By Lauren Hunt, Moneta Advisor

Restricted stock plans involve the transfer of corporate stock to compensate executives, but it contains some sort of restriction or limitation. Time-based restriction is most popular by way of a vesting schedule. The restriction allows the executive to achieve tax deferral on the compensation received.

If you work at Facebook, for example, your restricted stock units (RSU’s) are subject to a four-year quarterly vesting schedule. Every three months upon your RSU start date, you vest 6.25% of your initial grant for a total of 25% per year. By the end of your fourth year of employment, the restriction is lifted and you are fully vested in your initial award.

Being vested means the shares are your own without any strings attached. At the time of vesting, you will recognize income equal to the stock’s fair market value. This income is subject to ordinary income tax as well as Social Security and Medicare taxes.

RSUs have the potential for three tax events you need to be aware of:

  • Withholding at vesting
  • Vested RSU pushing you into a higher overall tax bracket
  • Short-term or long-term capital gains at the time of sales (if not sold immediately upon vesting).

In our experience, most employers will withhold compensation taxes on the vested shares via a surrender of shares. This means that the employee will receive a slightly lower share quantity than the vesting schedule shows. Whatever amount of shares the company doesn’t sell to cover withholding taxes will pass to the employee through an equity award account.

Once the RSU shares have vested, you own them. That means you have the ability to move them to another institution, cash them out, save them or give them as a gift.

Is there risk associated with a large amount of my net worth in a single concentrated stock?

Yes, lack of diversification can carry excess risk.

What happens if I cash out the vested RSUs?

If you cash out the stock at the time of vesting, you can use the after-tax proceeds to provide supplemental income beyond your salary or invest the proceeds elsewhere. By investing the proceeds into a diversified portfolio, you reduce your exposure in the concentrated employer stock.

What happens if I hold onto the stock at the time of vesting?

The capital gains holding period begins at the time of vesting. If you hold onto the stock, there are two possibilities:

  • The price goes up: after one year, the shares can be sold and qualify for long-term capital gain tax treatment on the price increase from vesting date to sale date. If the stock is sold within one year of vesting, the gain is considered short-term and taxed at ordinary income rates.
  • The price goes down: you can sell and harvest a loss. Losses can be used to reduce other capital gains or up to $3,000 can be deducted from ordinary income per year.

If the price remains steady, there is no tax benefit of holding the stock since capital gains are owed only on the difference in sale price and cost basis.

How do my RSUs fit into my financial plan?

There is no one-size fits all solution when it comes to navigating RSUs as part of a broader financial plan. Our clients at Moneta are typically invested with long term goals in mind and with a strategic viewpoint.

© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only, based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.