RSA vs. RSU: What You Need to Know as an Equity Recipient
If you’ve been granted equity compensation like Restricted Stock Awards (RSAs) or Restricted Stock Units (RSUs), congratulations! Equity awards are an excellent way to participate in your company’s success and build long-term wealth. While RSAs and RSUs sound like they could be similar, they are actually quite different. Understanding the type of equity compensation you received is critical in making informed financial and tax decisions.
In this guide, we’ll break down the differences and offer tips to help you maximize the value of your equity awards. Plus, don’t forget to download our free RSU Essentials Guide for detailed advice on managing your equity compensation!
What’s the Difference Between RSAs and RSUs?
Both RSAs and RSUs represent a way for your employer to grant you company equity, but the way they work—and how they’re taxed—varies significantly.
Restricted Stock Awards (RSAs)
With RSAs, you’re granted actual shares of stock upfront. However, these shares typically come with restrictions, such as a vesting schedule, that must be satisfied before you gain full ownership.
- Ownership: You own the shares as soon as they’re granted, but they’re subject to restrictions until vested.
- Tax Opportunity: You can file an 83(b) election to pay taxes on the shares’ value when you receive them. This can lock in a lower taxable amount if your company’s stock is expected to grow significantly.
- Best for Startups: RSAs are often issued by startups with a low fair market value (FMV), which minimizes your upfront tax burden.
Pro Tip: If you receive RSAs, seriously consider filing an 83(b) election within 30 days of your grant. This allows you to pay taxes based on the current (likely low) value of the shares rather than their higher value when they vest.
Restricted Stock Units (RSUs)
RSUs have become super popular lately. RSUs are a promise from your employer to deliver shares of stock once you meet certain conditions, such as staying with the company for a set period or meeting performance targets.
- Ownership: You don’t own shares until they vest.
- Tax Simplicity: RSUs are taxed as ordinary income when they vest, based on the shares’ value at that time.
- Best for Established Companies: RSUs are more common in larger companies with higher stock values, offering you equity without the need for upfront payments.
Pro Tip: Plan ahead for the tax hit when your RSUs vest. If the RSU compensation bumps you up a tax bracket or you are already in a higher tax bracket, you may want to make an estimated tax payment or set aside some cash to help pay the taxes that go above what your Company will withhold for you.
Key Differences Between RSAs and RSUs (at a Glance)
| Feature | RSAs | RSUs |
|---|---|---|
| When You Own Shares | Immediately, but subject to restrictions | After meeting vesting conditions |
| Tax Timing | Taxed at grant (with 83(b) election) or at vesting | Taxed at vesting as ordinary income |
| Best for | Startups with low stock value | Mature companies with higher stock value |
Tips to Maximize Your Equity Compensation
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Understand Your Vesting Schedule
Whether you have RSAs or RSUs, the vesting schedule determines when you gain full ownership of your shares. Keep track of these dates and plan accordingly for tax events. -
Plan for Taxes
- For RSAs, consider the 83(b) election to lock in a lower taxable amount.
- For RSUs, prepare for the ordinary income tax hit when shares vest. Know that your Company will withhold 22% federal taxes, but that may not be enough.
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Assess the Growth Potential
RSAs can be highly advantageous if your company is in its early stages and expected to grow rapidly. RSUs, on the other hand, are less risky because you’re not investing upfront, making them ideal for established companies. -
Consult a Financial Advisor
Equity compensation can be complex. A financial advisor or tax professional can help you make strategic decisions about selling shares, managing taxes, and integrating equity into your overall financial plan. Book a call with an expert today.
Take Control of Your Equity Awards
Receiving RSAs or RSUs is an exciting opportunity, but it’s essential to understand how they work and plan ahead to make the most of them.
To dive deeper into managing your RSUs and making smarter decisions, download our free RSU Essentials Guide today. This guide will help you:
- Understand vesting schedules and tax rules.
- Plan for tax payments when your equity vests.
- Strategize for holding or selling your shares.
Download the RSU Essentials Guide now and take the first step toward turning your equity compensation into lasting wealth!
