by Charles Steege from SFG Wealth Planning Services

As the stock markets have waned, more companies have been compensating executives with restricted stock rather than stock options in recent years. Executives who acquire a concentration in company stock often ask:

  • Are there ways to save taxes on particular awards?
  • Will the stock vest if I retire early?
  • What kind of tax savings can I afford with my restricted stock?

As restricted stock has gained in popularity, it’s important to know there are two types of restricted stock: Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs). When it comes to RSAs and RSUs, there are planning techniques that allow you to moderate your tax liability.

The two are different in fundamental ways:

1. Restricted Stock Awards (RSAs) are granted and issued on the same date. The executive has the right to vote and receive dividends right away. The executive may take what is referred to as an 83(b) election within 30 days, accelerating the recognition of income, such that all future appreciation can be taxed at the lower long-term capital gains rate, assuming the stock is held for one year or longer. It is important to act quickly as the election must be made within 30 days. The award is subject to ordinary income tax at vest.

2. Restricted Stock Units (RSUs) represent a pledge by the employer of a set number of shares of stock upon the completion of the vesting schedule. The units are granted but carry no voting rights on the stock during the vesting period, because no stock has actually been issued. Dividend equivalents may be earned prior to vest. When shares are released, the executive gains voting rights and receives dividends. The value of the stock is reported as ordinary income in the year in which the stock is released. If you continue to hold the stock for greater than a year upon vesting, all additional appreciation is taxable as long-term capital gains.

Restricted Stock vs. Stock Options: which is “better”?

Most executives do not have a choice in the type of restricted stock they receive.  In the more likely scenario where a choice or blend of restricted stock and stock options may be offered, there are three issues to consider:

  1. When do you need the money?  If not for a while, stock options may be more attractive. If the funds are needed sooner, perhaps in the next few years, restricted stock is the better choice.
  2. How volatile is the company’s stock price?  Restricted stock   may be a means of reducing volatility of your money associated with stock vs. stock options having far more potential fluctuation. Stock options may expire worthless if the stock dips near the expiration date. Restricted stock will be worth the value of the underlying stock upon vest.
  3. How optimistic are you about your company?

If you are optimistic that the stock will go higher, stock options would offer a potential upside relative to restricted stock. If you believe the stock is fully valued and may not go higher, restricted stock may be the better choice.

Consider these questions to help maximize the value of your stock rewards:

  • What is the most tax-advantaged way to maximize the value of particular awards?
  • How much company stock is too much?
  • How do you integrate these rewards into a plan to address your family’s financial needs?

As executives transition toward a significant financial event, such as retirement, it’s important to know how  best to divest a concentrated position, ratchet down your risk, sequence the tax liability and gain peace of mind by diversifying away from company stock  and repositioning for the future.

Should you have any questions, contact us for a complimentary consultation.

Mr. Steege is President of SFG Wealth Planning Services, Inc. (SFG), a fee-only financial planning firm. Founded 15 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.

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