Restricted Stock Compensation Awards: What to Consider

Many individuals working for large corporations are offered a compensation option in the form of restricted stock. While the rules set forth in how they are awarded can get complicated, there are some simpler, big-picture items to think about when considering your overall financial situation. Below are some major points to think about if you have received restricted stock compensation.

Vesting Periods & Tax Planning

Understanding vesting schedules for restricted stock can help you prepare for potential tax liabilities. Typically, vesting periods for restricted stock occur on a graded schedule where over the course of a few years, the shares awarded to you are fully vested. For example, the chart below demonstrates how a 5,000-share award vests over 4-year period:

Another type of vesting period are cliff schedules. Unlike the graded schedule, there are no incremental vesting periods. Depending on the plan’s rules, once the required years of service are met, you become full-vested. Below is a quick chart comparing the two schedules:

Once restricted stock vests, the fair market value of those shares will be fully taxable to you as ordinary income. Depending on the plan’s rules, you can use a portion of the vested shares as tax withholding. If this option is not available, you may have to look for other cash flow sources to address this liability. Tax planning is invaluable here as preparing for the tax liability in advance before shares vest can help the vesting schedule go smoothly.

Diversification

Upon fully vesting restricted stock, the shares now become a part of your overall portfolio’s asset allocation. Diversification becomes an extremely important topic to discuss when this occurs. You should carefully consider the risk of holding a concentrated position, especially in individual stock. The potential for loss can be severe and can be a setback to your financial goals.

Financial Goals

If you intend to use restricted stock to fund certain financial goals e.g. home purchase, college tuition, vehicle purchase, etc., having a well-defined financial plan can help address how to best accomplish these goals with restricted stock as a source of funds.

Conclusion

In general, restricted stock plans can get complicated to the point where decision paralysis can occur when trying to address it. Understanding your needs and mapping out the future with this type of compensation can go a long way. It is highly recommended to consult with a fee-only financial advisor to answer any questions about restricted stock compensation.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.