Amazon, one of the tech giants of our era, offers its employees a unique compensation benefit known as Restricted Stock Units or RSUs. These RSUs are a valuable addition to an employee's overall compensation package and can significantly contribute to their long-term financial well-being. In this comprehensive guide, we will delve into every aspect of Amazon RSUs, from eligibility and grant details to vesting schedules and tax considerations.
Are You Eligible for Amazon RSUs?
As of 2022, the good news is that the majority of Amazon employees are eligible for RSUs. However, there are a few exceptions to keep in mind. If you work fewer than 30 hours per week, you may not qualify for these stock grants. Additionally, employees at certain job levels may not receive RSUs. Assuming you don't fall into either of these categories, you can expect to benefit from Amazon's RSU program.
Understanding Your RSU Grant
The number of RSUs you receive at Amazon is not a fixed amount for all employees. Instead, your RSU grant is determined based on your target compensation level, which varies depending on your role and job level. This approach aligns Amazon employees' interests with the company's success by giving them a stake in the business.
Upon joining Amazon, you will receive an RSU Award Summary, which outlines the details of your grant. It's important to note that Amazon employees often receive additional RSU grants during their annual review and compensation adjustment, typically in the first quarter of each year. However, new employees usually won't receive additional shares at their first review.
The Unique Amazon RSU Vesting Schedule
Amazon's RSU vesting schedule sets it apart from many other companies. Instead of the typical 25% vesting each year over four years, Amazon's on-hire RSU vesting schedule is as follows:
- Year 1: 5% of the initial grant vests at the end of your first year.
- Year 2: 15% of the grant vests at the end of your second year.
- Year 3: 20% of the grant vests at the six-month point of your third year, with another 20% vesting at the 12-month mark, totaling 40%.
- Year 4: The vesting schedule for the fourth year mirrors that of the third.
To illustrate this schedule, let's consider an example. Suppose you've been granted $500,000 in Amazon RSUs, equivalent to 4,000 shares based on a $125 per share stock price at the grant date. Assuming a constant stock price over the four-year grant period and ignoring taxes, your vesting would look like this:
- Year 1: $25,000 vests after one year.
- Year 2: $75,000 vests at your second anniversary.
- Year 3: $200,000 vests, with $100,000 at the six-month point and another $100,000 at the 12-month mark.
- Year 4: The fourth-year vesting follows the third-year schedule.
It's worth noting that Amazon might introduce a monthly vesting schedule in the future as part of its efforts to retain employees.
Additional RSU Grants and Their Vesting
Once you complete your second year at Amazon, you become eligible for another RSU grant. The number of RSUs you receive depends on your performance and the stock's performance. However, these additional RSUs typically vest no earlier than year 4 and sometimes in year 5.
RSU grants awarded during annual performance reviews generally vest in May and November of each year. Keep in mind that the vesting may not follow an even schedule, as Amazon determines your target compensation band for the current year based on the stock's value at vest, unlike many other companies that use the value at grant. Additionally, employees subject to trading windows can adjust their tax election only during an open window.
Tax Considerations for Amazon RSUs
As your RSUs approach their vesting date, it's essential to have an investment plan in place. You have two primary options:
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Selling RSUs for Taxes: Under this option, you sell enough shares to cover the withholding taxes on the value of your shares, with the remaining proceeds held in Amazon shares. The default withholding rate is 22%, which includes federal tax withholding, and early in the year, it may be slightly higher to cover Medicare and Social Security tax. Changing this to not withhold for taxes and planning to pay your tax bill with cash later is not recommended.
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Selling RSUs for Cash: This straightforward option involves selling your shares and receiving the proceeds. However, it's important to note that this still incurs the default sell-to-cover amount, which is advisable to prevent unexpected tax bills.
The default 22% withholding rate may not be sufficient for those with significant RSU income, so consider adjusting your withholding amount as needed. You can change your election for a single grant or all previous and future grants at www.amazonstock.com. Be aware that employees subject to trading windows can only modify their tax election during an open window.
Putting Your Vested RSUs to Good Use
Once your RSUs vest, it's time to decide how to make the most of this financial opportunity. You have several options:
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Boosting Your 401(k) Contributions: If you're struggling to max out your 401(k) with your base salary, you can sell shares to increase your cash position, allowing for larger 401(k) contributions. Note that you cannot contribute RSUs directly to your 401(k).
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Contributing to a 529 Account: If you're planning to support your children's higher education, a 529 account can help you prepare for their educational expenses.
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Adding to Your Personal Savings: If you have no immediate financial needs, RSUs can help you build a nest egg for future goals.
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Creating an Emergency Fund: Financial uncertainties can arise, making it essential to establish an emergency fund for unexpected expenses.
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Enjoying Your Hard-Earned Rewards: It's not all about saving; consider how to spend your money responsibly to enjoy the lifestyle you desire while still achieving your financial goals.
Seeking Professional Guidance
Effectively managing your Amazon RSUs requires a well-thought-out plan and financial expertise. Consider working with a financial planning firm that specializes in tech professionals and understands the intricacies of your company's benefits. It's important that the firm you choose is a fiduciary and employs CERTIFIED FINANCIAL PLANNER™ professionals. If you're seeking professionals who prioritize clear and jargon-free communication, reach out to Consilio Wealth Advisors for a complimentary introductory call.
In summary, Amazon RSUs are a valuable part of your compensation package, and understanding their intricacies is crucial to make the most of this financial opportunity. Get the expert guidance you need and take control of your financial future with Amazon RSUs.
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