Financial Planning for Restricted Stock and RSUs: Key Considerations

1. Set Goals

All financial planning begins with setting clear goals. Companies grant restricted stock or RSUs to motivate and retain employees, wanting you to understand their value and how they fit into your financial life. Defining what you want to do with the proceeds from selling these shares will help clarify their role alongside your salary, 401(k) holdings, and other savings.

2. Understand Your Vesting Schedule

It's crucial to know your grant's vesting date, as this is when the shares become yours. Vesting triggers tax obligations, which require forethought. For restricted stock, the vesting schedule dictates when forfeiture restrictions lapse. For RSUs, it determines when shares are delivered, unless your plan allows for deferring delivery and taxes. Vesting schedules are often time-based, requiring a specific period of employment. For executives, schedules can also be performance-based, tied to company or stock market targets.

3. Know the Impact of Leaving the Company on Unvested Grants

Job termination generally halts vesting and results in the forfeiture of unvested restricted stock and RSUs. Exceptions may exist in your grant agreement or stock plan for situations like disability, death, retirement, or a merger/acquisition. You retain any shares that vested before your termination date. Therefore, if you plan to leave your job, you might consider remaining employed long enough to vest any significant upcoming restricted stock or RSU grants. This is a fair practice, as you've contributed to the company's long-term value and deserve to be rewarded.

4. Understand the Taxation

You cannot create a financial plan for restricted stock and RSUs without understanding their taxation. The market value of the shares at vesting is considered taxable income. This compensation income is subject to federal income tax, Social Security, Medicare, and any applicable state and local taxes. Your company may offer various methods to pay taxes at vesting, such as withholding shares, a sell-to-cover transaction, a salary deduction, or a check payment. Ensure your tax status is certified with your brokerage firm or transfer agent via IRS Form W-9 or W-8BEN to avoid backup withholding on sales proceeds. When you later sell the shares, any appreciation above the market price on the vesting date will be subject to capital gains tax.

5. Be Aware of Taxable Income Shifting

With restricted stock only (not RSUs), you can make a Section 83(b) election with the IRS within 30 days of the grant date. This election allows you to pay ordinary income tax on the stock's value at the grant date instead of at vesting. This can be advantageous if you're confident in meeting vesting requirements and believe the stock price will significantly increase by the vesting date, leading to lower overall taxes. An 83(b) election also starts the capital gains holding period earlier, which can be beneficial when you eventually sell the shares. However, it carries risks; you cannot recover paid taxes if you forfeit the grant (e.g., by leaving your job before vesting). Most people don't make this election due to these risks, but it's a planning tool to be aware of for restricted stock awards. RSUs do not allow for a Section 83(b) election. However, some RSU plans offer a tax-deferral feature, allowing you to delay share delivery and thus income tax until a future point, such as retirement.

6. Watch Your Tax Rates

Anticipate how restricted stock/RSU income will affect your tax rates in the year of recognition. An income spike can significantly impact your marginal tax rate, temporarily raising your income tax rate, increasing your capital gains tax rate on any shares sold, and triggering extra Medicare taxes. You might also need to pay estimated taxes if your default withholding isn't sufficient for your elevated income that year. For example, if a large restricted stock/RSU vesting pushes you into the highest tax bracket, consider carefully before selling those or other shares (or exercising stock options) in the same year. While taxes shouldn't be the sole driver of your decisions, if you have no reason not to wait, deferring sales until a year with normal income levels can avoid higher capital gains taxes and Medicare surtaxes.

7. Decide Whether to Sell or Hold Shares After Vesting

The decision to sell or hold vested shares depends on several factors:

• Taxes owed: Shares can provide proceeds to cover taxes at vesting through various methods like withholding or selling shares for taxes.

• Tax planning: Your decision to hold shares and for how long impacts your capital gains tax at sale. The holding period after vesting does not affect the income tax due on the shares' value at vesting.

• Cash needs and other financial planning factors: This includes upcoming life events, diversification, dividends, and alternative investments.

• Company type:

  • Publicly traded companies: Be aware of blackout periods when trading is prohibited or stock ownership/retention guidelines requiring you to maintain a certain amount of company stock.

  • Privately held companies: You likely won't be able to sell shares immediately after vesting due to grant restrictions or SEC resale rules.

8. Consider Dividends

Restricted stock shares are issued to you and are outstanding in your name from the grant date, even before vesting, meaning you typically receive dividends on restricted stock. RSUs, however, are essentially bookkeeping entries, with no actual shares issued until after vesting, so dividends cannot be paid on unvested RSUs. Nonetheless, companies can choose to pay "dividend equivalents" on RSUs when they pay dividends on outstanding stock. These may be deferred or accrued to additional units and settled when the RSU vests.