restricted stock units

Restricted stock units are often offered as part of a compensation package to attract and retain key employees   They are restricted in that certain requirements must be met before the employee can obtain full ownership rights to the value of the units.

Receiving your RSUs is usually contingent on staying employed with the company for a certain period of time, which is why the units come with a vesting schedule. Before they vest, RSUs are simply a future promise.

Understanding What Happens Immediately After RSUs Vest

Vesting schedules for RSUs dictate how and when the restricted stock units become the property of the employee.

A vesting schedule might, for example, state that 25% of the RSUs vest each year for 4 years. Once vested, RSUs shift from a future promise to the owned property of the recipient.

This “property” most often comes in shares of company stock, but RSUs may also be paid out via cash compensation. Your plan document should tell you more about exactly how your RSUs are set up.

When RSUs vest, that triggers a taxable event. The value of the vested units will be taxed as ordinary income, subject to both Social Security and Medicare tax.

Your tax obligation here is commonly handled via an automated share withholding when the shares vest.  Your company will withhold a number of shares required to cover the tax cost).

(Keep in mind that the amount of tax that’s withheld is often the statutory withholding requirements — but it might not be enough to cover your actual tax bill. Ensuring you know if you generated enough cash to cover your tax liability when your RSUs vest is one of many reasons to consider working with a financial planner or tax professional with expertise in stock options.)

Once Your Shares Are Yours… Should You Keep or Sell Your Restricted Stock Units?

Once your RSUs vest, they’re yours. You have full ownership rights to the shares that are left after the share withholding has occurred. At this point, you have a decision to make: should you keep your shares, or sell them?

While there may not be a single answer to address every need, we can evaluate the options by exploring the factors that can influence what makes a decision the right one for your situation.

One way to think about restricted stock units is to consider the vested value as compensation income for services rendered. Compensation income is earned income paid to you for successfully doing your job.

If you think about the value of restricted stock units as compensation for your work, their value should logically be the same as what you receive in your weekly, bi-weekly, or monthly paycheck. And in fact, RSUs are taxed the same as your regular paycheck, too.

The major difference is how each type of compensation is paid out to you. Your paycheck is given to you as cash that gets deposited into your bank account. That’s money you can use to pay bills, save, or spend.

Vested restricted stock units paid as shares, however, is company stock… meaning the value is on paper and not realized until you sell shares.

Know the Taxability of RSUs to Help You Decide What to Do Once Your Units Vest

Assuming you are not in a lock-up or blackout period (or facing any other restrictions), you may be able to sell the shares you received from your RSUs right away. Doing so allows you to convert the value of company stock into cash, just like your paycheck.

To better understand the right time to sell your restricted stock units, let’s explore how your RSUs are taxed when they vest and when you sell the shares:

1. Your RSUs vest and their value is reported as ordinary income
   • When your RSUs vest, the full value of the vested units is taxed as ordinary income and reported on your year-end W-2.

1. • Income tax is often withheld at a statutory rate (22% in 2020), and other withholdings are made for payroll and other taxes. Your company will usually retain a certain number of units equal to the value of the tax liability to manage that withholding.

1. • The after-tax value of the vested units is then deposited into a brokerage account as shares of company stock (assuming the units settle as shares). The cost basis of the owned shares is equal to the fair market value per share on the vesting date (the amount taxed as ordinary income), and your purchase date of the stock is the date the shares vest.
2. You Sell Your Company Stock in the Brokerage Account
3. • If you sell your shares, you report a capital gain or loss. The proceeds of the sale are deposited into your brokerage account, and the transaction is reported on a 1099-B tax statement at the end of the year.

If you sell your RSU shares immediately after they are deposited into your brokerage account, the tax impact of a sale will likely be minimal.

For example, let’s assume that your shares are deposited and have a cost basis equal to the vesting date FMV or $50 per share. Let’s also assume that you sell the shares right away when the FMV is still $50 per share.

This is a reportable tax event, but since the gain is $0 (your cost basis equals the sale price), you don’t owe additional taxes when you sell your restricted stock units.

Why You Might Want to Sell Your Restricted Stock Unit Shares Right Away

As you can see, it is possible that you experience no tax impact on selling shares. This is a good reason to consider selling right away, and transferring the paper value of the shares into actual cash you can use.

The next factor to consider when determining the best time to sell is whether you even want to own company stock. If you accept the suggestion that your RSUs are compensation income for services rendered, why not take that compensation as cash?

To illustrate this, let’s consider the following question: If I offered to give you tens of thousands of dollars in cash right now, would you use that money and go buy company stock? Or would you use it for another need?

If you’d take the cash, that’s a very good reason to consider selling your shares immediately to turn a paper value into actual cash you can use.

Using hypothetical numbers to illustrate the impact of this question, let’s assume that you have the following shares of vesting RSUs.

• RSUs Vesting: 1,000
• FMV of Stock: $50
• RSU Value: $50,000

If we assume that the value will be settled in shares after a 22% statutory withholding (we’ll assume there are no other taxes withheld to simplify the example), the value to be received after tax is:

• Value of Vested Units: $50,000
• Tax Withholding: $50,000 x 22% = $11,000
• After-Tax Value: $39,000
• Shares Deposited: 780

In this example, you will receive 780 shares of stock. So again: if I were to give you a check for $39,000, how much of that money would you use to buy 780 shares of company stock?

If the answer is none of it, it may make a strong argument to sell your RSUs right away.

Integrating Restricted Stock Units and Other Equity Compensation

If you have restricted stock units, it is possible that you have other types of equity compensation too. If you do, it may make for a more complicated situation when evaluating what of your various shares to sell.

Each type of equity compensation (incentive stock options, non-qualified stock options, employee stock purchase plan) has its own rules for when you may be able to do certain things, and what the tax impact of your decisions may be.

While beyond the scope of this article, its safe to assume that more detailed analysis should be integrated into your financial plan if you have more than one type of equity compensation because of the differences in taxability.

What to Do Now with Your Restricted Stock Units

If you have restricted stock units, pay attention to when the shares vest, what the value is, and how you receive that value (i.e. as cash or as company shares of stock). If you receive the value as shares of stock, you need to determine what’s in your best interest: keeping them, or selling the shares.

If you think you’d rather sell the shares and use the proceeds for other needs, it’s probably a no-brainer. Consider selling your shares immediately. The shares have already been taxed and you can sell them quickly with little to no tax impact (assuming the current price is near the vested price).

Furthermore, the immediate sale of restricted stock units can also help you diversify after from single stock risk or an over-concentrated position on company stock. This is an important consideration for anyone who wants to reduce risk in their investment portfolio.

But as with every question in financial planning, there’s no one-size-fits-all answer. Make sure you fully evaluate your personal situation, your goals and objectives, and your willingness to take investment risk prior to implementing any decision to buy or sell shares of company stock you acquired after your RSUs vested.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

Restricted stock units are commonly used as a compensation tool by employers who want to reward and retain key employees.

If you’re on the receiving end of restricted stock units, or RSUs, you could be set to financially benefit if you meet specific conditions set by your employer. The requisite condition is often staying employed with your company for a stated period.

If you meet the length-of-time condition, your RSUs vest and the value of the restricted stock units become yours. The value can be settled in shares of stock or cash.

Restricted stock units can be more valuable to you if the company stock price increases between the grant date and the vesting date. When the restricted stock units vest, you receive a value equal to the stock price on the vesting date times the number of units vested. A higher stock price, all else being equal, means a higher value for you.

This shared desire for an appreciating stock price is why both employers and employees may find restricted stock units attractive. The employer benefits from happy employees working hard in the company to maximize a future benefit. As an employee, you could benefit from an increasing stock price.

It can be a great win-win scenario, but you have to understand the ins and outs of your RSUs if you want to make the most of them. Here’s how to understand what happens when your employer grants restricted stock units, what happens when they vest, and how you can plan to manage the resulting stock value in the scope of your larger financial plan.

The Grant and Vesting of Restricted Stock Units

Generally speaking, when you receive restricted stock units:

• You have no legal right to the value of the units.
• The value is not taxed.
• If you leave your company, you will forfeit any future benefit or value.

As the name suggests, your restricted stock units are, in fact, restricted.

When the restriction is met and the restricted stock units vest, a taxable event occurs. You will be required to report taxable income equal to:

(Number of Units Vested * Market Value at Vest) = Taxable Income

Following the vesting of your restricted stock units and the payment of taxes, you’ll often receive shares of company stock. But remember that not all restricted stock units settle in shares of stock. Check your plan document to see what you will receive and the specific rules around your RSUs.

Know What You Will Receive When your Restricted Stock Units Vest

When your restricted stock units vest, you will be entitled to receive the vested value of your units. For some plans, the value of restricted stock units will be paid in shares of company stock. For others, the value will be paid to you in cash.

How this value is paid will be subject to the terms of your plan document; look for settlement options to find this information.

To illustrate how this might work, let’s assume you have the following:

• Number of Restricted Stock Units: 1,000
• Market Price of Each Unit on the Vesting Date: $50.00
• Tax Withholding: 22%

If we assume your restricted stock units will settle in shares, and that a share withholding will allow you to pay the corresponding income tax bill upon vest, we can calculate how many shares you will retain after the restricted stock units vest:

(Number of Units Vested * Market Value at Vest) = Taxable Income

1,000 * $50 = $50,000

(Taxable Income * Tax Withholding) = Tax Due

$50,000 x 22% = $11,000

(Tax Due x Market Price at Vest) = Shares Required for Withholding

$11,000 x $50 = 220 Shares

(Restricted Stock Units Vested – Shares Required for Withholding) = Shares Held

1,000 – 220 = 780 Shares Held

Post-vesting and post-tax withholding, you retain 780 shares of stock with a current market value of $39,000.

For comparison, if your restricted stock units settle in cash, your company will pay you $39,000 cash instead of 780 shares of stock.

Have You Withheld Enough from Your Restricted Stock Units for Income Tax?

While many companies will have a statutory tax withholding rate, they will require when restricted stock units vest, there’s no guarantee made by your company that the withholding rate will be enough to cover your actual taxes owed.

For example, if you withhold at 22%, but your real tax rate is 32%, you may find yourself owing tax when you file your tax return. On the other hand, if your overall tax rate is less than 22%, you may be entitled to a refund.

If you are ahead of the game in your planning, you can prepare a projected tax return to see the impact of vesting restricted stock units on your tax return. If you are unsure about how to do this, you may want to consider the services of a good accountant or financial advisor.

What Will You Do with Your Remaining Shares?

If your restricted stock units settle in cash, you can use that cash in several ways to help meet your financial goals.  You could buy into a diversified investment portfolio, use the money to pay down debt, or add it to your cash reserves.

You can even buy more shares of company stock if you want. The options are seemingly endless (which is even more of a reason to plan and know how you’ll leverage this opportunity).

If your restricted stock units settled in shares of company stock, there are other considerations to keep in mind. For one, you have to decide whether or not you want to retain the shares of stock. Simply because your restricted stock settled in stock, does not mean you need to keep the shares.  One might suggest that selling your vested restricted stock units might be your best bet.

You now have full ownership rights of stock. This means you are entitled to keep the shares, receive dividends (if any), vote on company related matters, etc.

Your ownership right also means that you can sell the shares of stock if you want. Just because you received company stock as part of your compensation does not need to mean to keep the shares, so you can always sell the shares and receive the proceeds as cash to create the same outcome as if the units settled in cash.

A Rolling Strategy to Manage Your Vested Restricted Stock

One strategy that may balance the decision to retain 100% of the shares or selling 100% is to implement a plan that suggests selling a specific number or percentage of shares over a set period.

In our example, this strategy could be implemented by planning to sell 25% of the shares over the next 4 years. If you did, the sale would look like this:

Calendar Year	Shares Sold
Year 1	195
Year 2	195
Year 3	195
Year 4	195

After the 4 years, you will retain 0 shares of company stock.

If the stock price goes up during the 4 years, you will participate in some of the upside as you still retain shares for 4 years.

This strategy allows you to intentionally reduce your company stock based on a set schedule. That’s a good thing because it means you don’t have to guess at what the stock price will do next, or say you will sell when the price reaches X per share, only to change your plans once the price does hit that point (and then risk the price going back down before you do sell).

This sell-on-a-set-schedule approach is a deliberate, intentional, and systematic process to manage your stock position in a way that allows you to participate in the upside and manage the downside.

What to Do Now with Your Restricted Stock Units

If you own restricted stock units, you need to plan for what you will do when they vest. If you have RSUs that have already vested and you own the shares outright, you should also consider how they fit into your overall financial plan.

Understanding the strategy, you’ll use — and then implementing it — is critical to making the right moves for your situation. Whether you retain your RSUs or sell them when they vest, being prepared will help you be proactive instead of reactive and make the most of the opportunity these units may provide.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

Restricted stock and restricted stock units (RSUs) are both commonly-used tools to attract and retain employees. While similar in feel, restricted stock, and restricted stock units are technically different instruments, the details of which go beyond the scope of this article.

Both restricted stock and RSUs allow employees to potentially benefit financially if they meet the vesting requirements set by the employer. Often, those requirements mean staying with the company for a set period of time.

That’s the employer’s incentive to give you these kinds of benefits — but that’s not necessarily a bad thing for you since restricted stock and restricted stock units (or RSUs) can possibly help you increase your net worth. How much you benefit is subject to the stock price. An appreciating stock price means you could benefit more. A depreciating stock price means you could benefit less. Ultimately (unless the stock becomes worthless), the restricted stock could give you something should you meet the vesting requirement.

Here are three things you should love about restricted stock.

1 – Restricted Stock and RSUs are Easier to Understand Than Other Types of Stock Options

As compared to its stock option cousins, restricted stock is easier to understand. Mainly, it’s easier to calculate the value of restricted stock.  And there are fewer decisions to make with restricted stock.

Restricted stock and RSUs can be very simple.

• Day 1 – You are given a set number of shares (or units, if you have RSUs), for which no tax is due.
• Wait – Technically, you do not own the stock yet. Restricted stock is typically subject to a vesting schedule, often a period of time that must elapse before you have the right to the shares.
• “Get” Your Shares – On the day the vesting period is met, the restricted stock “vests” and becomes yours, with full ownership rights. The value of the vested shares (number of shares vested times vested market price) is taxable income in the year the shares vest, subject to ordinary income, social security, and payroll tax.

Stock options, on the other hand, are more complicated because you need to track the value above and below a strike price, decide on the best time to exercise the option and deal with the alternative minimum tax (for incentive stock options).

Restricted stock removes much of this kind of thinking, planning, and complexity potentially associated with stock options. The decisions are seemingly made for you.

2 – Your Value Is Easier to Calculate

When your restricted stock or restricted stock units vest, you become the owner of the shares of stock. The math to calculate the value of your shares is remarkably easy.

Total Value = Number of shares vested * Per Share Price.

That’s it. Very easy to calculate

In addition to easily calculating the value, it’s likely that your restricted stock will have a value. Barring a total catastrophe where the stock price falls to zero and becomes worthless, you’ll receive the number of shares times the share price. That’s the case even if that share price is $1 or less.

Non-qualified and incentive stock options are not as easy to value because you must account for the strike price or the price at which you can buy the stock.

The strike price may lead to terms like “in-the-money” or “underwater.” To be in-the-money (a good thing), the share price needs to be higher than the strike price (the price at which you can buy the stock). Underwater stock options mean the current market price is less than the strike price. Therefore, they are typically not worth exercising.

For example, imagine a hypothetical company stock has a share price of $100 per share, and your current strike price to buy the stock is $150 per share. It would not make sense to buy the share at $150 when you can go somewhere else and buy it for $100.

To further complicate stock option value, stock options may have future value (even currently under-water stock options) based on factors such a time to expiration and expected price volatility.

For example, let’s assume stock options have five years until expiration. During the five years until expiration, it’s possible that the share price goes up from the current $100 per share and eventually exceeds the $150 option price. If it does, the previously under-water stock option will have value.

Because of this possibility, it is fair to say that the stock options, even when they are underwater, may be worth something. This complexity of assigning a fair value to stock options is another reason to love restricted stock. Restricted stock is significantly easier to value.

3 – You Can Elect an 83(b) in Hopes of Paying Less Tax

The option to take an 83(b) election creates one major difference between restricted stock and restricted stock units. This election is only available to those with restricted stock, and it allows you to pay income tax when the restricted stock is granted, instead of when it vests.

Usually, restricted stock is taxed when the shares vest. The taxable amount is equal to the vested shares times the share price. But an 83(b) election can potentially help you pay fewer taxes on the restricted stock.

This election is used as a strategy to hopefully lower the amount of tax you will pay on your restricted stock. But in an attempt to pay less in tax, you take on the risk that you will actually pay more in tax than had you not elected the 83(b).

Using an example to illustrate how you may pay less in tax using an 83(b) election, let’s assume the following:

• Number of shares: 10,000
• Share price at grant: $1
• Share price at vest (and final sale): $15

If we assume no 83(b) election, you will be taxed when the 10,000 shares vest. At $15 per share, the total value subject to ordinary income is $150,000. Assuming a flat 37% tax rate (the highest tax rate in 2018), you’ll owe $55,500.

If you opt for the 83(b) election, you are choosing to pay tax on the value of the shares at grant, not when they vest. You make this choice in hopes that the value at grant is less than the value at exercise.

In our example, you’ll be taxed on 10,000 at $1 per share when the shares are granted. Assuming the same 37% tax bracket on $10,000, you’ll owe $3,700.

When the shares vest, the price appreciation between the amount claimed as ordinary income via the 83(b) election ($10,000), and the vested market price ($150,000) is taxed at long term capital gains rates, if we assume 20% (the highest rate in 2018), the total tax due is $28,000.  Adding this to the tax paid upfront, we get a total tax paid of $31,700.

Comparing the two, not taking the 83(b) election leaves you with a $55,500 tax bill. Taking the 83(b) election would reduce what you owe in taxes, leaving you with a bill of $31,700.

This hypothetical example is not a suggestion to choose the 83(b) election. The strategy has its own risk and reward tradeoff, and like anything else, it should be considered in the scope of a larger financial strategy.

One additional point to note is that during the vesting period, even if you file an 83(b), you have no right to the shares of stock. Should you forfeit your right to the shares by leaving the company early, you will have paid tax on something that you never actually received.

What Now with Your Restricted Stock?

I love restricted stock because of the simplicity of the stock and the stock units. They offer employees an opportunity to build wealth via the accumulation and appreciation of company stock.

If you find yourself with restricted stock, it’s important to learn about the basics, so you can consider how this benefit fits (or doesn’t) into your financial plan.

Financial planning should be considered to allocate for the pending tax bill during the years your restricted stock vests (or planning for an 83(b)). Planning should also consider the intention to retain the stock shares post vesting or sell the shares and diversify the proceeds into something else. This conversation centers around investment risk tolerance and goals and objectives analysis.

If you have more questions about restricted stock and your personal needs, you can reach me directly by clicking here.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.    While there is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, and it does not assure against market loss, a diversified portfolio may reduce a portfolio’s volatility and potential loss.