I’ve Received Restricted Stock or RSUs of My Company Stock – What Is It and What Should I Do With It?
By: Kevin O’Brien, CFP®, AIF®, CAP®
Restricted Stock and RSUs of your employer’s stock are just that. They are stock of the company, or in the case of RSUs, it is a book entry of the value of the company’s shares, for your benefit, to be given to you at a later date. Technically, it is restricted from your use based on a time schedule, or it could be performance based.
Restricted Stocks are actual company shares given to you, however, you are restricted from selling, transferring, or gifting them until a future vesting date. In the meantime, you receive any dividends the company pays and you have voting rights like other shareholders. Also, within 30 days of being granted Restricted Stock, you can elect a Section 83b election which allows you to pay taxes on the shares at the grant date instead of waiting until the vesting date. This can be advantageous if the stock appreciates significantly between the grant date and vesting date. The trade-off is if you are no longer employed as of the vesting date, you’ve paid taxes on shares you don’t own.
Because RSUs (Restricted Stock Units) are just a book entry and not shares themselves, owners of these do not receive dividends and do not have voting rights until the vesting date, when the shares actually become available to the holder. RSUs do not have the ability to make a Section 83b election either.
With the exception of the 83b election, the value of the shares becomes taxable as of the vesting date. So, whatever the value of the stock is on the vesting date, multiplied by the number of shares that vested, this will be the amount of income you will pay taxes on. This is really important to know and anticipate, because it can affect a number of other taxable events in that same year. Will the vesting of shares force you into a higher tax bracket? Will it trigger the Alternative Minimum Tax (AMT)?
Having a good understanding of your vesting schedule in relation to your other compensation benefits, such as stock options, is critical in determining whether to exercise them in a different year or not. Also, synchronizing vesting dates with Qualified Plan contributions, Deferred Compensation Plan contributions, and charitable intent, can serve to further reduce your tax liability. However, if done in a piecemeal fashion, missed opportunities and higher taxes could easily be the results.
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