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Incorporating restricted stock and RSUs (restricted stock units) into your financial plan can get complicated. You will need to make plenty of decisions, such as how long you will hold your shares, if you should sell them and put them into an alternative investment, or if you will use the money to meet one of your financial goals. If your head is spinning, take heart. Here are 10 simple tips to help you maximize your restricted stock and RSUs.
Rule No. 1: Set Goals
In order to make the wise decisions, you need to determine what you hope your stock will do for you. When you eventually sell the shares, where do you want that money to go? How do your shares and their potential sale fit in relation to your other income, 401(k), and other savings?
Rule No. 2: Know Your Vesting Schedule
It is essential to know the dates your grants will vest since you will need to pay taxes on the resulting income. If you want to avoid a hefty tax bill, it requires some forethought. Your vesting schedule will depend on your company and the conditions they place on the stock, but it is usually time-based, requiring you to work at the company for a certain period before vesting can occur.
Rule No. 3: Understand The Consequences If You Were To Quit
If you leave your company before your restricted stock vests, you will usually forfeit the unvested grants. There can be exceptions to this, so be sure to gather all the details from your company before you make the decision to leave. If you have a significant amount of shares that haven’t vested, it might be worth it to stay with your company long enough to benefit from this reward for your service.
Rule No. 4: Consider Taxes
Your taxable income will be the market value of the shares at vesting and is subject to federal income tax, Social Security, and Medicare, plus any state and local tax. Your company may offer you a few ways to pay taxes at vesting, such as withholding shares for taxes, a sell-to-cover transaction for taxes of a portion of the shares, a salary deduction, or simply a check payment. When you eventually sell the shares, you will pay capital gains tax on any appreciation over the market price of the shares on the vesting date.
Rule No. 5: Look Into An 83(b) Election
With restricted stock (not RSUs), you have the option to make a Section 83(b) election with the IRS within 30 days of the grant date. An 83(b) election allows you to pay taxes on the value of the stock at grant date rather than vesting date. If you believe the stock price will be higher on the vesting date and you are confident you will meet vesting requirements, this can be a beneficial move for you. Also, moving the time of taxation to the grant date starts the capital gains holding period earlier, which can make a difference at the eventual sale of the shares.
Rule No. 6: Watch Your Tax Rates
Be sure to anticipate what restricted stock and RSUs will do to your tax rates when you vest.
The extra income could push your income into a higher tax bracket, raise your rate of capital gains tax, and trigger extra Medicare taxes, possibly costing you thousands of dollars. If you plan ahead, you can implement strategies that could keep you in the lower tax brackets.
Rule No. 7: Decide Whether To Hold Or Sell
Whether or not you sell your shares at vesting will depend on multiple factors, such as tax planning, financial planning goals, and company restrictions. If you sell immediately, you can use the shares to pay for the taxes incurred at vesting. If you hold your shares, your capital gains tax will be affected when you sell in the future. Your decision may be influenced by your cash needs, upcoming life events, and other financial planning factors, including diversification, dividends paid on your stock, and alternative investments. If your company is publicly traded, there can be blackout dates that prevent you from trading and stock ownership guidelines that require you to keep a certain amount of stock. With private companies, there are probably restrictions in your grant or SEC rules that will impact when you can sell.
Rule No. 8: Remember Dividends
Even though you can’t transfer or sell restricted stock until it vests, the stock is still issued to you and in your name, which means you could receive dividends. If you have unvested RSUs, this does not apply. But when a company pays dividends on outstanding shares of stock, it can choose to pay dividend equivalents on RSUs. These may be deferred or accrued to additional units and then settled when the unit vests.
Rule No. 9: Don’t Let Company Stock Skew Your Portfolio
It’s a cliché, but when it comes to your portfolio, you don’t want to keep all of your eggs in one basket. You don’t want too much of your net worth tied up in your company stock, and since restricted stock and RSUs vest over time, it’s easy to miscalculate how much of your portfolio is reliant on the success of your company. In order to avoid overconcentration, work with a professional to determine how much your holdings in company stock contribute to your overall net worth.
Rule No. 10: Rely On A Professional
This stuff is complicated. Sound financial planning, investing, and tax management require specialized knowledge, skills, and experience. At Archer Investment Management, we specialize in serving tech executives with their financial planning needs. We understand your needs and complexities and are here to make sure your financial plan is airtight. If you have ESOs, restricted stock, or RSUs, don’t hesitate to reach out to us to help you maximize these benefits and incorporate them into your overall financial picture. Click here to schedule a phone call today!