Maximizing Restricted Stock

Financial advisor and StockOpter user Megan Gorman in her Forbes article How A Restricted Stock Strategy Can Maximize Your Wealth has some great tips for restricted stock recipients.

Megan explains “Restricted stock is simply shares issued to an employee that cannot be transferred to them until certain conditions have been met. These conditions can be time- or performance-based.” However she continues, “while restricted stock creates great upside potential, if employees do not know how to manage the risks, they might not receive the full benefits.”

The initial risk associated with restricted stock is the tax impact of vesting (conditions met). The value of the shares when they vest are treated as ordinary income. The issuing company is required to withhold for federal and state taxes.  For most employees the company withholds 22% for federal taxes, but this will be insufficient for those in higher tax brackets. Consequently at tax time, the employee may be surprised with an additional tax bill and nothing set aside to pay it.

Another risk inherent to restricted stock is related to wealth building.  Recipients that accumulate a concentrated position in their company stock are at risk should the stock price tumble.  Conversely, employees that consume their restricted stock value on living expenses are not maximizing its wealth building potential. Systematic diversification and reinvestment of these shares over time will build wealth and reduce the risk of a concentrated company stock position.

Megan also suggests, “the proceeds should be earmarked for different buckets of the employee’s financial plan. For example, an employee might allocate the proceeds to be split between paying the remaining tax due, contributing to their child’s 529 plan and adding to their investment account.  These strategic allocations enable the employee to make progress toward financial goals versus letting the proceeds simply go to cash flow.”

Restricted stock awards are a great benefit, but in order to maximize their value recipients need specialized assistance to address the complexities of taxation, diversification and reinvestment. Not all financial advisors are experienced at providing restricted stock guidance so look for an advisor that specializes in equity compensation and uses to analyze these holdings.

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