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Retired Military Finances 401: Restricted Stock Units

Investment Retirement Funding Taxes

If you manage to land a C-Suite position or perhaps you’re a very valuable technical expert, your compensation package might include Restricted Stock Units (RSU). They’re a great benefit, but they’re not simple. So, let’s take a look.

What Are They?

RSU’s are a type of non-qualified plan. This means that an employer can offer them to just the employees he or she wants to. Specifically, RSUs are the promise to transfer company stock to the employee at some future date.

Typically, an RSU will have a vesting schedule where a certain percent of the grant becomes vested (yours) over a period of 5 years or so. Leave the company before the 5-year period? Leave some stock behind.

That’s it, basically. Pretty simple. They are, but the taxes aren’t exactly

Tax Ramifications of RSU’s

Since the RSU’s have a “substantial risk of forfeiture”, when they are granted, they are not included in your taxable income when granted. The deferral of income recognition is common in non-qualified plans.

However, when they do vest the fair market value of the stock received is included in income and is considered compensation. This means it is subject to income and Social Security and Medicare taxes. Often, Social Security taxes won’t matter as employees that are offered RSU’s usually are above the Social Security Wage base. But they could be subject to the additional ObamaCare surtaxes.

You can decide to hold the stock after it vests. Just make sure you are aware of the risks in owning a single stock and of having too much employer stock in your portfolio. Many times it makes sense to sell the shares shortly after vesting.

When you sell the stock, any gain after vesting is a capital gain subject to capital gains tax. To get long-term capital gains treatment, you’ll need to hold the stock for a year. And remember, the basis of the stock is the value on the vesting date.

One of These Things is Not Like the Others

There are also non-qualified plans that include restricted stock. These are not the same thing as an RSU. The major thing you need to be aware of when it comes to the differences is that RSU’s can’t take the 83(b) election. You can read about restricted stock plans here.

This stuff isn’t easy and it takes time. If you’d like some help, give us a call.


If you liked this article, you might enjoy the following blog posts:

Retired Military Finances 401: Non-Qualified Stock Options


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