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Why you shouldn't hold on to your RSUs
How to maximize gains & reduce taxes on vested stock
Sumeet Ganju
June 08, 2025 • Estimated Reading Time: 8 minutes
💰️ RSUs can be a significant source of wealth. IF managed properly.
For many professionals in tech, RSUs (Restricted Stock Units) are a significant part of their total compensation. It’s not uncommon for tech pros (or bros) to own hundreds of thousands of dollars of company stock.
But here’s the catch: RSUs are not an investment plan. They’re a form of income, and a risky one if left unmanaged.
Read on to find out why hanging on to your RSUs can be dangerous. And what to do instead.
⚠️ 3 reasons you shouldn’t hold on to RSUs
You are doubling down on company risk
You already depend on your company for a paycheck. Things can go south at your company at any time. When that happens, not only could you lose your job, your company’s share price can go down significantly. All at the same time.
You could lose wealth quickly
Tech stocks are volatile. RSUs that look like a windfall today, can drop 30-50% in a matter of months. Wiping out years of gains.
You’ve already paid tax
Employees often mistakenly believe that holding onto RSUs can be more tax-efficient. However, you’ve already paid income tax at vesting. From that point on, any decline in stock value is a loss to you.
Holding on to your RSUs is, at best, a speculative bet with your post-tax money.
As a smart investor, would you invest all your savings - every month - in a single company stock?
If the answer is no, then you should not be holding on to your company stock.
Instead, consider selling RSUs as soon as they vest, and investing proceeds in a well-constructed investment portfolio. This can help you grow your wealth without single-stock risk.
3 strategies for divesting stocks with large unrealized gains
What if you you’ve already accumulated significant gains on your vested stock?
Selling them all at once might lead to large tax bill. These three strategies can help you reduce your tax-bill while still achieving diversification.
These are somewhat complex strategies and we recommend working with a knowledgeable financial advisor.
Note: For some of these strategies to work, your RSUs need to be freely transferrable to external accounts or entities. Many companies impose trading/transfer restrictions on RSUs due to insider trading policies. Those restrictions may make some of these strategies unfeasible.
🏦 Exchange Fund (not to be confused with an ETF)
An Exchange Fund is a private investment fund that pools stock from multiple investors into a single fund. Each investor gets a stake in the fund (in proportion to their investment). Exchange funds can track an index such as the S&P 500 or Nasdaq-100.
With an exchange fund, your single stock ownership is exchanged into ownership of a diversified stock fund. You don’t have to sell your shares & pay taxes on your gains.
Exchange funds have a holding period of 7+ years. At the end of the holding period, you can redeem and receive your allocation of diversified stocks. For example, if the exchange fund tracks the S&P 500, you will receive a portfolio of stocks that constitute the S&P 500.
Because you receive a new set of shares at redemption, your gains remain unrealized. Exchange funds are therefore a powerful tool for diversifying your wealth while deferring taxes & compounding gains.
There’s quite a few caveats here:
Exchange funds are not liquid. They do not trade publicly on a stock exchange. They typically require a holding period of at least 7 years. Early withdrawals can result in penalties, and you will receive your original single stock contribution instead of a diversified stock portfolio.
Investors need to be accredited investors (i.e. typically high net-worth individuals meeting SEC standards of income and wealth)
These funds typically have very high minimum contribution amounts (traditionally $500k to $1M, but some newer ones accept $100k)
Because they are private funds, they have their own unique risks and have traditionally been available only through advisors or private networks.
📊 Individualized direct indexing
Direct indexing is a strategy where you invest in the individual stocks of an index. So instead of investing in an S&P 500 ETF, a direct indexing account holds the individual stocks that make up the S&P 500 index.
Direct indexing can lead to higher after-tax gains compared to investing in an ETF, due to more tax loss harvesting opportunities. A direct indexing strategy modified for your personal situation can help diversify a concentrated stock position.
Let’s say you own $200K worth of META shares. An individualized direct indexing strategy would:
Sell a portion of the META shares (let’s say shares worth $50K). Pay taxes on your gains. (Let’s assume you realize a profit of 100% ($25K) from the sale. Assuming long-term capital gains tax rate of 20%, you are left with $45K)
Invest the $45K in a direct indexing portfolio that tracks S&P 500.
And here’s the key part: Normally, a direct indexing account for the S&P 500 would include META stock. However, in this case, exclude META from the stocks that are purchased in this account. And instead, contribute META stock that you already own. Assuming META makes up 3% of S&P 500, you could contribute 3-5% to this account, from the META stock you already own. So about $2K of existing META stock can be added to this account.
To summarize, we were able to convert $52K worth of single stock into a diversified S&P 500 portfolio worth $47K, while losing about $5K in taxes (10% of value)
With direct indexing, you may be able to recoup some of those taxes over the next few years, due to it’s enhanced tax loss harvesting capabilities.
🪴 Charitable Donation
If you are philanthropically inclined, donating to a Donor-Advised Fund (DAF), can help you reduce taxes, while helping you do significant good.
DAF is a charitable investment account that lets you donate assets towards charitable causes. The funds in a DAF grow tax-free and can be granted to IRS-qualified nonprofits at your discretion.
Donating a portion of your RSUs to Donor-Advised Funds (DAFs) can get you an immediate tax deduction for the full value of your appreciated stock. This can be really impactful during high-income years to reduce your tax liability.
Once contributed, the stocks held in the DAF can be sold and invested in a diversified portfolio to grow tax-free - and granted to non-profits at any time at your discretion.
Note: It’s important that you understand the limitations of DAFs. You cannot receive a personal benefit from DAFs, there are restrictions on what investments are available and which entities can receive the funds. Do your due diligence and work with a knowledgeable advisor.
🏗️ What’s the best approach?
Overall, we believe that the best approach is to sell your shares at the time of vesting and invest the proceeds in a solid investment portfolio.
This avoids the need for complicated tax-savings strategies, while immediately reducing risk.
However, if you are sitting on a large amount of unrealized gains in a single stock, you could do a combination of these strategies for the best result.
For example, let’s say you have $1M worth of NVDA stock. A sample strategy in year 1 could be:
Allocate $250K worth of stock to an Exchange fund
Allocate $200K to direct indexing strategy.
Allocate $100K to a DAF
Keep $450K worth of NVDA stock as-is.
You would pay tax only on the $200K sale of stock (i.e. 20% of your holdings).
The $100K contribution to a DAF would give you a tax-deduction of $100K. This could greatly reduce the tax liability from the $200K NVDA stock sale 🔥
In this scenario, you could reduce your single stock risk by more than 50%, while minimizing wealth-loss due to taxes.
We hope you found this useful.
InverseWealth was founded with the mission of inverting the wealth pyramid, and making sophisticated strategies more accessible to the 99%.
If you want to talk to an advisor, send us an email at [email protected] or book a call.
Till next time,
Sumeet @ InverseWealth