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Welcome to the 40th edition of the Tech Financial Planning (TFP) newsletter.

If you work at a public tech company, RSUs can represent a significant portion of your total compensation

While you can’t control the timing of when your RSUs are taxed, there are ways to use your RSUs to lower your total tax bill.

Either now or in the future.

In this newsletter we’ll break down 5 possible ways to use your RSUs to reduce taxes, run through an example, and importantly, consider when you don’t want to use these strategies.

TL;DR

Use RSUs to fund pre-tax accounts to reduce taxes this year
Use RSUs to fund after-tax accounts to reduce taxes in retirement
Use RSUs to give to charity and save on taxes this year

A quick refresher on rsus

RSUs are taxed as income when they vest.

And it’s important to add that you can’t control the timing of when you receive your RSUs (aka vesting).

When they are granted to you, there’s a set schedule of when you will your RSUs over time (aka vesting schedule).

You will receive your RSUs on certain dates that are determined by your company - not by you.

Accordingly, you can’t control the timing of the tax on your RSUs.

When you get your RSUs as shares (aka they vest), you will owe taxes.

However, there are a few ways to reduce taxes, now or in the future (if it fits your plan - see then end.

Here’s 5 ideas

Idea #1 - Fund / increase Pre-tax 401k contributions

You could increase your pre-tax contributions if you aren't maxing out your 401k from your paychecks.

This can take out some of the taxes from your RSUs.

So lets say instead of putting in $10,000 into your 401k, you now put in $20,000 each year.

That’s $10,000 less income that you will be taxed on this year.

Idea #2 - Fund / increase HSA contributions

If you have a HSA, you could increase / max your HSA contributions if you haven’t hit the limit yet.

Similar to increasing your 401k contributions, this will help you reduce your taxes this year (and can be used for future medical expenses)

If you don’t have a HSA, you could also consider a FSA / dependent care FSA.

Idea #3 - Fund a 529 plan

Some of this is state dependent and will save you taxes now (i.e. Minnesota tax credit of up to $3,000 for couples married filing jointly versus California which has no state benefit).

But funding a 529 plan is like a Roth IRA for education - you don’t pay taxes on the growth, and when you take money out for qualified education expenses (like college tuition), you won’t pay any taxes.

Idea #4 - Fund all things Roth

Similar to #1, but in reverse.

Instead of getting tax savings this year, you will get tax savings in retirement.

You are building up a big bucket of money that you won’t pay taxes on when you take the money out in retirement.

Some potential options (depending on your retirement plans, income, etc)

Roth 401k
Mega Backdoor Roth
Roth IRA
Backdoor Roth

There’s a lot of opportunity here!

Idea #5 - Charitable giving

If you give to charity, you could use your RSU money to be more strategic with your giving.

The problem for many people who give to charity is that these gifts might not be deductible if the standard deduction is higher than your itemizations.

One way to solve this is by putting together several years worth of charitable gifts into one year.

As we’ll see in our example below, if you put 5 years of donations into one year, that might provide you the opportunity to itemize and lessen your taxable income.

Plus, if you donated the money to a donor advised fund, you could still distribute the money over 5 years as you normally would.

An important note: charitable giving only makes sense if you are charitably minded.

Even with a tax deduction, by giving to charity you will still end up with less money than if you had just kept the money and paid the taxes.

The math doesn’t work out where you give $100 and save $200.

It’s more like give $100 and save $20 to $40 (depending on your tax rate)

Example time

Let’s say you will vest $100,000 worth of RSUs this year, and for simplicity purposes, your combined Federal and State effective tax rate is 35%

In other words, you will expect to pay $35,000 in taxes for your RSUs.

However, you take some strategic moves:

You put an additional $10,000 into your pre-tax 401k - $3,500 expected tax savings
You put an additional $5,000 into your HSA (family coverage) - $1,750 expected tax savings
You normally give $5,000 a year to charity and take the standard deduction - no tax benefit for your charitable giving. So this year you front load your giving for the next 5 years and give $25,000 to charity this year (either bunching or a Donor Advised Fund). This (combined with other itemizations) puts you over the standard deduction. For simplicity’s sake, let’s say by $10,000 as well. Expected tax savings - $3,500

In short, you used $40,000 from your RSU proceeds to save more for retirement (401k), build up your healthcare account (HSA), and give to charity.

And for doing so, you reduced your taxes by $8,750.

Not bad!

Putting It All Together

We’ve focused a lot on tax savings here, either now or in the future.

But it’s important to remember that the only goal doesn’t have to be tax savings.

Depending on your plan, their can be better uses for your RSU income.

Some ideas we’ve implemented with clients:

save up for a down payment
pay down debt
fund daycare
diversify investments
build an emergency fund
house projects
travel
or even hold on to some!

We can’t lead with taxes - they are important, but they aren’t the only thing.

The key is to align your saving and investing with your plan and your dreams.

WHENEVER YOU’RE READY, THERE ARE 3 WAYS I CAN HELP YOU

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