- Being part of a publicly traded company,
you may receive restricted stock or restricted stock units
and the next question becomes what do you do with those
and how are they taxed?
Let's tackle that on this episode of Office Hours.
Hey everybody, Dominique Henderson here today,
Founder of DJH Capital Management, your YouTube CFP.
Wanna give you a quick rundown on how restricted stock
and restricted stock units,
we'll be using those terms interchangeably today.
They're pretty much the same thing
but basically your company's gonna give you these
when they wanna give you some comp
but not necessarily in the form of cash.
They're gonna give you in the form of stock
and what happens is after this is awarded to you
you can sell this stock and use the money
to pay for different things.
So let's break down how this will work from the beginning
all the way to the end.
The first thing you'll need to have is a brokerage account.
A brokerage account is just gonna be a place
where you can keep these awards
so that once the company awards them to you
they go right into the account at the broker
so that you can trade them, sell them, da, da, da, da, da,
all that kinda stuff.
So usually you're company's gonna have a preferred provider,
some wealth manager firm
that has already got accounts set up
with many of the employees there
and I would say it is to your advantage to use them,
one because of the relationship is already existing.
So if you ever had questions
then you could just give them a call.
They'll probably know what you're talking about
because they've done this many times over.
The second is you're probably gonna have an advantage
to some type of advantage pricing
when it comes to trading those stock units
or those stock awards that accumulate in your account.
There is anywhere from let's call it five bucks,
and some discount brokers are very, very cheap
and they're basically nothing like a Robin Hood,
all the way up to 20, 25 bucks a share,
I'm sorry 20, 25 bucks a trade to trade.
So you wanna let's say you don't wanna have
a cost prohibitive relationship
so it could be better for you to be at that relationship
developed through the firm
just so you'll be able to trade those when you want to
and it'll be pretty convenient for you.
Now come the fun part, the taxes, the tax man cometh.
The tax man always cometh, right?
Once you get an award
you're typically gonna have a 25% or so
federal tax for income.
Remember, just because you got stock awards,
this is also counted to you as W2 income.
So on your W2 let's say you make a salary,
a base salary of $100,000 a year
and you get stock awards of $50,000.
Combine those two together, it's like you made $150,000.
That's the way the IRS looks at it; therefore,
that's the way that your employer will calculate everything.
So they're gonna withhold something.
So let's use some round numbers.
Let's say you got a thousand shares awarded to you
that are trading at a price
of 100 during the date of the award so that's 100K to you.
The typically withholding rate, like I said,
could be upwards of 25% federal withholding.
So the way this would work is let's just say
you got an award of 100,000 shares and on the award date
those shares were worth $100.
So that $100,000 dollars as an award to you,
you won't get all $100,000 or 1,000 shares.
At a 25% withholding rate that's a $25,000 tax bill
and if you're using a method that's really common
when you get these awards,
which is the gross up method which means
that they're just gonna reduce the amount of shares
in your account by your tax bill.
So in this case $100,000, $25,000 of federal withholding,
leaves you with $75,000 and that would be divided by 100
would be 70, 750 shares.
So that's the way that would work.
You would see not a thousand shares,
that would be your award,
but what would be actually in your account
sitting at the broker account that you just opened
or had open already is the 750 shares.
Probably what you've been waiting for.
Should you sell them or should you hold them?
Like what does it really benefit me to have these?
So, this is where you're gonna have to use
a little discretion based on your goals
for wealth accumulation.
If you hold them you're gonna likely,
if the shares pay a dividend,
you're gonna collect the dividends,
they're gonna appreciate over time, you're gonna gain wealth
but you wanna be mindful of the fact that if you do sell
that selling within 12 months of your award date
is going to trigger a short-term capital gain
if the shares have moved in price.
Let's say that the shares were awarded at 100 bucks a share
like we had in our previous example,
but they went to $110 a share.
So this extra $10 of gain, if you sell those shares
within a year of receiving them,
you're gonna pay short-term capital gains tax,
which is going to be the same as your highest marginal rate
in your federal tax.
So you wanna avoid that at all costs.
That's how people get a really big tax bill
is by selling a little too early.
If you wait just one year and one day
you'll get the more flexible or let's say more lenient,
long-term capital gains rates
that you would pay taxes on the gain on.
So you wanna be mindful of that.
You probably wanna talk to your tax professional
or tax advisor or financial advisor
when it comes to a strategy on how you dispose
or sell any of these shares, or if you just decide to hold.
That strategy is gonna be
up to what your financial goals are
as far as wealth accumulation goes.
What is the takeaway from this?
Well, I think the takeaway is a couple of things.
The first is this can be a very scary, complex subject
at first glance.
You know you need to have a brokerage account,
you're gonna have taxes taken out,
and then you need to make a decision.
I recently sat down with a client about something
on this nature where they had publicly traded shares,
they'd been accumulating for quite some time,
and they wanted to decide whether or not
they should sell all, some, or none of what they had.
And what we did is we ended up sitting down together
and having a conversation
about where their finances were going to go,
what their goals were for the next couple of years,
and really just framing up
what I would call goal articulation.
Because once you have a passion or a purpose rather
behind what you're trying to make your money do,
it becomes very easy or at least easier
to make decisions of sudden wealth
or wealth accumulation strategies.
The other thing I would mention
is you wanna have some type of schedule in place
regardless of what your strategy is
simply because you don't wanna accumulate a majority
or the great majority of your net worth
all in your company's stock.
You know you've got a lot of assets there already
including the fact that you get paychecks,
you likely have your benefits through there,
and so you're probably got your 401K there too.
And so you wanna be cognizant of the fact of diversifying
your income and your net worth
when it comes to accumulating these awards over time.
Again, the key is going to be to sit down with somebody
to articulate what your financial goals are
and seeing how this bucket of wealth
is going to help you move closer to those goals
that are most important to you
and that will allow you to live the life that you want.
Okay, my question to you.
Do you have any stock awards, any restricted stock awards,
restricted stock units that you have questions about?
You may be curious, don't know if you should sell
or if you should hold.
Drop me a line down below,
I'll do my best to answer those questions.
Don't forget to subscribe,
we'd love to have you a part of this community.
We'll talk to ya later, buh-bye.