Suppose you work for a publicly traded company and are in a leadership or high-level professional position. In that case, you're likely compensated with some variation of stock options, grants, or units. This form of compensation can be confusing or unknown, especially if this is the first time you've received it.
Dave Ramsey doesn't talk much about stock options. However, here is a clip of Ryan in Texas calling Dave and asking him what to do when they become unrestricted: Ryan (Texas), Is Now The Time to Sell My Restricted Stock? Dave, as you can imagine, tells Ryan, who is in Baby Step 6, tells the listener while he doesn't like single stocks. He wouldn't have bought this stock on his own, considering the future expectations of the stock, which might be one reason to hold onto it for a bit longer, but Dave advocates have a pre-determined exit date, so you're not sitting in this forever.
If you have stock options, here is a summary of how restricted stock options work and how to best utilize them in a tax-efficient manner:
Granting of RSOs: Employees are granted RSOs as part of their compensation package, often as an incentive to stay with the company for a certain period of time or to achieve specific performance goals.
Vesting Period: RSOs typically come with a vesting period, during which the employee must fulfill certain conditions, such as remaining with the company for a specified duration or achieving performance targets, before they can exercise their right to buy or receive the stock.
Tax Implications: The tax implications of RSOs depend on several factors, including the type of RSO (restricted stock units or restricted stock awards), the timing of vesting, and whether a Section 83(b) election is made. Generally, the value of the stock at the time of vesting is considered taxable income to the employee, subject to ordinary income tax rates.
Tax-Efficient Strategies:
Timing of Exercise: Consider the timing of exercising RSOs to minimize tax impact. If you believe the value of the stock will increase significantly in the future, it may be beneficial to exercise when the stock price is lower to lock in a lower tax liability.
Section 83(b) Election: For RSOs subject to vesting, employees have the option to make a Section 83(b) election with the IRS within 30 days of receiving the grant. This election allows employees to pay taxes on the value of the stock at the time of grant rather than at vesting, potentially resulting in lower taxes if the stock appreciates in value.
Tax Planning: Consult with a tax professional to develop a personalized tax strategy based on your individual circumstances. They can help you navigate the complex tax implications of RSOs and identify strategies to minimize tax liability while maximizing the benefits of your equity compensation. 5. Diversification: Once RSOs are exercised and the stock is owned outright, consider diversifying your investment portfolio to reduce risk. Holding a large portion of your wealth in company stock can expose you to significant risk if the company encounters financial difficulties.
With all that said, everyone's situation is different. You should consult your tax professional and financial planner to ensure this form of compensation is built into your financial plan. You have a strategy to maximize the benefit your employer is striving to provide you while minimizing the impact of the IRS.
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