How to Make the Most of Your RSU Payout
It may feel like we just rang in 2020, but February is already here! And, for P&G RSU (restricted stock unit) award recipients, this means it’s time to receive your RSU payouts. As a refresher, a P&G RSU represents a right to one share of stock, which is then converted to an actual share on the release date.
You decide how to receive the RSU payouts—either in the form of P&G common stock or in cash. This decision is called your “delivery preference,” and you already made that decision when the RSU was awarded in the fall. And, within the last week, those with P&G RSUs scheduled to release at the end of February have received a reminder to review their delivery preference.
Here’s an added bonus—those who would like to change their preference can! Active employees wishing to change their preference can do so through their Life & Career/My Stock Options tools. The RSU vesting date is February 27, 2020, and you have until one day before (February 26) to change those preferences. Non-active employees can also change their preference but must do so via www.pg.com/options before February 21, 2020.
So, now that you have been reminded of your current delivery preference and how you can change it, the question becomes, should you change it?
How to Choose Between P&G Stock or Cash
Before outlining our decision-making framework, let’s dispel one misconception right out of the gate. Many believe there is an income tax advantage of one delivery preference over another. In reality, the income tax consequence of receiving cash is identical to that of receiving shares and, therefore, should have no bearing on your delivery preference. So, you may be asking yourself, if income taxes are not a driver in this decision, what should be?
Two Words: Concentration Risk
Remember to take a close look at how much of your wealth—and future wealth—is tied up in P&G. Add up the stock in your P&G Profit Sharing Trust (PST) and Savings Plan, your stock options and RSUs, and any shares held outside of the retirement plan. Also keep in mind that, simply by being a P&G employee, you are reliant on the company’s long-term growth and success.
If a disruption in P&G stock would significantly affect your ability to achieve your financial goals, then you should elect to receive your RSUs in cash. This is the situation for most P&G employees, who are significantly exposed to the financial health of P&G. Financial professionals refer to this as “concentration risk”—the risk you incur when your net worth is significantly invested in one company. At Truepoint, we consider any singular company exposure greater than 5% of your net worth to be a concentration. By cashing out your RSUs, you can use the proceeds to invest in a broadly diversified portfolio and thereby lower your P&G concentration risk.
You may be thinking that even if you’ve elected to receive shares, you can sell them and convert them to cash at some point. However, there can be a temptation to hold onto the shares for “just a bit,” hoping that the stock price will increase. But, it could just as easily go down. Let’s look at an example. If P&G stock is at $126 per share when you receive your payout, you may be tempted to wait until it hits $135 per share before you sell. Yet, you also know that the stock price could go down. If it does, will you still hold onto your shares until they hit your $135 goal, or will you want to sell them once they got back to $126?
As you can see, it’s impossible to determine the “right time” to sell. If you receive your RSU payout in cash, the shares will be liquidated automatically. But if you received your RSUs as shares, it may be difficult to sell your shares right away. We advise you to not try and time the markets!
Additionally, we mentioned in last month’s newsletter the outperformance of P&G stock versus the S&P 500 over the past 15 months; this outperformance makes it an attractive time to receive cash for your RSU payout and reinvest the proceeds in a broadly diversified portfolio, should you not need the cash for upcoming expenses.
What Are Your Short-Term Expenses?
Many current employees have major financial expenses on the horizon; they’re at a stage in life when they’re working toward many concurrent goals. These might include saving for a child’s college tuition or other major educational expenses, paying down debt, or investing money for retirement. Rather than taking on more debt or failing to save properly, let your RSU payout provide the cash reserve you need to achieve your shorter-term financial objectives. Similarly for retirees, your RSU payout could provide the cash needed for home renovations, a vacation, or funding grandchildren’s 529 plans.
A Few Words of Caution
Finally, some may elect to receive their RSUs as shares, in order to use them for charitable gifting and receiving a tax deduction. A few words of caution here:
- The real tax benefit of giving stock for charitable purposes is in giving away capital gains. When donating a long-term stock holding, taxpayers can deduct the fair market value of the donated shares at the time of the gift. This is most powerful when highly appreciated stock is involved. There are likely better options for stock donations than shares received from an RSU payout.
- Timing is important. Any shares you receive are treated as short-term stock holdings for 12 months. Tax laws dictate that for any stocks you’ve owned for less than a year, you can only deduct your cost basis. To put this in concrete terms, if P&G’s stock price goes from $126 to $135 in six months, you will only be able to deduct $126 per donated share, not $135. Therefore, you should wait 12 months to donate any shares in order to get a tax deduction for the full value at the time of donation.
Tax implications can vary for everyone, so talk to your Truepoint advisor to determine the most prudent way for you to donate stock.
Working with a wealth management firm like Truepoint—with significant experience working with P&G employees and retirees, as well as a comprehensive set of experts who can help with tax planning, investments, and estate concerns—can be truly beneficial in making all these decisions.