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Help! I Was Just Awarded Company Stock: Restricted Stock Unit (RSU) vs. Restricted Stock Awards Thumbnail

Help! I Was Just Awarded Company Stock: Restricted Stock Unit (RSU) vs. Restricted Stock Awards

Investment Planning

As a highly compensated employee you may find that company stock is now a part of your overall salary package. For some, managing these different types of stock grants and planning what to do with them can be frustrating and confusing.

As a newbie to company stock in my corporate life, I had to ask my boss what they were and how did they work. His advice? Hire a financial planner, which I promptly did.

The good thing is that receiving any type of company stock can be useful in a variety of ways.  You might find it valuable for some of these reasons: 

  1. It can help you build your wealth.
  2. It allows you to participate in the growth of the company. Some stock will even have voting rights.
  3. You can structure the sale of company stock to fund large life expenses like college, a wedding, charitable donations, and retirement. 

Let’s talk a little about restricted stock. Restricted stock is a type of executive benefit that is non-transferable but has potential tax benefits and may be more valuable than stock options. They come in two types: restricted stock awards/grants and restricted stock units.

Restricted stock unit (RSU) is the right to receive stock after you have satisfied conditions set by your company such as continuing to work for the company for a period of time. If you still work there at the end of the specified period you receive and own the stated number of shares.

 RSUs are not eligible for an 83(b) election if you exercise them early. 

 Restricted stock awards or restricted stock grant provides the same benefit as a restricted stock unit. The difference is that shares are transferred to you at the time of the award, subject to a provision that you will forfeit the shares if you don’t satisfy a “condition” like continuing to work for the company for a stated period of time.

 Although you don’t possess the shares of stock, they are transferred into escrow and you may receive dividends for the shares and have the opportunity to participate in shareholder votes. With restricted stock awards you are also eligible to elect which set of tax rules apply to you. 

 What is this you ask? The 83(b) election is a provision under the Internal Revenue Code that gives an employee, the option to pay taxes on the total fair market value of their restricted stock at the time of granting. If you do not file the Section 83(b) election within 30 days of the grant date, you are generally forced to recognize the stock value as income as you satisfy the vesting conditions – which will often happen at a time when the stock has appreciated, and the amount of taxable income has increased. 

In plain English this means being taxed at your capital gains tax rate versus your ordinary income tax rate. If you are a highly compensated employee this can be very important at tax time.  

It’s a little complicated, but a great way to receive company stock without having to pay for it; not to mention becoming a shareholder of the company you work for! 

In this blog you’ve learned a little more about restricted stock. Please see our other blogs covering incentive stock options and employee stock purchase plans.

And if you’re ready to take the next step and work with a financial planner, you can learn more about how we work with clients right here.

The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.  Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.   Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.

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