When you receive stock compensation from an employer, it generally requires a comprehensive financial plan – and restricted stock units are no exception.
In 2000, only 20 percent of public companies granted restricted stock or restricted stock units, primarily to senior or senior executives, according to the National Association of Stock Plan Professionals.
That percentage, however, has climbed to 94%, and most public companies now provide subsidies to at least middle managers, according to the organization’s most recent 2021 survey.
From a tax perspective, “it’s very similar to a cash bonus,” said certified financial planner Chelsea Ransom-Cooper, director of financial planning at Zenith Wealth Partners in New York.
Learn more about personal finance:
Here’s what you need to know before signing up for your employee stock purchase plan
Incoming students could owe $37,000 in loans before graduation, report says
The rise of the “tradwife”: why some women say they are giving up work
However, once the shares vest, you will need to decide whether to sell or continue to hold shares in the company, she said.
This can depend on several factors, including your short- and long-term financial goals, how many shares you already own, and how you feel about the company’s growth potential.
How Restricted Stock Units Work
Typically, RSUs are granted to you upon hire, throughout your employment, or tied to company performance.
“That first grant is usually always the largest,” Ransom-Cooper said. “The extra handcuffs will be these golden handcuffs.”
You acquire the actual shares over a specified period or according to a “vesting” schedule. Until you own the shares, you will not receive dividends or voting rights.
The vesting schedule could be progressive, which would allow shares to be allocated in specific tranches. Alternatively, there could be a cliff, such as a year of employment. In either case, you could lose the unvested shares by leaving the company early.
Once RSUs vest, you can sell shares or continue to hold them, as with other investments. Over time, you could build up a significant concentration of a single stock, which experts say could be risky.
“Choose a Strategy” for PSUs and Taxes
If you receive RSUs, you should plan to pay regular income taxes on the market value of the shares as they vest. Your business’s tax withholding may not be enough, experts say.
“Companies have a flat withholding rate” of 22% or 37%, said Bruce Brumberg, editor and co-founder of myStockOptions.com, which covers RSUs and other stock compensation.
“You have to be aware of it and choose a strategy,” he said. If your business only withholds 22% and your tax bracket is higher, you may need to make quarterly estimated tax payments.
If you sell your shares, taxes depend on how long you held the shares. Your purchase date, or “basis,” is the market value of the shares at the time of acquisition.
You could pay long-term capital gains on profitable stocks – taxed at 0%, 15% or 20% – if you held the shares for more than a year. But you’ll have to pay income taxes on short-term gains from stocks held for a year or less.
Whether you buy or sell stocks, you’ll need to weigh your overall tax situation and the impact the additional income could have on things like college financial aid, eligibility for certain tax breaks and more.
cnbc
