Restricted stock requires planning
by William G. Lako, Jr.
June 20, 2013 11:15 PM | 2088 views | 1 1 comments | 170 170 recommendations | email to a friend | print
William G. Lako Jr.<br>Business Columnist
William G. Lako Jr.
Business Columnist
If you receive restricted stock as part of your compensation package, you are most definitely fortunate. You also most definitely need to consider how this benefit affects your overall financial plan, including your tax planning and portfolio diversification.

If restricted stock is a large component of your compensation, you may be underwithholding your taxes. Companies have two options to calculate the federal withholding. They can use an employee’s W-4 rate; however, this is extremely complicated, as the company must combine the income from all the stock plan transactions with an employee’s other income for the year. Then the employer must derive the employee’s marginal tax rate using a complex formula. The other option, which a majority of employers use, is a flat rate for supplemental payments. This is usually 25 percent for those whose supplemental payments are less than $1 million. For those whose supplemental payments exceed $1 million during the year, employers usually withhold the maximum individual tax rate of 39.6 percent.

Let’s say you have 1,000 shares that should vest at the estimated stock price of $35 a share. Your company assesses a federal withholding at the flat 25 percent rate on your vested stock of $35,000. If your taxable income is more than $125,450 for single or $146,400 for married filing jointly, you will have withheld less tax on the $35,000 than your marginal rate. For taxpayers in brackets higher than 25 percent, but have supplemental income less than $1 million, the supplemental rate falls short of covering the tax liability. This can lead to an unexpected balance due in April. By working with a tax adviser, you can either adjust your W-4 withholdings to make up for the shortfall in withholding on your restricted stock, or you can make an estimated tax payment(s).

Another potential pitfall you may have with restricted stock is lack of diversification. Typically, you exercise options to realize the value of the options due to either a need for the funds or to diversify your investments. You are granted the right to exercise your options; thus, you purchase at a discount, and typically sell the shares the same day at a much higher rate to generate your cash profit. Alternately, restricted stock does not often coincide with a monetary need. Rather, you are given shares that vest over time. The shares are placed in your account noting the restrictions. When the restrictions lapse, you generally withhold shares to cover the required tax. The remaining shares stay in your account.

Over time, as your shares vest and the company stock continues to increase, you may find yourself overweight in one company. Such concentrated positions mean a large portion of your overall wealth is dependent on the performance of one company: the company that pays you a salary and whose stock you own. While your company may not be the next Enron and end bankrupt by an accounting scandal, your industry may experience a prolonged period of slow earnings growth. Of course, selling company stock you’ve acquired over the course of several years will likely require the assistance and advice of a financial adviser and tax consultant. They should assist you in minimizing the tax impact of a stock sale.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
Comments-icon Post a Comment
Bruce Brumberg
July 14, 2013
Good coverage of a few of the many issues to think about related to restricted stock, whether the taxes or financial planning. For additional information on restricted stock and RSUs, see that section on the website
*We welcome your comments on the stories and issues of the day and seek to provide a forum for the community to voice opinions. All comments are subject to moderator approval before being made visible on the website but are not edited. The use of profanity, obscene and vulgar language, hate speech, and racial slurs is strictly prohibited. Advertisements, promotions, and spam will also be rejected. Please read our terms of service for full guides