4-Year Vesting With a 1-Year Cliff: What It Means and How the Cliff Vest Is Taxed

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A 4-year vesting schedule with a 1-year cliff means none of your grant vests during your first 12 months, then 25% vests all at once on your one-year anniversary. The remaining 75% usually vests in equal monthly or quarterly slices over the next three years. If you leave before the cliff date, you typically forfeit the entire grant.

For a household earning $750,000 or more, the cliff is rarely a question of meaning. It is a question of timing: when you can change jobs without walking away from six figures, and how a single large vest lands on your tax bill in California or Washington. This guide covers both, with a worked example.

How a 1-year cliff on a 4-year RSU grant works

Take a new-hire grant of restricted stock units (RSUs) worth $480,000, vesting over four years with a 1-year cliff and quarterly vesting after that:

Dollar values assume the share price stays flat. In practice the grant is a fixed number of units, so the value at each vest moves with the stock. Your grant agreement and plan document set the exact dates, and some employers count the cliff from your start date while others count from a later grant date. For how to value units on a given day, see how to calculate RSU value.

What “3-year cliff vesting” means

You will also see 3-year cliffs. In an equity grant, it means nothing vests until your third anniversary and then the whole tranche vests at once. Some retention and executive grants use it.

The phrase is more common in 401(k) plans. Your own salary deferrals are always 100% vested, but an employer match can be on a schedule. Under a 3-year cliff schedule for employer contributions, you go from 0% to 100% vested at three years of service. The IRS vesting page shows this as one example; its graded example instead reaches 100% at year six, and plans can choose other schedules, including immediate vesting. Check your summary plan description before a job change, because an unvested match stays behind.

How the cliff vest is taxed in California in 2026

RSUs are taxed as wages when the shares are delivered at vest, on the full market value that day. There is no 83(b) election for RSUs, because an RSU is a promise to deliver shares, not property, until delivery (Treas. Reg. §1.83-3(e)). The 83(b) election applies to restricted stock and early-exercised options.

Employers usually withhold federal tax on the vest at the 22% supplemental rate for 2026, and must use 37% on supplemental wages above $1,000,000 in the calendar year (IRS Publication 15). Withholding is a prepayment, not the tax owed. At this income level, 22% almost always falls short.

Worked example: a $750,000 Bay Area household hits the cliff

Assumptions (illustrative): married filing jointly in California. One spouse joined a public tech company at a $300,000 base with the $480,000 grant above. The other is a physician earning $450,000. With a bonus and some investment income, and after deductions, taxable income before the vest is assumed to be $700,000 federal and $750,000 California. The cliff delivers $120,000 of shares.

• Federal income tax. For 2026, the 35% MFJ bracket runs to $768,700 of taxable income and 37% applies above it. So $68,700 of the vest is taxed at 35% ($24,045) and $51,300 at 37% ($18,981), a total of $43,026.
• Federal withholding at 22%: $26,400. The shortfall is about $16,626, due by April or through higher estimated payments.
• Medicare: 1.45% plus the 0.9% Additional Medicare Tax, since the household is over $250,000 MFJ, is 2.35%, or $2,820. Social Security tax (6.2%) applies only if this spouse has not yet passed the 2026 wage base of $184,500 when the vest hits.
• California income tax: the vest falls in the 10.3% bracket ($742,958 to $891,542 for joint filers, 2025 schedule, since 2026 brackets are not yet published), about $12,360.
• California SDI: 1.3% of all wages with no cap for 2026, or $1,560.

Total: about $59,766 before any Social Security tax, or roughly half the vest. The family receives around $120,000 of stock on paper and should plan on about $60,000 of it being theirs. If the employer sells shares to cover withholding, the shortfall still has to come from cash. See withhold to cover vs sell to cover for how that choice works.

The same cliff in Washington

Washington has no individual income tax in 2026, so the $120,000 vest carries no state income tax. Payroll still takes the WA Cares Fund premium of 0.58% of wages with no cap ($696 here) unless you hold an approved exemption. Two things change the picture for high earners:

• From January 1, 2028, Washington will tax AGI above $1,000,000 at 9.9% (WA Department of Revenue). A household whose wages plus vests pass $1 million may owe state tax on RSU income from 2028. Details, including how income is defined, are pending DOR guidance.
• If you hold vested shares for more than a year and sell at a gain, Washington’s capital gains tax is 7% above the annual standard deduction ($278,000 for 2025, the latest published) and 9.9% on taxable gains above $1,000,000.

In California, by contrast, any later gain is taxed as ordinary income with no lower rate for long-term gains.

Three decisions the cliff forces

1. Leaving before the cliff. An offer that arrives in month 10 means walking away from the full first tranche, $120,000 in our example. That is a negotiating number: ask the new employer to make you whole with a sign-on grant or cash. Parental and medical leave can also affect vesting under some plans, so read the plan document before planning leave near the cliff date.
2. Which tax year the cliff falls in. A cliff in December adds a large lump to a year that may already include a bonus. Starting in late January instead of December moves the cliff into January, a new tax year. You cannot usually move the date, but you can raise withholding on your W-4 or make an estimated payment in the same quarter.
3. Keep or sell. Once shares vest, holding them is the same as using $120,000 of cash to buy your employer’s stock. Many families who already depend on that employer for salary and future vests decide to sell the cliff shares and diversify. Our guide on sell to cover vs same-day sale explains the mechanics.

Common mistakes at the 1-year cliff

• Treating the gross vest value as spendable. Plan on roughly half in California at this income level.
• Assuming 22% withholding settles the bill, then finding a five-figure balance due in April.
• Resigning a few weeks before the cliff without checking the exact vest date in the equity portal.
• Letting the cliff shares sit, so one company becomes a larger share of net worth each quarter.

What to write down for your kids

A cliff vest is a clear, one-time decision: keep or sell, and why. Write a short note on what you decided, the tax you paid, and what you did with the proceeds. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” The FamilyKnowledge® Library is where that note can live, so your children can read your reasoning years from now.

Frequently asked questions

What happens to unvested RSUs if I am laid off before the cliff?

Under most grant agreements, unvested units are forfeited when employment ends, including a layoff before the cliff. Some employers offer accelerated vesting or a cash payment in a severance package, but that depends on the plan and any separation agreement. Read your grant agreement and ask HR in writing before you sign a release.

Does a 12-month cliff mean I get paid after exactly one year?

Usually the cliff date is the first vest date on or after your one-year anniversary, set by your grant agreement. Some companies vest only on fixed quarterly dates, so the cliff can land a few weeks after the anniversary. Shares then take a few business days to settle into your brokerage account.

Next step

Before your cliff date, check the exact vest date, your projected shortfall versus 22% withholding, and whether you plan to hold or sell. If you want a second set of eyes on the full picture, including other grants, a Tax & Wealth Assessment covers it. Our equity compensation and tax management pages explain how we help families with this.

This is general education, not individual advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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