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Why Restricted Stock is Great for Employees and Not-So-Great at the Same Time

The Case for Great

  • RSUs are an additional form of compensation (always good) and a way to participate in the success of your company.
  • Unlike stock options, RSUs almost always have some value to you, even when the stock price drops below the price on the grant date.
  • You have fewer decisions to make with RSUs versus stock 
    1. You don’t have to choose when to exercise the stock; shares are simply received when they vest. 
  • Tax withholding is typically automated for you, taking one less concern off your plate. 

The Case for Not-So-Great

  • Taxes are due when they vest. It’s true, you don’t have to decide when to exercise RSUs like you do with stock options BUT that also means you lose control over tax considerations.
    1. Vested RSUs are taxed as ordinary income in the year they vest. You are not able to push them off into another year – for instance, a year when income is down. 
  • Although you don’t have to decide when to exercise the stock, you’ll still need to make a decision on what to do with the shares you receive. 
    1. Will you hold the shares in anticipation of further growth? If so, are you building up a concentrated position in the company? The same company you rely on for your paycheck.
    2. Should you sell the shares – since you already paid taxes on them – and reallocate the proceeds? 
      • Maybe the proceeds should support current spending – allowing you to increase tax-deferred savings elsewhere like your 401k or deferred compensation plan. 
      • Maybe the shares should be sold and invested in a diversified portfolio to reduce your exposure to one company
  • Withholding is often defaulted to a rate lower than the employee’s actual tax bracket which can lead to a tax time surprise. If you’re unable to change the withholding rates on your RSUs, then it’s good practice to estimate the actual tax due on those shares and set that aside for tax time, or increase your withholding in your remaining paychecks throughout the year.

Since most steps in the RSU cycle are automated, it’s easy to let the process run without any input from you, the owner of the shares. It’s far better to develop a plan and use these key wealth builders wisely.