Global Tax Guide
The top 10 questions to ask about a grant of restricted stock or RSUs
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EDITOR'S WELCOMEThis issue of our quarterly newsletter showcases some of our award-winning content on restricted stock, restricted stock units, and performance shares. Although our trusted brand name is myStockOptions, we could just as easily be myRestrictedStock, given our extensive and engaging articles, FAQs, videos, podcasts, and quizzes on restricted stock/RSUs and the related financial planning. After sampling the information below, click through to the section about restricted stock and RSUs on myStockOptions.com and the related parts of our Tax Center.
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What are the top 10 questions I should ask about my grant of restricted stock or RSUs?
You should know the answers to the following questions. Understanding the topics involved will help you make the most of your restricted stock/RSU grant and prevent costly mistakes.
1. Do I have a grant of restricted stock or a grant of restricted stock units? What are the key differences?
2. Is formal acceptance of the grant required? What happens if I don't accept the grant before vesting?
3. What is the vesting schedule?
4. Is vesting based on duration of employment or on performance goals?
5. What would happen to the vesting of my grant if I were to leave or lose my job, die, become disabled, or retire?
6. When the shares vest, what account will they appear in?
7. How does the tax withholding work?
8. With RSUs, can I defer the delivery of the shares at vesting?
9. If my company pays dividends to shareholders, will I get dividends on my restricted stock? If so, when? What if I have a grant of RSUs instead?
10. What would happen to my restricted stock in a corporate acquisition or merger?
In addition, you should understand the tax treatment, the reporting on your Form W-2 (whether for restricted stock or RSUs), and the related tax return reporting. The myStockOptions Tax Center covers all tax topics involving stock compensation.
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What advantages do restricted stock and RSUs have over stock options? How do the two grant types compare?
It's not easy to determine which type of grant is better for you. Restricted stock/RSUs always have some value to you, even if the stock price drops below the price on grant date. This may help you feel more of the wealth impact (and shareholder pain) of rises and falls in your stock price.
Example: Your company grants you 2,000 shares of restricted stock when the market price of its stock is $22. By the time the grant vests, the stock price has dropped to $20. The grant is then worth $40,000 to you before taxes. If instead your company grants stock options with an exercise price of $22, at vesting they have no real value, as the options are underwater by $2 when the stock price is $20.
Because restricted stock has full value at vesting, companies grant fewer shares of restricted stock than stock options (see the FAQ on the ratios of restricted stock and stock options). Although "underwater" options (market price lower than exercise price) have little practical value to you, options give you more leverage in a rising market than restricted stock does. On the other hand, if your company pays dividends, an advantage in restricted stock is that it may pay them on your restricted shares. (See a related FAQ on how you can calculate which grant is better in your situation.)
Alert: While the decision to exercise stock options lets you choose when you will pay taxes, with restricted stock you cannot control the timing of taxation in the same way. Therefore, it is important to understand the tax treatment and the withholding methods.
| Restricted stock/RSUs | Stock options |
|---|---|
| Value depends on the stock price at vesting, even if the price fell after grant. | Value depends on any stock-price increase over the exercise price set at grant. |
| No payment needed to receive the shares. | You pay the exercise price to buy the shares. |
| With restricted stock (not with RSUs), you get dividends and shareholder-voting rights during the vesting period. | You get dividends and shareholder-voting rights only after you acquire the shares. |
| You own the shares upon vesting. | You own the shares upon exercise. |
| The income is taxable at vesting, unless you filed a Section 83(b) election to be taxed on the value at grant (not available for RSUs). | Option income is taxable at exercise for NQSOs and at share sale for ISOs. |
| For accounting purposes, the grant date "fair value" is spread over the vesting period, and forfeited unvested shares are not expensed. Accounting for performance shares depends on the goal(s) applied. | For accounting purposes, the grant date "fair value" is spread over the vesting period. Underwater options are expensed, but forfeited unvested options are not. |
To compare the taxation of various types of stock grants, see this related FAQ.
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Below we list articles, videos, podcasts, and interactive quizzes about restricted stock and RSUs in the award-winning content of myStockOptions.com.
The extensive section on restricted stock and RSUs at myStockOptions.com is complemented by a self-study course and exam for CFP and CEP continuing-education credits. All of this content is available with Premium or Pro Membership or through corporate licensing.
ARTICLES
NEW! Ten Financial-Planning Rules You Should Know About Restricted Stock And RSUs by the myStockOptions Editorial Team
While grants of restricted stock and RSUs are conceptually simple, financial planning for them can be complex. This article presents the essential financial-planning points that you should consider before your restricted stock or RSU grant vests.
Restricted Stock Units Made Simple (Part 1): Understanding The Core Concepts by the myStockOptions Editorial Team
Restricted stock units (RSUs) have become the most popular alternative to stock options. While RSUs share many of the same issues as restricted stock, there are differences, and it is important to understand the basics of RSUs in their own right. This article is available free!
Restricted Stock Units Made Simple (Part 2): Taxation by the myStockOptions Editorial Team
The taxation of RSUs generally resembles that of restricted stock but carries some important differences, as this article explains.
Restricted Stock 101: Five Essentials Of Restricted Stock & RSUs by the myStockOptions Editorial Team
While restricted stock and RSUs are relatively straightforward, they have technical aspects you must understand to make the most of them. Learn the essential facts of restricted stock and RSUs, including basic concepts, vesting schedules, and tax treatment.
The Great Benefits Of Restricted Stock And RSUs by Richard Friedman
Podcast included! Your company may no longer be using stock options. Instead, it may be granting restricted stock, restricted stock units, or performance shares. While these grants don't carry the same upside as stock options, they have benefits you will surely appreciate once you understand their special features. This article is available free!
Restricted Stock: Tax, Financial, Estate, And Retirement Planning (Parts 1 and 2) by Richard FriedmanPodcast included! Understand financial planning for restricted stock and RSUs. Part 1 discusses the growing popularity of these grants, their special features, and the related tax planning. Part 2 covers complex issues in financial, estate, and retirement planning.
Restricted Stock Versus Stock Options: Making A Rational Choice by Alan B. Ungar
In a growing trend, your company may let you choose between stock options and restricted stock. Which is better for you? Learn techniques to analyze your financial situation and goals so that you can make the right choice. Part 1 compares and contrasts the basic traits of restricted stock and stock options. Part 2 provides a method of analysis to help your decision-making.
Stockbrokers' Secrets: Restricted Stock And Performance Shares by John Barringer
For many employees, receiving restricted stock, restricted stock units, or performance shares adds a new layer of complexity to their equity compensation. This article presents six common questions the author hears from his clients.
Performance Shares by Bruce Brumberg
Many companies now make stock grants that base your gains on more than just your continued employment or an increase in stock price. As companies take a "portfolio approach" to stock compensation, you may be granted performance shares, which you receive only upon the achievement of specified goals. Part 1 explains the basics of performance share grants. Part 2 explores their structure in depth, along with the concept of expiration and the impact of job termination. Part 3 explains the taxation of performance share grants and then goes on to discuss the special tax considerations that arise in corporate mergers and acquisitions.
Decisions At Grant With Restricted Stock by Tom Davison
When your company grants you restricted stock, it promises to let you keep a set number of shares on a particular date in the future. The stock becomes yours if you still work for the company on the vesting date. In the typical case, you do not pay for the shares. Part 1 presents what you need to know at grant and the decisions you can make. Part 2 discusses the risks of the Section 83(b) election. Part 3 explains ways to analyze your alternatives.
Decisions At Vesting With Restricted Stock by Tom Davison
Vesting is another crucial time for making decisions about your restricted stock. Part 1 explores what tax-withholding method to use, whether you should hold or sell the stock, and what account to keep the shares or cash in after vesting. Part 2 looks at key vesting decisions.
VIDEOS
Restricted Stock & RSUs (Part 1): Key Aspects To Know
Editor-in-Chief Bruce Brumberg presents the fundamentals of restricted stock and RSUs to help stock plan participants make the most of these grants. The coverage includes key concepts, such as vesting schedules and understanding a grant's value. Running time: 4:37.
Restricted Stock & RSUs (Part 2): Taxes And Related Key Decisions
An engaging primer on the basic tax treatment of restricted stock and RSUs, including the tax rates, the timing of taxation, and withholding. Running time: 3:57
PODCASTS
Basics Of Restricted Stock And Restricted Stock Units
Running time: 8:05. In this audio interview, the editor-in-chief of myStockOptions.com explains how restricted stock and RSUs work, including grant, vesting, sale, and taxation.
Why Restricted Stock And RSUs Are A Good Deal
Running time: 11:37. Compensation expert Richard Friedman explains what makes restricted stock and restricted stock units valuable equity awards. This interview is a companion to Mr. Friedman's article on this topic in the Restricted Stock section of myStockOptions.com, where he also has articles on financial and tax planning for restricted stock and RSUs.
Restricted Stock Units After An Acquisition: Know What Could Happen
Running time: 13:36. When a company is merging or being acquired, its employees wonder what will happen to their unvested RSUs. In this interview, wealth advisor Kristin McFarland explains the potential outcomes for holders of unvested RSUs and current equity holders in an M&A deal. This interview is a companion to her article on this topic.
INTERACTIVE QUIZZES
Test your smarts with our free interactive quizzes on restricted stock and restricted stock units. In addition to being fun, the quiz is also a course of study. The answer key links to content on the topic for followup reading.
For its study 2018 Trends And Developments In Executive Compensation, Meridian Compensation Partners surveyed 127 companies to uncover current practices in equity grants for executives. For their senior executives, about 90% of the surveyed companies use two or three types of long-term grants. For grants to employees at lower levels, the use of just one type is more common. Meridian discovered the following about the prevalence and weight of LTI vehicles for executives.
| Type of award | % of companies | Performance awards (dollar weight in total LTI value) | Stock options (dollar weight in total LTI value) | Restricted stock (dollar weight in total LTI value) |
|---|---|---|---|---|
| Performance awards, stock options, and restricted stock | 28% | 42% | 29% | 29% |
| Performance awards and restricted stock | 51% | 60% | — | 40% |
| Performance awards and stock options | 13% | 55% | 45% | — |
| Stock options and restricted stock | 1% | — | 30% | 70% |
| Performance awards only | 6% | — | — | — |
| Restricted stock only | 1% | — | — | — |
| Stock options only | 0% | — | — | — |
| Overall (averages) in 2018 | 100% | 56% | 14% | 30% |
| Overall (averages) in 2017 | 100% | 56% | 13% | 31% |
An FAQ on myStockOptions.com presents numerous other surveys which show that many companies use a variety of grants in tandem, including restricted stock/RSUs and performance shares.
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Easy to use and secure, the tools for financial and tax planning at myStockOptions.com can help you make smart decisions with your restricted stock or RSUs.
- Track your grants in the myRecords portfolio-tracker and get email alerts about imminent vesting dates.
- Perform "what if" modeling with your stock price and tax rates in the Quick-Take Calculator for Restricted Stock.
- In the I Need The Money Tool, you can set a cash goal for your grants and then determine whether you can reach it now or in the future.
- The Restricted Stock Comparison Modeling Tool can help you decide whether to hold or sell the shares after vesting. The tool (similar to our patented modeling tool for stock options) lets you explore whether you may be better off holding the shares or selling them for an alternative investment.
To learn more about all of the features in these award-winning online applications, see the myTools page.
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We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:
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Continuing education credits will be available, include CE for CFPs and CEPs. Register at the conference website or contact us for more information (617-734-1979, editors@mystockoptions.com).
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The course on restricted stock, RSUs, and performance shares features articles, FAQs, videos, and a podcast from myStockOptions.com on all aspects of these grants. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. In the exam that follows the course, the answer key also links to relevant content on the site for further reading and learning.
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