I was going to try and write about RSUs (restricted stock units) in one post, but I finally determined that my recent nightmare scenario deserves its own standalone assessment – yeah, it was some holier-than-now-fucked-up-shit that almost made me take a flamethrower to Wells Fargo. So today I’m going to be nice and mild-mannered, running you through how my RSUs work for anyone who is curious, and fill you in on my customer service fiasco next time.
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I like to think that I’m a pretty smart guy. And when it comes to finances, this isn’t my first rodeo. Between my professional career in M&A, my education and my personal zeal for investment and portfolio theory, I feel very comfortable that I can figure out most things financial. With a little time and research, anything business related should be in my wheelhouse.
However, once again, I was humbly reminded of just how much I don’t know. My recent run in with RSUs, flat out, kicked my ass.
So first off, what’s an RSU?
I’m not going to get into all the specifics but if you want a better understanding check out Full Time Finance’s article, Stock Incentives: Options and RSUs. He explains them much better than I would ever be able to.
But in a nutshell, RSUs are restricted stock that is most likely granted to you in tranches over a period of time. For example, Johnny boy makes $100K a year, he has a 20% RSU bonus, he gets $20K in an account in his name at the end of the year but he can’t access it. His vesting is a 25% tranche per year. So, in the following year 25% vests and he gets $5K (assuming the value hasn’t changed – but hopefully this shit mimics TSLA – haha) and so on. The real wealth builds up when the stock increases in value and your tranches layer on top of each other.
This can be an amazing wealth building tool if you stay at a company for a decent amount of time, and here’s the real kicker: your company does well! The more that stock increases the more valuable those RSUs become. Duh! But on the flip side, the more they increase, this might lead to you sticking with an employer longer than you wanted – they call them golden handcuffs for a reason (wink). But if you combine these bad boys with a high variable comp, you got one potent income package that will hopefully send you to the moon and back while slapping down an early FI date on that good ol’ calendar of life.
Is there risk involved?
Of course there is! This is stock we’re talking about. But here’s the funny thing about company stock. Everyone and their mother tell you to sell it right away. You need to diversify and common wisdom posits – if your paycheck (cashflows) are already dependent on your employer, you don’t want company stock tied up in them as well in case they go under (Enron) – and this is both a widely accepted truth in finance as well as the politically correct answer. But, and this but is not financial advice, here’s something to chew on…
There was study completed a few years back (which I need to find again and link to) that looked at how 401K millionaires in the US had invested in order to achieve that coveted millionaire status. And I can’t remember the number exactly, but it was pretty wild that the study concluded the majority of 401K millionaires had reached that milestone by owning and leaving company stock – even though most advisors recommended to never do this. Hahahaha. So yes, there is immense risk in owning company stock. But the data tells you, owning appreciating company stock is the fastest and most prevalent way to become a 401K millionaire (not financial advice). How’s that for a catch-22? Anyway, just something to keep in mind when you hear the you-must-sell-company-stock-hype all the time in the FI echo chamber. It’s kind of one of those classic situations – do what I say not what I do. Of course, try to really understand your risk tolerance before you ever dabble in any of these things.
I’ll also warn with RSUs – you need to read the fine print. Be careful and understand the difference on restrictions vs. vesting. When your stock vests it can’t be taken away from you (I think in most cases – this is not financial advice again because I don’t know the full answer – maybe someone can chime in here in the comments), but even once stock vests, there can still be restrictions on it, meaning just because the stock is vested does not mean the same thing as having access to it. In my case, I have a one-year time restriction on when I can access my stock from the vesting date.
Alright, now that we talked about RSUs in the general sense, I thought I’d share how mine actually work. Now, don’t quote me on this, but I believe if you are receiving US based stock (securities on the NYSE) you probably have a very straightforward method. Mine are not… hahaha.
Like the example I mentioned earlier, I receive my full number of shares in an unvested account each year, and these shares vest in tranches of 25% each following year. However, when it comes to taxes (again no financial/tax advice and I am not an accountant), this is where things get interesting. My company is a multi-global corporation that is not headquartered in the US. Therefore, the RSUs are in a foreign currency and purchased on that country’s home stock exchange. In order to cover my US taxes, in July of each year, the company purchases my total bonus amount and then sells shares in October in the number of shares that would cover my taxes. So, when I finally have access to the shares, the only taxes I need to pay would be in capital gains and not bonus if I were to sell them. I have no clue how common this method of dealing with RSU taxes is, however, from the limited amount of people I have discussed RSUs with so far, they seem to think this is a very bizarre way of handling them.
In addition, since my RSUs are in a foreign account, this causes other complications which I did not realize at first, and that I’ll be getting into more detail in my next post (foreign shares converted to ADRs). Particularly, that when dealing with international accounts there is no easy way to transfer money. Your only option is to wire, which holy fucking shit is one insane rip off!
I’ll leave you with this final example. In my RSU account, dividends can’t be rolled over, so they are put in a separate cash account. When I went to transact them, thinking I could do a simple ACH transfer over to my US account (which my contract said I should be able to), I found that my only option was to wire them. Keep in mind, I’m talking a pittance here, $32.00 in dividends. But here’s the real irony, after checking with my banks, they all had the same wire rates, it would cost me $30.00 to wire the money out and $15.00 to receive the wire. So, it would cost me $45.00 in transaction fees to try to access my $32.00 – a $13.00 loss. Hahahaha. How fucked up and hilarious is that? When I read the fine print in my RSU contract I did not see this coming. All I can do is smile because it just seems so ridiculous to me.
Anyway, I’ve never had to deal with wiring money before in my life, but this seems fucking insane. In an era with blockchain, Venmo and Zelle, why the fuck isn’t there a better way to transfer money? C’mon world, yes, we sure as hell are better than this!!!
So, one of you FI nuts get on it! Save the world and bring blockchain to the masses so that money can be transferred instantaneously and across currencies!
Alright, now that I’ve warmed you up and you’ve had a small taste of my frustration. Get ready for the next post in which I let loose and lose most of my brain cells in the herculean task of transferring these shares to my US account.
Stay safe out there and I’ll see you back here in a few days.
-Q-FI
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P.S. Have you ever had experience with RSUs before? Was it anything like mine? What was your strategy with them? Did you hang on to them or sell as soon as you could? Let me know.
Interesting one. I’ve had both RSUs and stock options over my career. Mechanically, I never had any real issues with either. I generally sold/exercised when I needed $ or the value was very high. For example, sold to find the 20% down on my home. In a total of 4 situations, 2 I did really, really well with and the other 2 ended up being worth essentially nada.
I can tell you the way to described how your foreign-based employer treats your RSU is not even remotely standard, aside from being mechanically bizarre as you point out.
Looking forward to reading the next article on this.
Interesting. Yeah, a few other people I have asked advice on this said the same as you – that my employer is beyond weird in the transaction structure. Thanks for sharing your experience – it helps me get some perspective on these. I’ve never had the options yet, only RSUs.
We got SAR’s, stock appreciation rights. They were very strange in that they were worthless unless the value of the shares increased. If the stock was worth $20 a share when you got the SAR’s “shares” then after you vested you could at any time “sell” your SAR’s and you would receive in cash the amount this imaginary stock had grown in value. For instance they granted me 10,000 shares at $15 a share. A year later I was vested in 25% of the SAR’s and the stock value had gone up to $40 a share. So I could sell 25%, or 2,500 shares and would receive the difference between $40 and $15 which was $25. $25 times 2,500 shares was equal to $62,500 (Not actual amounts). But if the stock was still selling for $15 then selling the SAR’s made you zero. Or you could hold them and hope they went up before they expired. They did not expire for ten years. But if you left employment then you only had 60 days to redeem them. They made me six figures of cash during my employment so we all loved them. I retired when I still had $60,000 I could redeem, it was December and I was retiring in January, but SAR’s income counted just as ordinary income and my last year I made a ton of money. Because I was in a high tax bracket I reasoned if I just held on to the stocks for 30 more days I could sell them in January, a new tax year when I’d be making much less income as a retired dude. Smart huh? Nope, the value of the stock fell like a rock to below the price the SAR’s were granted at, they went underwater, and stayed there until my right to sell them expired. Cost me $60,000 of real money on my way out the door. My advice is to sell every share of any kind of stock award on the first day you are vested and eligible and put that money into index funds instead. I don’t care about the millionaire study, almost all the other data shows that index funds are clearly better than a single stock, especially one someone else picks for you. That’s what I did, except for that last mistake, and I ended up well over a million in my 401K.
I love it Steveark – you’re bringing out the big guns here!
Thanks for sharing your example. I have never come across SAR’s before and found your situation very interesting. On your $60K out the door, I probably would have done the same as you. The gamble of 30 days seems like a decent trade off for the tax advantage. But hindsight is always 20/20, and you’re right, losing everything hurts more than the mere gain on the tax efficiency.
I also agree with you on the 401K and selling company stock. Most people should do that and index. But I did find it fascinating that the reality didn’t match the advice. Everyone touts index funds (as they should), but the majority of 401K millionaires hit that mark because of high company stock allocation. And I’ll also be honest, I have made some very big bets and risky trades with previous company stock in my 401K that paid off handsomely. But these were very risky and not advised. I was in a good place and could take some big swings for the home run. Obviously, if I got burned then I’d be sitting here explaining how stupid I was. Instead I can say the truth, I got LUCKY and took the money off the table. The one thing I’ve learned in investing over the years, is not to confuse luck with genius.