By: Matt Weier, CFA, CFP® 29 January 2021

Your 3M RSUs (and Stock Options*) are About to Vest!

You’ve been waiting patiently for the last three years and the day is now fast approaching! The Restricted Stock Units (RSUs) that you earned for your service in 2017 and were awarded in 2018 will vest on Friday, February 6th, 2021. They’ll at last be yours to do with as you see fit. You can finally enjoy the fruits of your 2017 accomplishments!

But what does it mean when they vest? And what should you do with them? A cash bonus is easy. You receive it and you can easily spend or save it. Your RSUs will soon be real shares of 3M stock that are all yours. It will be important that you treat them as the valuable tool they are.

This won’t be a full analysis of RSUs (or Stock Options) – you can find that here – but this quick guide will hopefully arm you with what you need to successfully utilize the award you’ve been patiently awaiting for the last three years. Answers to the two questions posed above will help you navigate your RSU vesting with confidence and hopefully make the right decision for your needs.

*First, a quick note on your 3M Stock Options:

If you also received Stock Options as a part of your LTIP award in 2018, these too will be fully vested on February 6th. At the time of this writing, this award is “under water,” meaning that the market price is below the strike price of $233.63. Please keep in mind that you still have seven years before they need to be exercised, which is plenty of time for them to create meaningful wealth.

You may notice that your stock options awarded in 2019 or 2020 are now, or will be, partially vested and “in the money.” You may even be thinking of exercising them. Please try to avoid this if possible. Just like you wouldn’t plant an apple tree seedling and expect to be eating lots of apples after only a few years, your stock options need patience to fully reap the greatest potential value. Exercising them too soon may significantly curtail the wealth potential of this valuable asset.

What happens when your 3M RSUs vest?

One way to think about your RSUs is that they are simply a bonus that could be paid in cash, but rather is paid in the form of shares of stock. This analogy will provide context for most of what follows.

While your RSUs remain restricted (or unvested), 3M carries them as a liability on their balance sheet. This means that they owe them to you – it’s a matter of at what price the share trades on vesting day. As long as you remain with the company or meet retirement requirements during the restricted period, they will then become an asset of yours once they vest.

A couple days after the stated vesting date (to allow for processing), the shares will be released from being a line item in the “3M Restricted Stock Unit” category in your Fidelity profile. From there, they will arrive as unrestricted shares of 3M stock in the investment account you have at Fidelity, where you also purchase shares through the GESPP, if you participate in this. At this point you are free to do with them as you wish.

That all seems pretty simple. But there are some things that happen on their way from being restricted shares to becoming unrestricted shares. As with many things, taxes are the culprit here. Because these shares are effectively income for you, they are taxed accordingly. You’ll have Federal, State, Social Security, and Medicare taxes withheld from the value of these awards. Your income and associated taxes are based upon the fair market value of the shares on the day they vest.

The withholding for your RSUs is pretty straightforward. A portion of shares are withheld to cover all the taxes on the vesting day with the remaining shares distributed to you. So, if you’ve been watching 119 shares of RSUs the last three years and find only 76 shares available to sell after they’ve vested, the other 43 shares went to pay various taxes.

Something to keep in mind is that the withholdings on your RSU income is fixed at 22% for Federal taxes, regardless of how the withholdings on your paycheck are configured. It is also fixed at the state level – for those of us in Minnesota, it is 6.25%. For higher earners, these rates may be well below what your actual marginal rates are for the year. Because of this potential for underpayment, it can be helpful to project your taxes for the full year to make up any shortfalls either through additional paycheck withholdings or estimated payments. We want you to avoid surprise tax liabilities next spring!

To wrap up this segment on a positive note – you will also receive the dividends that accrued during the three-year vesting period as a cash payment. In the 119-share example above, that would provide another approximately $2,000 of cash when the shares vest.

What should you do with your 3M RSUs when they vest?

Here’s a helpful question to consider. If you were to receive a bonus in cash, instead of 3M shares, would you use that cash to purchase more shares of 3M stock?

I’m going to go out on a limb and assume that buying more shares of 3M stock wouldn’t be your first choice. If you agree with this, then it would make sense to sell your shares and put them to work. You could use the proceeds to either help pay for a goal or reinvest them to diversify your investments beyond the other 3M shares you may likely already own.

Here’s a list of common ways we see others using their RSUs to further their goals:

Investment related:

  1. Re-investing in a brokerage account in diversified investments
  2. Funding a Roth IRA (“back door” or normal contribution)
  3. Contributing to kids’ (or grandkids’) 529 College Savings Account

Non-investment related:

  1. Spring break or summer vacation family trips
  2. Upcoming house projects
  3. Replenishing cash reserves after a previous expense or building cash reserves for a future planned goal/expense
  4. Tuition payments

Maybe you have one of the above in mind or possibly something else, but what is important is that this resource is used to further your life or financial goals. It’s ok if you decide to hold on to your shares, but accumulating too much stock in one company does present unique risks and challenges to financial goals.

I hope this helps provide some additional perspective as your 3M RSU vesting date approaches. Please let us know if we can be of help.

**Note to clients: We will be reaching out to you individually in the coming days to discuss specific plans and recommendations for your RSUs.

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