Peter Egolf

peter@onedayinjuly.com | (802) 999-2321

I seek to eliminate many of the problems common in the financial industry: conflicts of interest, excessive fees for advice, and significant investment fees. I experienced these issues as an investor and joined the firm as a fiduciary financial advisor to teach other investors how to avoid these financial mistakes and build their wealth.

Contact a fiduciary Financial Advisor now.

Please enter a first name.
Please enter a last name.
Please enter an email address.
1000 characters remaining
Please enter a message.

Restricted Stock Awards

by Financial Advisor Peter Egolf

Restricted Stock Award Agreement

A Restricted Stock Award (RSA) grants an employee shares of company stock, vesting at a future date. The stock is restricted from sale when granted. Once vested, the employee has full control over the stock.

At the time of granting, the employee has the option to accept or decline the offer. The employee should be aware of the tax implications associated with accepting the agreement, which will impact the company stock’s potential financial benefits.


Restricted Stock Award Tax

Employees with Restricted Stock Awards default to having their award taxed as ordinary income when the stock vests (when the employee assumes control of the stock). The taxable value is calculated using the difference between the granted fair market value (less any amount paid for the stock at granting) and the fair market value of the stock at vesting.


Vested Value [$100K] = $100K Taxable Gains (Taxed at Ordinary Income Rates)


However, the tax equation does not end there. Now that the employee owns these shares with a vested cost basis ($100K), should the stock appreciate further and they decide to sell, they will pay capital gains tax on the difference between the vested basis and the value of shares at the time of sale. Alternatively, should the stock price decline below the vesting price, and the employee decides to sell, they will have a capital loss.


Sale Value [$110K] - Vested Value [$100K] = [$10K] Capital Gains (Taxed as Short or Long-Term)


RSA with no 83(b) election


A key consideration is that if the employee sells the stock immediately at vesting, they will likely minimize any potential gain or loss and associated tax bill. However, if the employee sells the stock within a year of vesting, they would be subject to short-term capital gains tax. If the employee sells the stock more than a year after vesting, they would be subject to long-term capital gains tax. Either way, the employee is required to determine the “optimal” time to sell.

There is an alternative option available to employees under Section 83(b) of the Internal Revenue Code.


83(b) Election

The Section 83(b) election allows an employee to pay tax on the Restricted Stock Award at the time of granting – when property is transferred in connection with services. For example, if the employee was granted $10K of company stock, they would pay ordinary income tax on the fair market value of the award in the year it was granted.

This election must be filed in writing with the Internal Revenue Service (IRS) within 30 days of the grant.

The 83(b) election establishes the cost basis of the stock award at the time of granting rather than at vesting. Therefore, upon sale, whether at vesting or later, the employee would pay capital gains taxes. These capital gains can be short or long-term depending on whether the time between granting and vesting is less or more than one year.

Granted Value [$10K] = [$10K] Taxed as Ordinary Income

The advantage of the 83(b) election is avoiding a potentially large ordinary income tax burden in the year of vesting by paying the ordinary income tax at the time of granting as well as beginning the long-term capital gains tax clock before vesting. The downside of the 83(b) election is that if employee does not vest, they are left having paid taxes upfront that cannot be reclaimed.


Sale Value [$110K] - Granted Value [$10K] = $100K Capital Gains (Taxed as Short or Long-Term)


RSA with 83(b) election


In the example above, the stock could have been sold at the vesting date, in which case the calculation would be:


Sale Value [$100K] - Granted Value [$10K] = $90K Capital Gains (Taxed as Short or Long-Term)


Restricted Stock Award Tax Calculator

The examples above (No election and 83(b) election) reveal that by the time of vesting the employee would have either paid $100K in ordinary income tax, or $10K in ordinary income tax. And at the time of sale, $100K in ordinary income tax plus $10K in capital gains, or $10K in ordinary income plus $100K in capital gains.

Completing this calculation (estimation) at the time of granting is complicated by numerous variables including the stock price movement, the employee tax bracket in each of these tax years, changes to ordinary and capital gains taxation rates, probability that employee remains with company to vest, etc. As a result, it is critical to speak with your tax accountant before deciding to make a Section 83(b) election.


Summary

Restricted Stock Awards can be a wonderful benefit from an employer, but they require foresight at the time of granting, vesting, and sale to plan for the tax implications. Whether or not the tax bill is big, you can choose to be prepared or not.


1. https://www.law.cornell.edu/uscode/text/26/83



Contact a fiduciary Financial Advisor now.

Please enter a first name.
Please enter a last name.
Please enter an email address.
1000 characters remaining
Please enter a message.

How We Are Different
Low-fee index funds. Transparent & fiduciary financial advisors.
Local Financial Advisor
We are in your community. We are local.
Investment Management
We tailor to each client. Index funds at the core.
Index Funds
Broad market exposure, low expense.
Dan's Corner
Meaningful musings from our founder.
Fiduciary
Your best interests are our priority.
Low Fees
Our fees are among the lowest in the nation.
Financial Planner
Financial advisor optimizes your financial picture.
U.S. Treasury Bonds
Use Treasury Bonds to reduce risk.
Book Recommendations
Here are some of our favorites.
Inflation
What is inflation, and what cuases inflation.
When Should I Invest?
Life transitions = important financial decisions.
Retirement: 401k and More
Retiring? Plan the future you want.
IRA Rollovers
401k Rollovers. IRA Rollovers
Active vs. Passive Investing
We believe there is a winner in this debate.
The Investment Process
How we work: low-cost index funds, personalized attention.
Simplicity
Simplicity is the ultimate sophistication.
Investing: What to Focus On
Low-fee index funds. fee-only advisor.
Switching Financial Advisors
Can be uncomfortable, but an important step.
Advisor Recruiting
We attract top-tier talent. Not your usual firm.
Basic Investing
Let's start with Investing 101.
Understanding Your Financial Statement
Let's break it down to basics.
Taxes on Investments
What causes taxes within your investments?
Behavioral Economics
The less emotion, the better.
Timing the Market in 2020
2020 - a case study in the futility of market timing.
How Financial Firms Bill
Fee-based vs. fee-only, and lots more.
Who Supports Indexing?
Bogle, Swensen, Buffett, and others.
Transparency
One click to see our fees.
Mutual Funds vs ETFs
Clarifying the difference.
Does Stock Picking Work?
The research says no.
Countering Arguments Against Index Funds
What happens in a down market?
Annuities
Lots of fees, little clarity.
How Do Mutual Funds Work?
Invest in the basket.
How to Relieve Financial Stress
New client? anxiety is normal.
Financial Terms Glossary
Common investment terms you should know.
Firm Comparison
One Day In July vs the competition.
Retirement Investing
Retiring? Let us help.
Accounts We Manage
We manage a wide range of investment account types.
High Net Worth Investors
Preserve and grow your wealth.
Investing an Inheritance
Prioritizing and planning for the future.
Frequently Asked Questions
Good questions, real answers.
Female Investors
Your voice needs to be heard. We are listening.
For the Business Owner
Choosing what's best for your business.
Environmental Investing
Carbon intensity, fossil fuels.

Locations

Vermont

Connecticut

United States

Services

Individuals

401k Plans

Institutions

Environmental

Account Types

Differentiators

Cash Flows

Low Fees

Fiduciary

Dedicated Advisor

Materials

Advisors: Join Us

Careers

Articles on Investing

About the Secure Act

Quarterly Booklets

Resources

Vermont Investment Management

Vermont Retirement Planning

Vermont Wealth Management

Vermont Financial Advisors

Investment Tools

In the Media

Shelburne, VT Financial Advisor

Frank Koster | Josh Kruk | Keith McCarthy

5247 Shelburne Rd, Suite #101

Shelburne, VT 05482

(802) 777-9768

Stowe, VT Finanical Advisor

Available for meetings in Stowe.

Peter Egolf

(802) 999-2321

Burlington, VT Financial Advisor

Hans Smith | Katie Muttitt

Nancy Westbrook | Peter Egolf

77 College Street #3A

Burlington, VT 05401

(802) 503-8280

Darien, CT Financial Advisor

Available for meetings in Darien.

Keith McCarthy

(203) 554-9466


v 2.1.11 | © One Day In July LLC. All Rights Reserved.