Diversify RSUs to Protect Financial Goals
Financial advisors recommend tech workers sell excess RSUs to protect their financial goals and avoid tying both their human and financial capital to one company. High savers often max out 401(k)s and equity plans but overlook single-stock risk, making balance key, according to social media.
Diversifying RSUs is crucial due to the concentration risk of tying your financial well-being to a single company. Your income, retirement savings, and equity position may all depend on one company's success. Financial advisors often suggest selling a portion of vested RSUs to reinvest in a diversified portfolio of assets like equities, bonds, and real estate. A systematic vest-and-sell strategy helps to avoid emotional decisions and reduce the risk of trying to time the market. Some advisors recommend selling a predetermined percentage, such as 25%, of newly vested RSUs each quarter. Establishing a clear rule about how much company stock you're willing to hold, often in the range of 15-25% of your portfolio, is a good starting point. When RSUs vest in Canada, they are taxed as ordinary income based on the fair market value of the shares at that time. Employers typically withhold taxes, CPP, and EI by selling some shares to cover these obligations. A second taxable event occurs when you sell the shares, triggering capital gains tax based on the difference between the sale price and the fair market value at vesting. To minimize taxes, consider spreading RSU sales across multiple years to avoid higher tax brackets. Contributing RSU income to RRSPs or TFSAs can provide tax deductions or tax-free growth. You might also donate RSUs to charities or donor-advised funds to receive a tax deduction. Failing to diversify RSUs can lead to significant financial setbacks, as seen with Silicon Valley Bank employees before its collapse. Developing a well-crafted RSU strategy, aligned with long-term financial goals, can provide confidence in your financial decisions.
