Managing your Costco RSUs

Maximizing Your Wealth: A Guide to Managing Your Costco (COST) RSUs

Restricted Stock Units (RSUs) are a significant part of the compensation for many top employees, and for Costco team members, they represent a powerful wealth-building tool. Taking an intentional, well-informed approach to managing your Costco RSUs is crucial for maximizing returns and minimizing tax liabilities.

Investment Strategy: Should I Hold or Diversify My Costco Stock?

1. The Concentrated Approach: Aim Big, But Risky

The "Aim Big" strategy involves holding onto your vested Costco (COST) stock. Many long-term Costco employees have seen immense success with this "do nothing" approach because Costco's stock performance has historically outperformed the broader market.

• The Upside: Potential for superior growth from a high-performing stock.
• The Risk: Significant concentration risk. History is full of once-dominant market leaders that eventually suffered extended periods of poor returns.

2. The Diversified Approach: Slow but Steady

Sell your Costco RSUs immediately upon vest and diversify into the whole stock market via a low-cost index fund. RSUs are taxed when they vest, so there is no additional tax for selling immediately.

• Recommendation: For most individuals using RSUs to fund essential goals like retirement, the disciplined approach of diversification is generally the most prudent strategy.

Tax Management: Minimizing RSU Tax Liability

The Three Key RSU Tax Events

1. Grant: No tax impact.
2. Vest: Fair market value taxed as ordinary income on your W-2. Alert: Costco defaults to withholding a flat 22% federal rate — if your bracket is higher, this causes a large unexpected tax bill.
3. Sale: Any gain since vest is taxed as a capital gain.

Tax Planning at Sale

• Sell immediately upon vest: zero capital gains tax.
• Sell within 1 year: taxed at ordinary income rate.
• Sell after 1 year: taxed at lower long-term capital gains rates (0%, 15%, or 20%).

Watch out for tax cliffs: Federal Capital Gains Tax jumps from 15% to 20% above ~$600k for joint filers. Net Investment Income Tax adds 3.8% for high-income earners. Washington State Capital Gains Tax adds 7% on gains above $270,000/year.

Build Your RSU Action Plan

1. Define your goal — if the money is for long-term security, prioritize diversification.
2. Confirm your vest withholding is appropriate for your actual tax bracket.
3. Strategize annual sales quantities to stay below major tax cliffs.

We are a fiduciary financial advisory firm based in Issaquah, less than a mile from Costco headquarters. We'd love to help.