Making the most of restricted stock and RSUs

Restricted stock and restricted stock units (RSUs) are two alternative forms of employee compensation. They’re a way for a company to incentivize employees with equity in the company.

Restricted stock is typically granted as a type of bonus or added compensation, using a vesting schedule. You receive partial ownership of the shares and may be entitled to voting rights and dividends before they vest. Until the stock is vested, however, you can’t sell it. If you leave the company before you vest, you lose your shares.

RSUs on the other hand, give you stock once you meet vesting requirements. You don’t own partial shares and will typically not receive voting rights or dividends.

Not options. Restricted stock and RSUs are different from stock options which only give an employee the option to purchase shares in the future.

Vesting. Be sure you understand how vesting works. Some stock vests after a specific length of time, but some shares require a secondary vesting trigger, such as an IPO or acquisition event.

Thinking about a job change? Pay attention to your vesting date and consider whether you want to stick around until your shares are vested.

Taxes. Once your shares vest, they become part of your compensation and are reported on your W-2. At this point, your standard tax withholding probably won’t cover your tax bill, so know your vesting years and be prepared.

An estate planner can help you model your tax scenarios. You may want to defer other income or increase deductions (e.g. retirement contributions, charitable giving) to manage the spike in your income.

Note, the value of your stock on the day it vests will also be used to calculate capital gains taxes. For example, if your shares vest at $20/share and you sell five years later for $60/share, you’ll pay capital gains on the $40 of appreciation.

83(b) election. You may be able to reduce taxes on restricted stock through an 83(b) election. That allows you to pay income tax on the shares when you receive them, not when they vest. (This strategy does not apply to RSUs because you hold no ownership prior to vesting.)
If the value is substantially lower at time of granting, you can recognize significant tax savings. Be aware, however, that you must make an 83(b) election within 30 days after receiving a restricted stock grant. If you leave the company before your stock vests, your tax payment will not be refunded.

Diversification. Watch your portfolio risk and pay attention to an overconcentration in company stock. Think about balancing your account and consider a sell schedule to manage your vested stock holdings.