loan options.

5. Tax costs: Depending on the type of options, you may face taxes such as ordinary income tax or the Alternative Minimum Tax (AMT). As with the exercise cost, if the tax is too high, you may need to seek outside monies to help.

6. Lack of confidence in the company: Some employees choose not to exercise their options if they don’t believe in the company’s upside potential. This one is tough as you’ve poured your blood, sweat, and tears into helping build the company.

3. Exercise at Expiration (Before a Liquidity Event)

What happens if you’ve held your stock options almost to expiration, and there’s still no liquidity event? You have two choices: exercise the options or let them expire.

Before making a decision, consider:

• Company outlook: Do you still believe in the company’s long-term success?

• Cash flow: Can you afford the cost of exercising without jeopardizing your financial stability? 

• Concentration risk: How does exercising affect the diversification of your investment portfolio?

• Tax implications: What will be the tax impact in the current year?

• Long-term goals: Does exercising align with your broader financial objectives?

• Exit strategy: How and when will you sell your shares in the event the company does have a liquidity opportunity?

Take time to evaluate and answer these questions. Be honest with yourself and understand that your decision is right for you, and that's what matters most.

4. Early Exercise for Stock Options

If your stock option plan allows it, early exercise can be a savvy tax-planning strategy, particularly if you believe in the company's future success.

What is Early Exercise? Early exercise allows you to exercise unvested stock options and begin the holding period for long-term capital gains immediately. This can result in significant tax savings when you eventually sell your shares.

Key Steps:

1. Exercise your stock options while they are still unvested.

2. File an 83(b) election within 30 days to start your holding period for capital gains tax.

Pros:

• Lower potential tax burden if the exercise price equals the fair market value (FMV) of the stock.

• Start your capital gains holding period earlier, which can lead to lower tax rates when you sell.

Cons:

• You risk holding illiquid stock that may not vest or could become worthless.

• Early exercise isn’t available in every stock option plan, so you may need to negotiate for it.

5. Exercise Stock Options as They Vest

For many, exercising stock options as they vest can be the most effective way to manage taxes and maintain control over their equity compensation.

Why This Works:

• By exercising options regularly, you can start the capital gains holding period earlier, similar to early exercise.

• You avoid the higher tax costs associated with waiting too long to exercise, such as AMT or ordinary income tax on non-qualified stock options.

How to Maximize This Strategy:

1. Stay informed: Keep track of your company’s fair market value and any upcoming events that could affect the stock price.

2. Evaluate regularly: Assess the costs and tax implications of exercising as your options vest. It may take some financial planning, but the benefits often outweigh the work involved.

Final Thoughts: How to Choose the Best Strategy for Exercising Stock Options

Selecting the right stock option exercise strategy is crucial to maximizing the value of your equity compensation. Whether you’re waiting for a liquidity event, considering early exercise, or evaluating other options, the decision should be based on your financial situation, company outlook, and long-term goals.

Consulting with an expert in equity compensation—such as a Certified Financial Planner (CFP) who specializes in stock options—can provide you with tailored advice to make the best decision for your financial future.

By educating yourself on these strategies and making thoughtful decisions, you can unlock the full potential of your stock options and achieve greater financial peace of mind.

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Tax Diversification Within Your Portfolio and Balance Sheet

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Tax diversification is a crucial but often overlooked aspect of financial planning. By strategically spreading your investments across different tax treatments, you can enhance flexibility, minimize tax liabilities, and maximize long-term wealth. Understanding how to incorporate tax diversification within your portfolio and balance sheet can help you optimize financial outcomes and maintain tax efficiency over time.

The Importance of Tax Diversification

Tax diversification plays a vital role in long-term financial security. By strategically allocating your investments across different tax categories, you can significantly reduce your tax burdens in retirement. A well-diversified tax strategy also provides flexibility when withdrawing income, giving you greater control over taxable income in different market conditions. Additionally, tax diversification helps hedge against future tax law changes, ensuring that your portfolio remains resilient even as tax policies evolve.

Understanding Different Tax Buckets

To effectively implement tax diversification, it is important to understand the three primary tax categories where your investments can reside: taxable, tax-deferred, and tax-free accounts.

Taxable Accounts

• Taxable accounts include brokerage accounts and other investment vehicles that do not receive tax-advantaged treatment. While these accounts are subject to capital gains tax on any realized gains, they also provide advantages such as liquidity and flexibility. With proper planning, tax-efficient strategies like tax-loss harvesting can help minimize tax liabilities in these accounts.

• Within taxable accounts, the most tax-efficient investments are those that generate long-term capital gains rather than ordinary income. Examples of suitable assets include individual stocks, index funds, and tax-exempt municipal bonds. These investments minimize tax consequences while allowing funds to grow efficiently. In contrast, actively managed mutual funds, REITs, and high-turnover investments should generally be avoided in taxable accounts since they can generate high taxable distributions. Research has shown that holding equities in taxable accounts can be beneficial when turnover is low, as it avoids converting preferential capital gains treatment into ordinary income taxation. 

Tax-Deferred Accounts

• Tax-deferred accounts, such as 401(k)s, and traditional IRAs allow contributions to grow without immediate tax implications. Contributions to these accounts may be tax-deductible, reducing your taxable income in the year of contribution. However, withdrawals in retirement are taxed as ordinary income, so it is crucial to plan strategically to manage future tax liabilities.

• Investments best suited for tax-deferred accounts include those that generate high taxable income, such as bond funds, real estate investment trusts (REITs), and actively managed mutual funds. Since these accounts defer taxes until withdrawal, income-generating investments can grow without immediate tax consequences, making them more effective within tax-deferred structures. Placing high-turnover investments in tax-deferred accounts is often preferable. 

Tax-Free Accounts

• Tax-free accounts, such as Roth IRAs, Health Savings Accounts(HSAs) and Roth 401(k)s, offer significant tax advantages. Contributions to these accounts are made with after-tax dollars, but qualified withdrawals, including both principal and earnings, are entirely tax-free. By incorporating tax-free accounts into your strategy, you can create a tax-efficient withdrawal plan in retirement, reducing your overall tax exposure.

• Since Roth accounts provide tax-free growth, they are best suited for high-growth investments such as stocks, equity ETFs, and small-cap or emerging market funds. These investments have a higher potential for capital appreciation over time, maximizing the benefit of tax-free withdrawals. Additionally, Roth accounts do not have required minimum distributions (RMDs), allowing assets to grow indefinitely if not needed for retirement expenses.

Why Tax Diversification Matters

Having a diversified tax strategy ensures that you are not overly reliant on any single type of account, reducing potential risks and increasing financial flexibility.

Managing Future Tax Liability

• By diversifying across taxable, tax-deferred, and tax-free accounts, you can prevent unexpected tax burdens in retirement. Strategic withdrawals from different account types can help you stay within lower tax brackets, ultimately minimizing lifetime tax expenses.

Enhancing Income Flexibility

• Tax diversification provides you with the ability to withdraw funds from different accounts based on the most favorable tax treatment at the time. This flexibility allows you to better manage taxable income, avoid unnecessary taxes, and adapt to changing financial circumstances.

Optimizing Estate Planning

• For those looking to pass wealth to future generations, tax diversification can play an important role in estate planning. By leveraging Roth conversions and other tax-efficient strategies, you can minimize the tax burden on your heirs, ensuring that more of your assets are preserved for your loved ones.

How to Achieve Tax Diversification

Achieving tax diversification requires careful planning and strategic decision-making.

Strategic Contributions

• A well-balanced approach to contributions involves spreading investments across taxable, tax-deferred, and tax-free accounts. Taking advantage of employer-sponsored retirement plans, Roth IRAs, and brokerage accounts can ensure a diversified tax strategy that offers maximum flexibility.

Tax-Efficient Withdrawals

• When planning withdrawals in retirement, prioritizing tax efficiency is key. Typically, withdrawing from taxable accounts first allows tax-advantaged accounts to continue growing. Additionally, Roth conversions during lower-tax years can reduce future tax burdens and enhance retirement income flexibility.

Common Mistakes to Avoid

Despite the benefits of tax diversification, many investors fall into common pitfalls. Relying solely on tax-deferred accounts can lead to significant tax burdens in retirement when required minimum distributions (RMDs) begin.Also ignoring what you want out of your life. For example, if you are looking for financial independence before full retirement age, you’re most likely going to need to build up a large taxable bucket of assets. Its hard to do this if you’re only putting money away into tax-deferred accounts. Ignoring Roth contributions or conversions can mean missing out on future tax-free income. Additionally, overlooking the tax implications of investment withdrawals can lead to unnecessary tax expenses that could have been avoided with proper planning.

Final Thoughts

Tax diversification is a powerful tool for financial stability and long-term wealth preservation. By structuring your portfolio and balance sheet strategically, you can mitigate tax burdens, enhance financial flexibility, and secure a more efficient retirement strategy. Taking the time to assess your current tax diversification strategy and making necessary adjustments can provide lasting financial benefits. If you need assistance in optimizing your tax strategy, consulting a financial professional can help ensure that your investments align with your financial goals.

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The 5 Biggest Mistakes People Make with RSUs (and How to Fix Them)

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Restricted Stock Units (RSUs) can be a fantastic wealth-building tool, but they also come with pitfalls that can trip up even the most financially savvy. If you have RSUs as part of your compensation, avoiding these five common mistakes can save you from tax surprises, financial instability, and concentration risk. Here’s what to watch out for—and how to fix them.

1. Not Knowing Your Vesting Schedule

Many people assume their RSUs will just “show up” when they vest, but failing to track your vesting schedule can lead to missed planning opportunities.

Fix It: Grab your grant documents and build out a simple spreadsheet with your vesting dates. Even better, set a reminder on your phone for each vesting date. Why? Because when your shares vest, you may need to take action—whether that’s selling some for taxes, rebalancing your portfolio, or making sure your overall strategy stays on track.

2. Misunderstanding Taxation

RSUs are taxed as supplemental income when they vest. For most employees, companies withhold 22% for federal taxes. But if your income is high enough to push you into a 32% or 37% tax bracket, you’re likely under-withholding—and that could mean a surprise tax bill or worse penalties come April.

Fix It: Run a projection to see if your RSU withholdings match your actual tax bracket. If you’re under-withheld, you may need to make estimated tax payments, adjust your withholding on your RSUs, or adjust your W-4.

3. Lack of Diversification

When RSUs vest, you might be tempted to hold onto them, especially if your company is performing well. But keeping too much of your wealth in one stock creates concentration risk—meaning a downturn in your company’s stock could significantly impact your financial well-being.

Fix It: Have a strategy for selling your RSUs. Decide in advance what percentage you’ll sell upon vesting and reinvest into a diversified portfolio. Remember, putting all your eggs in one basket isn’t a great idea when it comes to investing.

4. Not Considering Unvested RSUs if You Change Jobs

Unvested RSUs don’t travel with you if you leave your company. This means that if you’re considering a job switch, you might be walking away from a significant portion of your compensation.

Fix It: Before making any career moves, check how many RSUs are unvested and when they’re set to vest. If a large vesting date is coming up, it might make sense to stay a little longer. Also, negotiate your new compensation package with RSU loss in mind—some companies may offer a signing bonus or equity grants to make up for it.

5. Relying On RSUs to Cover Fixed Expenses

Since RSU vesting depends on your employment and company stock performance, relying on them for fixed expenses (like mortgage payments or rent) can be risky. If your company’s stock declines, your compensation could take a hit—making it harder to meet those financial obligations.

Fix It: Treat RSUs as a bonus, not a guaranteed paycheck. If you want to incorporate them into your cash flow, use them for flexible expenses or investments rather than relying on them to cover essential bills. This way, you won’t be caught off guard if your stock takes a dip.

Final Thoughts

RSUs can be a great thing for wealth building—if managed correctly. By understanding your vesting schedule, planning for taxes, diversifying, evaluating unvested shares before job changes, and not relying on RSUs for fixed expenses, you’ll be in a much stronger financial position.

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