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Retired Military Finances 401: Restricted Stock and the 83(b) Election Thumbnail

Retired Military Finances 401: Restricted Stock and the 83(b) Election

Investment Retirement Funding Taxes

As you progress in your post military-retirement career you may become eligible for equity compensation. One type of equity compensation is Restricted Stock. In general, in a restricted stock plan you receive a stock “pledge” that you will get at some point in the future. Like most equity compensation plans, a restricted stock plan has unique tax treatment.

How is Restricted Stock Taxed?

When you receive the grant of restricted stock, there are no tax consequences as the grant is subject to substantial risk of forfeiture…if you leave the company before the grant vests (usually around 3 years or so), you give up the stock. Once the stock vests (it becomes yours), the fair market value is included in your income and taxed the same as your wages. In fact, it will be included in your wages on your W-2. When you sell the restricted stock, if you meet the plan requirements and the Tax Code, the increase in value of the restricted stock will be treated as capital gains. This is normal treatment (and the default) of grants of restricted stock.

What is the 83(b) Election?

The 83(b) election is the decision to have your restricted stock taxed in a different manner. It is important to realize that the 83(b) election applies only to restricted stock and not restricted stock units. The two are similar, but not the same.

If you decide to take the 83(b) election you will be taxed on the fair market value of the restricted stock in the year the grant is made (or the difference between fair market value and the amount you pay for the stock), not when the stock vests. Or said another way, you will pay the tax earlier perhaps on a lower amount. The increase of the value of the stock that occurs while you’re waiting for the stock to vest will be taxed as capital gains when you actually sell it.

Why Would You Want to Take the 83(b) Election?

Taxes on capital gains are lower than on compensation/ordinary income. So, while you pay some tax earlier, your total tax bill will likely be lower as capital gains tax rates are lower than the taxes on ordinary income. You’ll also get beneficial tax rates on any dividends received.

How do You Take the 83(b) Election?

Taking the election is not difficult, but there are time limits. You must make the election within 30 days of receiving the restricted stock (not when it vests). To file the election, you must provide a written statement to the IRS and another statement to your employer. It’s likely that your employer will have a template for you.

Military Finances are Different

While the rules pertaining to 83(b) elections are the same for civilians and military members. That isn’t always the case. Active and Retired Senior Military Officers and NCOs have financial and tax benefits and programs not available to civilians. That’s why we think you should work with a financial planner/advisor that deals with your issues each and every day. If you’d like to see how we work with Active and Retired Senior Military Officers and NCOs just like you, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 401: Phantom Stock. No it Doesn't Have Anything to Do with the F-4


Retired Military Finances 401: Restricted Stock Units


Retired Military Finances 401: Non-Qualified Stock Options


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