- Restricted Performance Stock (RSU) is a type of equity compensation that is granted to employees as a form of incentive or compensation, subject to certain restrictions such as a vesting schedule or performance conditions.
- The main characteristics of RSUs include a vesting date, tax consequences of vesting, the RSU agreement, graded vesting, and the need to adjust financial plans to manage the added risk.
- RSUs align the interests of employees with those of the company, encourage employees to focus on long-term success, and offer the potential for appreciation and the ability to claim a capital loss if the value of the stock decreases.
- The grant date is the date on which the RSU award is granted to the employee and is used to determine the vesting schedule and fair market value of the stock at the time of vesting.
Restricted performance stock is a type of equity compensation that is granted to employees as a form of incentive or compensation. It is typically subject to certain restrictions, such as a vesting schedule or performance conditions, before the employee can fully exercise their rights to the stock. If your company gave you RSUs as part of your employment contract at your new job, it’s important to understand how those RSUs work. In this article, you’ll learn about your RSUs vesting schedule that are held at Etrade, how they work, and much more.
Characteristics of Restricted Performance Stock
Restricted Performance Stock (RSU) is a type of stock award that is granted to employees as a form of compensation. Typically you’ll receive a designated number of stock option grants in a stock plan once you’re hired at a company like amazon. You expect that the current price will increase between the initial grant date and its subsequent vest date which means that your shares will only be worth more than they are when you initially receive them.
The main characteristics of RSUs include:
- Vesting date: The date on which the employee becomes entitled to receive the shares of stock. This date is usually set in the RSU agreement and may be based on the employee’s length of service or the achievement of certain performance milestones.
- Tax consequences of vesting: When the RSU vests, the employee will be taxed on the fair market value of the stock at that time. This is considered ordinary income and will be subject to federal and state income taxes.
- RSU agreement: The RSU agreement is the document that outlines the terms and conditions of the RSU grant, including the vesting schedule and any restrictions on the stock.
- Graded vesting: This is a type of vesting schedule where the employee receives a certain percentage of the stock award each year. For example, the employee may receive 25% of the shares each year for four years.
- Adjusting your financial plan: When an RSU is included in your financial plan, it is important to consider the tax implications and the potential impact on your overall investment portfolio. You may need to adjust your investment strategy or consider diversifying your holdings to manage the added risk.
It’s always important to consult with a financial advisor or tax professional when it comes to RSUs, as the tax implications and the terms of the agreement can vary depending on the company and your personal financial situation.
Advantages of Restricted Performance Stock
Restricted Performance Stock (RSU) has several advantages as a form of compensation:
- Alignment of interests: RSUs align the interests of employees with those of the company, as the value of the stock award is tied to the performance of the company.
- Potential for appreciation: The value of the stock award can appreciate over time, providing the employee with the potential for a significant return on investment.
- Long-term focus: RSUs encourage employees to focus on the long-term success of the company, rather than short-term gains.
- Capital losses work on performance stock: Capital losses are the losses that arise when the value of an investment decreases. If the value of the RSU decreases, the employee can sell the shares and potentially claim a capital loss on their taxes.
- Amount of cash you’re paid when they vest: When the RSUs vest, the employee will receive shares of stock, not cash. The value of the shares will be based on the fair market value at the time of vesting.
- Grant date: The grant date is the date on which the RSU award is granted to the employee. This date is used to determine the vesting schedule and the fair market value of the stock at the time of vesting.
- Taxes on restricted performance stock: When the RSU vests, the employee will be taxed on the fair market value of the stock at that time. This is considered ordinary income, and will be subject to federal and state income taxes. Additionally, if the employee decides to sell the shares, they may be subject to capital gains taxes on the difference between the sale price and the fair market value at vesting.
It’s important to consult with a tax professional when it comes to RSUs, as the tax implications and the terms of the agreement can vary depending on the company and your personal financial situation. Talk to a personal finance expert who can give you investment advice like an investment adviser to get help understanding what to do with your shares and get tax advice from your own tax advisor before the shares vest so you know what to expect.
How Does Restricted Performance Stock Work?
- Restricted performance stock is usually granted to employees as part of their compensation package.
- The stock is subject to certain restrictions, such as a vesting schedule or performance conditions, before the employee can fully exercise their rights to the stock.
- The employee will typically be able to vote on the stock, but will not be able to sell it until the restrictions have been lifted following the vest date.
- Once the restrictions have been lifted, the employee will be able to sell the stock on the open market or hold onto it as a long-term investment but they need to remember that they may have a substantial tax withholding in the tax year that they
RSUs and Their Role in Your Total Compensation
RSUs, or restricted stock units, are a type of compensation that is often used by companies to reward employees. Unlike stock options, which give the holder the right to purchase shares at a set price, RSUs give the holder the right to receive shares at a set price. The price is typically set at the time of grant, but may be based on the market price at the vesting date.
While RSUs are not as widely used as stock options, they do have some advantages. For example, RSUs do not have an expiration date and they can be sold immediately after they vest. Additionally, RSUs are often considered to be more tax-efficient than stock options.
The main disadvantage of RSUs is that they are subject to vesting schedules. This means that the recipient will not receive all of the shares immediately and may have to wait years for full vesting. Vesting schedules are often complex and can vary based on factors such as length of service or performance goals.
If you receive RSUs as part of your compensation package, it is important to understand how they work and what role they play in your overall financial picture. This guide will provide an overview of RSUs and their pros and cons, as well as a detailed look at RSU vesting schedules for Etrade employees.
What is an RSU Vesting Schedule and How Does It Work?
An RSU Vesting Schedule is a schedule that outlines the terms and conditions under which an employee will receive shares of Restricted Performance Stock (RSU). The schedule typically includes a vesting date, which is the date on which the employee becomes entitled to receive the shares of stock, and a vesting period, which is the length of time over which the employee will receive the shares.
The stock grants work by giving the employee the right to receive a certain number of shares of stock at a future date, subject to certain conditions. The employee does not receive the shares immediately, but rather over a period of time, as outlined in the vesting schedule. This is done to align the interests of the employee with those of the company and encourage the employee to stay with the company and contribute to its success.
The vesting date is the date on which the employee becomes entitled to receive the shares of stock. This date is usually set in the RSU agreement and may be based on the employee’s length of service or the achievement of certain performance milestones.
The sell-to-cover method of covering the tax obligation resulting from vesting is when the employee sells enough shares to cover the taxes that will be owed on the vesting of the RSUs. This can help to minimize the impact of the taxes on the employee’s overall financial situation.
If an employee quits prior to their shares vesting, the unvested shares will generally be forfeited. However, the exact terms of the vesting schedule will depend on the specific RSU agreement, and some companies may have different policies in place.
Different Types of Vesting Schedules
There are four different types of vesting schedules for RSUs: cliff vesting, graded vesting, accelerated vesting, and lump-sum vesting.
Cliff vesting is when the entire RSU grant vests at once on a specified date. This type of vesting schedule is typically used for new hires, to ensure that they are committed to the company for at least a certain period of time.
Graded vesting is when the RSUs vest gradually over time, typically over a period of 3-5 years. This type of vesting schedule gives employees an incentive to stay with the company long-term, as they will only receive the full value of their grant if they remain employed until the end of the vesting period.
Accelerated vesting is when the RSUs vest more quickly than originally planned, typically due to a change in circumstances such as a merger or acquisition. This type of vesting schedule can be beneficial to employees, as it allows them to receive the full value of their grant sooner than expected.
Lump-sum vesting is when all of the RSUs in a grant vest at once on a specified date. This type of vesting schedule is typically used for grants that are large in size or have a long-term horizon (e.g., 10 years).
How Vesting Schedules Are Determined By Different Companies
The vesting schedule for RSUs is determined by the company that granted the RSUs. The schedule can vary from company to company and even from RSU grant to RSU grant within the same company. However, there are a few factors that typically influence how a company structures its vesting schedules.
Time-based vesting schedules are the most common type of vesting schedule for RSUs. As the name implies, with this type of schedule, the longer an employee stays with a company, the more vested they become in their RSUs. The vesting intervals are generally quarterly or yearly, although some companies have shorter or longer intervals.
Performance-based vesting schedules tie the vesting of RSUs to specific performance milestones that an employee must achieve. For example, an employee may vest in 25% of their RSUs if they meet certain sales targets within the first year of their employment. This type of vesting schedule provides employees with an incentive to perform well and achieve specific goals.
Cliff-vested RSUs vest all at once after a certain period of time has elapsed (e.g., after four years of employment). This type of vesting schedule is less common than time-based or performance-based vesting schedules, but it can be used in certain situations, such as when an employee is hired into a managerial role.
How Vesting Schedules Affect the Value and Liquidity of RSUs
Vesting schedules play a big role in how much value and liquidity RSUs have. The main types of vesting schedules are cliff vesting and graded vesting. Cliff vesting means that all of the shares are vested at once after a certain amount of time has passed. This is common with startup companies that want to keep employees around for a long time. Graded vesting means that the shares vest over time, usually in equal increments. This is more common in larger companies where employee turnover is more likely.
The value of RSUs depends on when they vest. If they cliff vest, then the entire value is vested at once and can be sold immediately (assuming the company has gone public). If they grade vest, then the value vests over time and can be sold as soon as each increment vests. However, because there is less immediate liquidity with graded RSUs, they are often worth less than cliff-vested RSUs.
The amount of time until an RSU vests also affects its value. If it vests immediately (or very soon), then it will be worth less than if it vests further in the future. This is because there is more risk that the company will go bankrupt or be bought out before the RSU fully vests. On the other hand, if an RSU has a very long vesting period (e.g., 10 years), then it may never vest at all if the employee leaves the company before then.
How Vesting Schedules Affect Taxes on RSUs
Vesting schedules for RSUs can have a significant effect on the taxes that you owe. The main thing to be aware of is that when your RSUs vest, you will be taxed on the value of the shares at that time. This can create a large tax bill if the stock price has gone up significantly since you were granted the RSUs.
To minimize this tax impact, you can consider selling some of your shares immediately after they vest. This way, you can spread out the tax liability over a longer period of time. Another option is to hold onto the shares and pay the taxes when you eventually sell them. This strategy is generally only recommended if you are confident that the stock price will continue to rise.
It’s also important to be aware of the different types of vesting schedules and how they can affect your taxes. Cliff vesting means that all of your RSUs vest at once after a certain period of time (usually 3-5 years). This can create a large tax bill if the stock price has gone up significantly during that time. Graduated vesting means that your RSUs vest over a period of time, typically in increments of 25%. This can help reduce the tax impact because you will only be taxed on a portion of your RSUs each year.
How To Minimize the Tax Liability Associated With The Vesting Of Your RSUs
If you’re an employee of a public company that has been granted RSUs, you may be wondering how to minimize your tax liability on the vesting schedule.
Here are a few tips:
- Maximize your 401(k) contributions: By contributing the maximum amount to your 401(k), you can reduce your taxable income and lower your overall tax bill.
- Take advantage of deductions and credits: There are a number of deductions and credits available that can help offset the taxes owed on RSUs. Be sure to talk to your tax advisor about which ones you may be eligible for.
- Defer taxation: If you have the option, you can elect to defer taxation on RSUs until they are actually sold or exchanged for shares. This can help minimize the impact of taxes in the short term and may result in a lower overall tax bill.
How to plan for taxes when selling RSUs
When you vest your RSUs, you will be taxed on the value of the stock at vesting. The amount of tax you pay will depend on the type of RSU and the tax treatment that applies to it.
If you have an employee stock option, you will be taxed as if you had sold the stock on the day you vested. This means that you will pay capital gains tax on any appreciation in the value of the stock from the time it was granted to the time it was sold.
If you have a restricted stock unit, you will be taxed as if you had sold the stock on the day it vested. However, you may be eligible for special tax treatment if you meet certain conditions. For example, if your RSUs are subject to a holding period, you may be able to defer paying taxes until the shares are sold.
To avoid paying taxes on your RSUs all at once, you can plan ahead and spread out your vesting schedule over several years. This way, you can take advantage of lower tax rates and minimize your overall tax bill.
Summary of key points
It’s important to know when your RSUs will vest so that you can make informed decisions about what to do with them. Here is a summary of the key points from the blog article “The Comprehensive Guide To RSU Vesting Schedules for Etrade RSUs”:
- RSUs may be subject to a vesting schedule, which means that you will not have full ownership of the shares until a certain date or event has occurred.
- Vesting schedules for RSUs are typically based on either time or performance, but can also be a combination of both.
- Time-based vesting schedules typically have monthly or quarterly vesting dates, while performance-based vesting schedules may be based on things like reaching certain milestones or targets.
- If your RSUs are subject to a vesting schedule, it’s important to know when they will vest so that you can make informed decisions about what to do with them (e.g., sell, hold, or exercise).
Additional resources for further information
If you’re looking for more information on RSU vesting schedules, Etrade has a few additional resources that may be helpful. Their website has an FAQ section that covers some common questions about RSUs, and they also have a dedicated phone line for RSU-related inquiries.
Additionally, Etrade’s customer service team is always happy to help with any questions you may have. You can reach them by phone or email, and they’re typically available during regular business hours.