By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
When stock vests, it becomes yours to keep: your employer’s condition (usually staying employed until a date) has been met, and the shares or options can no longer be taken back if you leave. Before vesting you hold a promise. After vesting you hold an asset, and for RSUs and restricted stock that is also the moment the IRS treats as payday.
What vesting actually gives you depends on what you were granted. A vested RSU is a share in your account. A vested stock option is only the right to buy shares at a fixed price. A vested 401(k) match is cash in a retirement account. For a California or Washington household where equity is a third or more of pay, mixing these up leads to surprise tax bills and to people walking away from money they did not realize was unvested.
Vested, unvested, exercised, released: the four words on your equity statement
- Unvested. Granted but not earned. If you leave, unvested awards are usually forfeited. You cannot sell, pledge or gift them.
- Vested. Earned. The vesting condition is satisfied and the award cannot be clawed back for leaving (some plans can still claw back awards in limited cases, such as misconduct).
- Released or settled. For RSUs, the shares actually land in your brokerage account, often a few business days after the vest date. See how long release takes.
- Exercised. For options only. You paid the strike price and turned a vested option into shares. A vested option you never exercise can expire worthless.
Vesting schedules are set by your grant agreement and the company plan, not by law. A common pattern at large tech and biotech employers is four years, either with a one-year cliff (nothing vests for twelve months, then a block vests) followed by monthly or quarterly vesting, or a back-loaded schedule where more vests in years three and four. Some grants vest on performance goals instead of time. The exact vest dates and the time of day the shares post are in your plan documents; see what time of day stocks vest.
What vesting means for each type of equity
| What you hold | What vesting gives you | Federal tax at vest | What to decide after vesting |
|---|---|---|---|
| RSUs | Actual shares, delivered at release | Yes. Full market value is wages on your W-2 | Keep or sell. Selling right away usually adds little extra tax |
| Nonqualified stock options (NSOs) | The right to buy at the strike price | No. Tax comes at exercise, on the spread | When to exercise, and whether to hold the shares |
| Incentive stock options (ISOs) | The right to buy at the strike price | No. Exercise can trigger AMT if you hold the shares | Exercise timing against AMT, and holding periods |
| Restricted stock (not RSUs) | Shares you already received lose their forfeiture risk | Yes, unless you filed an 83(b) election within 30 days of receiving them | Usually decided at grant, not vest |
| 401(k) employer match | Employer dollars you keep if you leave | No. Taxed when withdrawn (pre-tax money) | Whether leaving before a vesting date is worth the forfeit |
Two corrections to common claims. First, an 83(b) election is not available for RSUs. RSUs are an unfunded promise, which is not property under Section 83 until shares are delivered (Treas. Reg. §1.83-3(e)); the election applies to restricted stock and early-exercised options, and must be filed no later than 30 days after the transfer (IRS Pub 525). If you hold early-exercised shares, see how to draft an 83(b) election. Second, your own 401(k) deferrals are always 100% vested; only employer contributions can vest on a schedule (IRS, Retirement Topics: Vesting).
For options, vesting and taxes happen at different times. Exercising nonqualified options creates ordinary income on the spread, and many people exercise and sell at once; see tax on a cashless exercise.
How an RSU vest is taxed in California and Washington: a worked example
Assumptions: a married couple filing jointly, one parent at a large Bay Area or Seattle-area employer, about $1,000,000 of combined W-2 pay for 2026 including RSUs. Before this vest, federal taxable income is already above $768,700, so each extra dollar is in the 37% federal bracket. For the California household, state taxable income before the vest is already above $891,542 and stays under $1,000,000 after it, so the whole vest falls in the 11.3% bracket (2025 schedule) and the extra 1% Behavioral Health Services Tax on taxable income over $1,000,000 does not apply. The parent receiving the vest has already passed the Social Security wage base ($184,500 for 2026) at this employer, so no more Social Security tax applies. Combined wages are over $250,000, so the 0.9% Additional Medicare Tax applies. A quarterly vest delivers shares worth $100,000.
| Tax on a $100,000 vest | California household | Washington household |
|---|---|---|
| Federal income tax at 37% | $37,000 | $37,000 |
| Medicare 1.45% + Additional Medicare 0.9% | $2,350 | $2,350 |
| State income tax | $11,300 (11.3% bracket, 2025 schedule) | $0 in 2026 |
| CA SDI 1.3% / WA Cares 0.58% | $1,300 | $580 |
| Total | $51,950 | $39,930 |
| Federal withholding at the 22% supplemental rate | $22,000 | $22,000 |
| Federal shortfall left for April | $15,000 | $15,000 |
The 22% flat rate is optional for employers, and 37% becomes mandatory only on supplemental wages above $1,000,000 in the calendar year (IRS Pub 15, 2026). Four vests like this in a year can leave $50,000 or more of federal tax unpaid (a bit less than four times $15,000 if some of the year’s vests fall in the 35% bracket), before any state gap. California brackets for 2026 were not published when this was reviewed, so the 2025 bracket is shown (FTB 2025 rate schedules); SDI is 1.3% of all wages for 2026 with no cap (EDD). California also has no lower rate for capital gains, so holding vested shares longer does not reduce the state bill on later growth.
Washington has no wage income tax in 2026 (WA DOR), but a 9.9% tax on AGI over $1,000,000 takes effect January 1, 2028, and long-term gains on shares you keep can face the state’s capital gains tax: 7% above the annual standard deduction ($278,000 for 2025, the latest published) and 9.9% on taxable gains above $1,000,000 (WA DOR). A household at this income should not plan multi-year RSU sales around “no state tax”.
The mechanics of how shares are withheld are covered in withhold to cover vs sell to cover.
What happens to unvested stock if you leave, or the company is sold
Leaving a job is where vesting turns into real money. Before giving notice, list every grant with its next vest date and value. A parent who resigns two weeks before a $100,000 quarterly vest gives up the whole tranche; a new employer’s sign-on grant may or may not replace it. Vested options usually have a short post-termination exercise window in the plan (often measured in months), after which they expire.
In an acquisition, the deal and your plan decide what happens to unvested awards: they may convert into the buyer’s equity, be cashed out, or accelerate. “Double-trigger” acceleration, common in executive agreements, requires both the sale and a qualifying termination. See what happens to your stock if your company is sold.
Decisions a family actually has to make about vested stock
- Keep or sell at release. Selling RSUs on release day typically triggers little or no extra tax, because your cost basis equals the value already taxed as wages. Holding is a choice to buy your employer’s stock with that money. Ask whether you would buy it with $100,000 of cash.
- Cover the withholding gap. Raise W-4 withholding on regular pay, make estimated payments, or set aside a fixed share of each vest in a separate account.
- Cap concentration. When one employer pays your salary, your bonus and a large share of your net worth, a bad year hits all three. Some families set a written ceiling, such as no more than 10% to 15% of liquid net worth in one stock, and sell above it.
- Time job changes around vest dates. Know what you forfeit before negotiating a start date.
Common mistakes with vested stock
- Treating the shares in the account as the full value, when part was already withheld for tax and the rest may still owe tax in April.
- Forgetting that a vested option is not money until exercised, and letting it expire after leaving.
- Reporting RSU sales with a zero cost basis from the broker’s 1099-B, which double-counts income already on the W-2.
- Assuming 401(k) matching dollars come with you when you leave before the plan’s vesting date.
What to write down for your kids
Your children will not inherit a vesting schedule. They may inherit the shares, and with them the question of why you held or sold. A one-page note each year can cover what you hold, when it vests, your concentration ceiling, and the reasoning behind any large sale or hold. Conversations fade. Documentation compounds. A child who reads that note at 25, when they get their own first grant, starts with judgment instead of guesswork.
Common questions
Does vested mean I can sell?
For RSUs, yes once the shares are released, subject to company trading windows and blackout periods if you are an insider. For options, vested means you can exercise; you own shares to sell only after exercise. For a 401(k) match, vested means the money stays yours if you leave, but withdrawal rules still apply.
Is vested stock counted as income?
Vested RSUs and restricted stock (without an 83(b) election) are income at vest, reported on your W-2. Vested options are not income until exercised. A vested 401(k) match is not taxed until you withdraw it. See whether RSUs count as income.
What does “fully vested” mean?
Every unit or share in that grant has met its condition, so nothing is left to forfeit. You can be fully vested in one grant and partly vested in a newer one, which is why a single grant-by-grant list matters before any job change.
Next step
Pull your equity statement and list each grant, its next vest date and its value at today’s price, then compare the expected tax with what will be withheld. If the gap or the concentration is larger than you expected, our tax management and investment risk management work at Age Five Family Office™ starts with exactly that list. This is general education; the right move depends on your family’s full picture.
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.
Connect on LinkedIn → · About KevinThis is part of how we approach Tax Management for high-income W-2 families at Bright Advisers.
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