Stock compensation is a valuable part of employment compensation packages, offering employees a stake in their company’s success. Two forms of stock compensation are Restricted Stock Units (RSUs) and Incentive Stock Options (ISOs). Understanding how they work, and their respective tax implications can help you make important financial decisions.
What Are RSUs?
Restricted Stock Units (RSUs) are company shares granted to employees, typically subject to a vesting schedule. These units have no intrinsic value until they are vested. On the vested date, the shares become yours, and their value is considered taxable income at the fair market value (stock price X number of shares). RSUs have no purchase requirement, providing you (the employee) guaranteed value if the stock has worth. Your employer can allow a portion of the shares to be withheld to cover potential future tax liability.
What Are ISOs?
Incentive Stock Options (ISOs) offer employees the right to purchase company stock at a set price, known as the exercise price, within a specified period (expiration date). ISOs are not automatically taxable upon vesting; taxes are due when you sell the stock. In general, if you meet certain holding requirements (at least two years from the grant date and one year from the exercise date) gains may qualify for favorable long-term capital gains tax treatment.
Exercising ISOs can trigger Alternative Minimum Tax (AMT), which adds complexity to tax planning. It is important to note that ISOs can be “disqualified” if not exercised properly resulting in unfavorable tax consequences.
Key Differences
Financial Planning Ideas
1. Manage Taxes: For RSUs, consider setting aside after-tax dollars or withholding shares to cover taxes at vesting. For ISOs, holding period and AMT considerations are essential driving factors associated with tax liability. It is important to hold these shares at least two years from the grant date and one year from the exercise date to maintain favorable tax rates.
2. Concentration Risk: While stock compensation is an attractive employee benefit, overconcentration in a stock, especially your employer’s stock, is risky. This can leave your retirement account and total net worth vulnerable to high volatility or significant losses. Diversification is core in risk management and comprehensive financial planning. The use of covered call option writing or tactical stock rebalancing can help mitigate concentration risk.
3. Align with Your Goals: Stock compensation can be a valuable award and long-term wealth-building tool. Ensure that your RSU or ISO strategy aligns with your financial goals by working with a CERTIFIED FINANCIAL PLANNER® today. A disciplined process and tax efficient strategy may be appropriate to protect your wealth.
Your Next Move
Do you have an employer stock position with a total of 5% or greater in your investment portfolio? Choosing how to handle your RSUs or ISOs requires thoughtful planning. The right approach will depend on your personal financial situation, tax bracket, and investment goals.
Aventine Financial Group LLC is a team of CERTIFIED FINANCIAL PLANNER’s ready to help you with your employee stock compensation package as part of our financial planning process. We are independent, fiduciary wealth managers who specialize in building balanced investment portfolios for individuals and families.
The financial advice we offer is based on our company mission to see you reach your financial goals and achieve financial freedom. We look forward to helping you protect your wealth, grow your net worth, and enjoy financial peace of mind.
Always, Rob
Robert Barth, CPA, CFP®
Financial Planner
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