Developed in conjunction with Ext-Joom.com

Amat Victoria Curam

Financial Information for Senior Military Officers

You've Made it When...

You've Made it When...
...The boss calls you in to talk about a "non-qualified" plan. 
 
A non-qualified plan is one that doesn't meet the Department of Labor's rules for employee benefit plans and normally they are set-up for key members of a company.  So, if your boss is talking about a non-qualified plan, you're doing all right.  The down side is that non-qualified plans are tricky and you can significantly change your tax bill by the decisions you make. 

For today, we'll talk about Restricted Stock Plans, one type of non-qualified plans.  Under a Restricted Stock Plan an employee (normally highly compensated or key personnel) is granted shares of stock (normally company stock) for free or a reduced price.  In line with the name, the stock is restricted.  Normally, the restriction is based on an amount of time passing or serving as employee for a certain amount of time (or both) and you won't be able to sell the stock until the restriction is lifted.  At the time of grant (when you buy or receive the stock) there are no tax implications.  This is because you have a substantial risk of forfeiture of the benefit as you get nothing if you don't meet the requirement to lift the restriction.  But there could be tax implications when the restriction ends.  Unless...

Let's start with the general rule.  Under the general rule when the restriction ends (the stock vests), you will be taxed on the difference between what you paid for the stock and the fair market value on that date.  Under the general rule the income is ordinary income and taxed at your marginal tax rate.  In other words, if the stock goes up in value, you will be paying taxes on capital gains at your marginal rate...not a good deal for you.  It is also important to note that you're not receiving any "real" income when this happens only a right.  You'll have to pay that tax with "real" money.

Section 83(b). Under Section 83(b) of the Tax Code you have the option to pay some taxes now to save taxes in the future.  If you select to exercise the Section 83(b) election you will pay taxes on the discount (the difference between the price and current fair market value) when you are granted the restricted stock.  In some cases there may not be a discount element (often the case in start-ups) when you are granted the stock.  This income is taxed at your marginal tax rate.  If the 83(b) election is taken, then there is no tax implications when the restriction is lifted and taxes will only be due when the previously restricted stock is sold.  And all the gains will be taxed as capital gains and almost certainly the capital gains tax rate will be lower than your marginal tax rate.

There is a limited amount of time to exercise the 83(b) option.  More precisely, you have 30 days from the transfer of the stock.  There are also specific paperwork requirements.

If the boss starts talking about Restricted Stock Plans, make sure you give us a call before you agree to anything.

Have You Planned How You Will Spend Your Money?
Did You Get an Unexpected Tax Refund?
 

Comments

No comments made yet. Be the first to submit a comment

Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.

Read Our Blog

 

Understanding TSP RMDs
      You can't leave your money in TSP forever.  Find out what happens if you don't take it out...

 

Read More

Access Your Accounts

 

Sign-up for Newsletter