By Mike Gibbons, RICP®
Restricted stock units (RSUs) have taken hold as a creative way to compensate workers. They have proven especially helpful to pharmaceutical companies, as their extended vesting schedules work well with the long development timelines in big pharma. Knowing how RSUs work—especially how they impact taxes—is vital for pharmaceutical employees when making financial plans. Below, discover answers about restricted stock units, how they work, and strategies to optimize tax implications.
What Are Restricted Stock Units?
RSUs are equity vehicles that reflect and reward workers for high performance. They’re often included in compensation packages to attract and retain highly skilled workers.
A company awards restricted stock units to employees on a certain grant date. For Abbott and AbbVie, for example, that grant date happens in February.
RSUs are valued in line with the company’s current share price. However, they’re not exactly stock shares—not yet—although they represent equity in the company.
After employees get the grant, a vesting period begins. During this time, employees must meet certain benchmarks, typically time-bound and performance-driven. Once the employees attain their set goals—continued excellent performance, length of service, or other milestones—they take full ownership of the stock shares.
Vesting schedules come in two types—graded (shares distributed in implements or phases) and cliffs (all shares vest immediately). Once the shares vest, they become taxable income based on their current value.
Why RSUs Work Well in Pharmaceutical Companies
RSUs are frequently tied to years of service. That works hand in hand with the typically long development cycles of new drugs and products. This gives employees an extra incentive to remain with the company over the long term.
Pharmaceutical products also generate a lot of corporate revenue. With consistent market growth, RSUs can appreciate quickly and push share prices higher. Employees are more closely tied and invested in the company’s success. RSUs can strengthen that bond.
Pros and Cons of Restricted Stock Units
Although the benefits of RSUs can be great, they do risk some potential drawbacks. First, let’s look at some of the advantages:
Wealth building: If a company issuing RSUs performs strongly over several years, RSU holders may notice accelerated growth in their portfolios.
Alignment with growth: RSUs drive employees toward high performance and innovation, positioning the company for great growth.
Retention of top talent: Professionals who stay with the company and foster future developments are richly rewarded when RSUs vest.
Disadvantages include:
Tax implications: Vested shares are taxable, and employees may be driven to higher tax brackets if their income grows.
Market fluctuations: The volatile nature of the stock market can affect the vested shares’ value.
Illiquidity: RSUs aren’t easily converted into cash, and employees may have to take measures on their own to cover taxes or monthly expenses.
Carefully weigh these factors when making a decision on RSUs.
Tax Timing and Mitigation Strategies for RSUs
To derive the most value and mitigate tax exposure from restricted share units, here are a few strategies Abbott and AbbVie employees can take.
Time Share Sales
Shares from RSUs trigger income tax the minute you sell them. You may decide that it’s worth it if you have financial needs. However, if you delay the sale (and can stomach the risk), the shares may qualify for long-term capital gains taxes, usually at lower rates than income tax.
Limit the Number of Shares You Sell
If you sell just a fraction of your vested shares, you may be able to distribute the taxable event over the long term by staggering future sales.
Roll the Shares Into Tax-Advantaged Retirement Accounts
If you can do so, you might consider rolling shares into an IRA or 401(k) plan that defers taxes before or after retirement, depending on the vehicle.
Learn More About RSUs
Restricted stock units can be great sources of income for those who are patient enough to wait out the vesting period (and work hard, of course). Gibbons Financial Group can guide you on how to use RSUs or other financial incentives.
Call 224-419-5550, contact me online, or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.