The Ready, Set Retirement Blog Focuses on Financial Planning issues facing Gen X Execs and Soon-to-Be Retirees and in this article we are going to explore RSUs or Restricted Stock units, how they differ from Non-Qualified Stock Options or SARs Stock Accumulation Rights. We will also look at how they are taxed and the benefits to each.

Non-qualified stock options used to be the most common form of stock compensation, but in recent years many companies have begun to transition to RSUs. Non-qualified stock options typically vest over a period of time and have a strike price that you would pay in order to purchase the shares.

The strike price, to justify their purchase or actually exercising the options, should be lower than the market price. And if you have the cash you can buy them outright, or most companies allow for a cashless exercise.

This allows you to purchase your shares without needing a chunk of money to use to pay for the shares. Instead, a portion of the shares you receive are immediately sold and the difference between the current price and the strike price you pay per stock are used to pay for the rest of your purchase. In doing this, you will end up retaining less shares than actually exercised.

With RSUs or Restricted Stock Units the strike price is basically zero and you have no control over when you become the owner of your employer shares. As shares vest with RSUs, you automatically receive the stock compensation. The vesting could be triggered by Stock Performance or a specific time period.

How Are You Taxed?

Both taxable portions of non-qualified stock options (Which I will describe) and RSUs are taxed as ordinary income. That means they are subject to Federal, State, Social Security, and Medicare taxes.

For NQSO’s you have to pay ordinary income tax on the bargain element. For example, if you are allowed to buy 100 shares at $10, but the market price is $20. You will pay income tax on the difference between the Market Price $20 and Strike Price $10 which is $10 multiplied by the amount of shares 100, which would equal $1,000 of ordinary income. Once the tax is paid your cost basis is now the market price when you exercised the options.

RSU’s are 100% taxable as ordinary income when they vest. Often, people who are awarded RSU’s liquidate a portion of the holdings to make up for the additional tax in ordinary income upon their vesting.

Benefits

Each have some benefits, that the other doesn’t. Once your NSQOs have vested you can choose as to whether you will and when you will exercise the options. That is a benefit. 

This allows you to dictate when and if you will create a taxable event. However, you need to track these and ensure that you exercise then prior to their expiration. 

Hot Tip- Tracking is really important! It makes sense to exercise these when the bargain element is at it’s lowest. If the stock has appreciated significantly and you didn’t exercise, you now have a larger amount of tax to pay on the bargain element. This is where a good financial planner can assist in making a call as to when to exercise these options.

As I said earlier, if the stock hasn’t performed well and your strike price is higher than the current market value, then you wouldn’t likely exercise the options; especially if you can purchase it for less in the open market. Which essentially makes the SAR worthless.

With RSUs, you are taxed when you receive the shares and those vest either by time or a performance measure. Congratulations!

-those shares are now yours! Woo Hoo

it has also created a taxable event,

whereby you are responsible for Ordinary Income Tax on that award. Your taxable income is the market value of the shares at vesting

Both RSUs and NSQOs are great problems to have. You should consult your Tax Preparer to determine the tax implications. In addition, reach out to your Financial Planner and find out about the impact of holding that asset in your portfolio. The Options/Grants can lead to a lack of diversification within your portfolio and might not be an appropriate investment given your time horizon, risk tolerance and investment objective.

My name is Derrick Glencer I am a CERTIFIED FINANCIAL PLANNER™ Practitioner if you enjoyed this content you can book a no obligation consultation via Calendly at: https://calendly.com/djgcfp

Or directly through email at: derrick.glencer@raymondjames.com

I can also be found on social media at:

LinkedIn: https://www.linkedin.com/in/derrick-j-glencer-cfp%C2%AE-026b125/
FaceBook: https://www.facebook.com/DerrickGlencerRJFS
Twitter: https://twitter.com/djgcfp

Thank you very much and go make it a great day!

Any opinions are those of Derrick Glencer and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/ SIPC.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER™, CFP^®(Plaque design) and CFP^® with flame design) in the U.S., which awards to individuals who successfully complete the CFP Board’s Initial and ongoing certification requirements.