Restricted Stock Units (RSUs) are taxed as ordinary income at fair market value when they vest, both during your career and after retirement if vesting continues. Once vested and held, subsequent gains are taxed as capital gains when sold. For retirees still vesting RSUs from a former employer or with significant accumulated vested shares, RSU planning intersects directly with Social Security claiming, IRMAA Medicare surcharges, and Roth conversion strategy.
RSUs differ from stock options in their tax treatment. When RSUs vest, the fair market value at vesting is treated as W-2 ordinary income subject to federal, state, FICA, and (for high earners) additional Medicare tax. The employer typically withholds shares to cover an estimated tax liability, but the withholding (often at a flat 22% rate) frequently undershoots the actual tax owed for high-earning recipients in the 32-37% brackets, leaving an unexpected tax bill at filing time.
After vesting, your basis in the shares is the fair market value at vesting (which you've already paid tax on). Subsequent gains or losses are capital gains when sold, short-term if held less than a year after vesting, long-term if held longer. This creates a planning question: hold for the lower long-term capital gains rate (and bear the single-stock risk) or sell immediately (and accept short-term ordinary income treatment but eliminate concentration risk)? For most recipients, immediate or near-immediate sale of vested shares is the right answer to avoid double-down on company concentration.
Retirement-related RSU issues: many executives at AbbVie, Abbott, Baxter, and similar companies continue vesting RSUs after retirement under change-of-control or service-based vesting provisions. Vesting income post-retirement can: (1) create unexpectedly high taxable income years that push the retiree into higher Medicare premium tiers (IRMAA); (2) reduce eligibility for ACA marketplace healthcare subsidies in pre-Medicare bridge years; (3) interfere with Roth conversion strategies designed for low-income early retirement years.
Coordination strategies: time Roth conversions and large IRA distributions to occur in years when no significant RSU vesting is scheduled. Use charitable giving (donor-advised fund contributions) to offset RSU vesting income in high-vesting years. For executives with discretion over vesting timing or accelerated vesting elections, model the tax consequences across multiple years before making elections. Consider whether to defer certain bonuses or comp into subsequent years where the tax bracket is lower.
Key facts
- RSU vesting: taxed as ordinary income at fair market value on vest date
- Default federal withholding on RSU vesting: 22% (often inadequate for high earners)
- Post-vest sale: capital gains (short or long term based on holding period after vesting)
- Basis in vested RSU shares: fair market value at vesting (already taxed once)
- Post-retirement vesting: can spike income, trigger IRMAA, reduce ACA subsidies
- Common strategy: sell vested shares immediately to eliminate single-stock concentration
Should I hold or sell vested RSU shares?
For most recipients, the answer is sell. Holding vested RSU shares means doubling down on your employer's stock, you already had concentration through your salary, your 401(k), your pension, and possibly your unvested equity. Adding vested RSU shares to that exposure compounds the concentration risk. The capital gains tax difference (short-term vs long-term) between selling immediately vs holding 12+ months is rarely worth the risk for the average concentration level. Exception: if your total company stock exposure is already moderate (under 10% of net worth) and you have strong conviction in the company's prospects, holding can make sense.
Can I defer RSU income to retirement years?
Generally no. RSU income is recognized at vesting under IRC Section 83 and isn't deferrable. However, some companies offer Restricted Stock Units with 'double-trigger' vesting (service + change of control) that can defer income recognition to a later event. Some executives also have access to nonqualified deferred compensation plans where bonus or RSU-equivalent income can be deferred to retirement years, but these have their own restrictions, risks (NQDC is unsecured), and irrevocable election timing. Don't assume RSU income can be deferred without specifically reviewing the award agreement.
