The Basics of Restricted Stock

1,000 shares x $75/share = $75,000

Step 2 – Calculate Projected Tax Liability

Taxable Income x Tax Rate

$75,000 x 33% = $24,750

In this example, the income tax due is $24,750.

How you pay for this tax liability is up to you. Option one is to write a check for this tax due (if you have the cash lying around). Option two is to perform a cashless exercise. A cashless exercise uses a portion of the shares you are vesting to pay the tax liability.

You can learn more about a cash versus a cashless exercise by clicking here.

Restricted Stock after Vesting
After a restricted stock vests, it’s important to consider how owning company stock fits into your overall financial plan. A big question you should ask yourself is, does it make sense to own a large position of company stock or does it make sense to sell and diversify*?

Additionally, you should ask yourself what you would do if your company paid you in cash in lieu of paying you in stock. Remember, just because you received the restricted stock as shares of stock doesn’t mean you need to keep the shares.

Let’s explore…

In our restricted stock scenario above, you received $75,000 when the shares vested (basically wages for your time), which was paid to you in company stock.

But what if that $75,000 were paid to you in cash instead?

If it were, would you immediately use $75,000 to buy company stock?

My guess is that for many, that answer is no. And if the answer to this question is no, does it make sense to retain the stock just because it was paid that way?

What Now?

The above conversation of restricted stock is intended to address many of the common issues the recipients of shares deal with. To be fair, the complexities, rules, and opportunities of restricted stock may go beyond the scope of this article.

Because of this, it’s important to understand what you have in plan stock and what you have elsewhere. Furthermore, plan specifics are different for various companies.

Prior to pulling any triggers or making any decisions, it’s important to evaluate how your plan rules work and what your intentions are.

This article was republished with permission from Daniel Zajac.