How to Diversify Investments After Receiving Rsus

A client of mine went from a net worth of $400k to 1.3 million in a few years. Here's how we did it... First, you probably think it's from great investment returns. Nope, just a good plan. >> We spent a lot of time focusing on what we can control (the financial and tax planning), and less on what we cannot control (stock market returns) >> Created a cash flow plan from salary to max out retirement accounts, and fund a brokerage account. We target a 30% savings rate. >> Created a plan to sell RSUs at vesting and use the proceeds to diversify, fund goals, etc. Our target is to save and invest 50% of RSUs. >> Elected and used the ESPP to maximize money. We sell immediately to lock in the discount (free money!) and use the cash to fund some short-term goals. >> Fund a backdoor Roth annually. We use the remaining ESPP proceeds for this purpose. >> Max out an HSA and invest the funds instead of spending them. >> Map out a plan for bonus income. We aim to save at least 50% of bonus income and use the rest for goals and other purposes. >> Annual tax planning and strategy to make sure there are no tax surprises and use all available tax strategies that make sense. >> Created an investment allocation that's backed by evidence (not market timing). A strategy they can stick with for decades. >> Automated as much as possible for ongoing savings and investing. >> Provide accountability and have clear, proactive action steps that my client can follow. They know precisely what they need to do and when. >> When life changes or goals change, we strategize, adjust recommendations, and update the action steps. Growing your net worth and financial optionality doesn't require beating the market. It requires a good financial and tax planning strategy that informs your investment strategy. Returns are necessary, but good planning is even more critical.

"Hold your RSUs for one year" That's what a co-worker said… But here's what they aren't thinking about My client works at a large public company, earning $450K with significant equity comp. Her co-worker's advice sounded logical: → "Hold for long-term capital gains treatment" → "You'll pay less in taxes" → "Just wait one year after each vest" But there's major pieces missing. For one: You already pay taxes on the stock upon vesting And what about her unique situation/goals? → 40% of her net worth was going to be in company stock → She was taking massive concentration risk → Her cash flow was unpredictable due to stock volatility → She was nervous about the stock price dropping The real issue wasn't tax "optimization." It was risk management. She implemented a different approach: → Sell 75% upon vesting → Hold 25% for long-term → Diversify proceeds → Create predictable cash flow for goals Results shortly after: → Reduced reliance on a single stock → Built a diversified portfolio she's confident with → Eliminated stress about daily stock movements → Still able to capture potential upside from growth the stock and long-term capital gains The lesson? Your co-worker's tax advice might be technically correct… But it could be financially dangerous. Every RSU strategy should balance tax efficiency with risk management.

One of the biggest financial mistakes I’ve made—and seen other tech employees make—is not having a strategy to diversify concentrated stock positions built up from RSUs. One way is to sell your stocks and invest in an ETF, but if these positions have appreciated a lot over time, this would mean paying a massive capital gains tax bill. There is an alternative way to diversify that could save you hundreds of thousands of dollars. If you sell your stocks to buy and hold an ETF, you don’t get tax benefits—and you may be hit with a massive, upfront tax bill. By diversifying into a direct index instead of an ETF, you track an index while capturing capital losses to offset gains from your stock sales, which can significantly reduce your tax bill. (More on direct indexing below [1].) But whether you do this in one shot or over time matters … a lot. Imagine you have a concentrated stock position worth $1 million with $500,000 in capital gains and compare two approaches, keeping in mind that direct indexing can help you generate ~14.7% of your investment in capital losses in the first year alone; ~8% in the second; ~6% in the third; and so on for a total of ~38% over 5 years [2]. The tax calculation of diversifying into an ETF immediately is simple: you owe taxes on $500,000 in gains immediately. But diversifying into a direct index equally over four years (and assume your capital gains remain constant, so you are selling $250,000 every year with $125,000 in gains) gets interesting: (1) In the first year, you owe taxes on $125,000 in gains and capture $36,750 (14.7% * $250,000) in capital losses (2) In the second year, you owe taxes on $125,000 in gains and capture $56,750 (14.7% * 250,000 + 8% * $250,000) in capital losses (3) In the third year you owe taxes on $125,000 in gains and capture $71,750 in capital losses (14.7% * $250,000 + 8% * $250,000 + 6% * $250,000) (4) And so on Hence, splitting your stock sales over multiple years can help you stack your harvested losses, translating into realized tax savings—and you preserve optionality to hold stocks through times of gain. My team and I will work with another 20 customers this year to create customized, tax-efficient plans. If you want to explore direct indexing as a way to diversify your stocks or other concentrated stock positions while minimizing your tax bill, get in touch at mo@frec.com

31 and 32 year old make $210K before equity comp at a larger tech firm They want to know they are on the right track and understand what changes they could make to improve their situation. They are heavily invested in their company stock but have been unsure about the best way to manage this moving forward and allocate funds toward other goals they have (retirement, kids, saving for their kids, etc) Here are a few things we are looking at with their plan: --> Right now they've got about $150K in company stock (60% ESPP, the rest is vested RSUs with more shares that have been granted and vesting in the coming years). They aren't maxing out the ESPP but I suggest they do this because they have the best plan I have ever seen. 15% discount on shares plus a 2-year lookback period. Example: If the stock is $50 at the beginning of the offering period and it goes up to $100, they still get to buy shares at a 15% discount ($42.50 per share) and they've got a 135.29% return on their dollars invested --> Then hold the ESPP shares until a qualifying disposition is hit, assuming they don't need the $ for other goals. This gets a 15% long-term capital gains treatment vs. 24%/32% ordinary income rates --> Holding these shares has investment risk of course so what we can do is sell out of existing RSUs and future RSUs as soon as they vest. They've been collecting shares for several years now and we can sell out of about $80K without paying capital gains tax (the stock went up a lot and then came down a lot so a lot of different cost basis as shares have consistently vested) --> We can use these proceeds to put $ in savings for a future downpayment on their next house—a goal of theirs—, fund the kids' 529 plans, fund backdoor Roth IRAs, or fund the mega backdoor Roth option available with her company 401K plan (many larger tech firms offer this which many don't realize). This reduces risk and uses the same $ to go way further since we have tax-advantaged places to put the same dollars Pretty great playbook to run and the key is to have the plan BEFORE future shares and future stock comes in. Often what happens is nothing because if the stock goes up, we want to keep shares and if the stock goes down we also hang onto shares because we think it'll come back up