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VIDEO: Railroaders' Essential Guide to RSUs

Video Financial Planning Taxes



Transcript:

The railroad has awarded you a grant of RSUs. Now what? Learn the basics and learn what to expect with the granting of restricted stock units.

Welcome everyone to the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors and today we're going to talk about a restricted stock units. Just a basic understanding, a guide to it. RSUs, as they're called. For a lot of railroaders, they're thinking RS, road switchers. No, restricted stock units. These are ways company incentivize employees, award employees and retain their services, to stay with the railroad. So let's just go over the basics. I'm just going to give you a foundational so that you understand it and it won't give you a lot of strategies, but at least you'll understand what you have. So from the basics, you are given a grant, a promise from the railroad to deliver you a certain number of shares but they're vest. So, there are certain requirements, usually they are time requirements in order to receive the restricted stock award.

They always have value, which is interesting from stock options, where you might be given a grant of stock options and they could be at a higher price. The stock could be trading at a lower price, in which case they have no value because you would never exercise stock options at a higher price when the underlying market is a lot lower. So, when they exercise restricted stock units, you're giving the shares, the shares are delivered to you at the price of where the stock is at that time. So from the railroad perspective, they're never actually ever giving you the shares until the day of delivery. For them, it's just a bookkeeping entry. The other thing that's important to remember is even though you're awarded, or granted, the restricted share units, you have no voting and you get no dividends on those shares until they're in your possession. For those years where they're not vested, they won't be returned.

Let's talk about vesting. What is vesting? It's when the shares are delivered, I'll use an example of how this would work out. Let's say you were given an award of 5,000 shares by the railroad. At grant time, you have zero shares. These are going to be vest equally, 25% at a time, over four years. So at the one year mark, you would get 1,250 shares, and then at year two, you would now have a total of 2,500 and so on, until the end of year four, on the anniversary of the date of year four, you would have received 5,000 shares in total by the end of year four.

That's how vesting works. Let's go to the important part. Taxation, this is where the rubber hits the road. Taxation, taxed at delivery, it's treated as ordinary income. Going back to this example, you got 1,250 shares at $20... Let's use simple math at, $10, that would be $12,500 of income. That would be ordinary income. That's the tax that you've got to pay on that. They withhold your railroad retirement board tax because it's income. So your Tier one and Tier two would be taken out, assuming you're still below the maximums. Your Medicare would be taken out, state and local. That grant, you've got to pay income tax on it. If you received $10,000 of value from the grant, you're going to have to pay $10,000 of ordinary income tax.

How can you pay the taxes? There are multiple ways to do it, depending on each railroad. You could surrender some of your shares. If you have 1,000 shares, you could surrender 300 shares to cover the taxes and just receive 700 shares. You could sell to cover. You can have 1,000 shares and sell 300 right away. Some, you can just make a payment. I'll just write you a check and there's the payment to cover the taxes for the grant because I want all the shares, and you just make the payment.

Let's work through an example of the granting process. In this example, you get granted 4,000 shares, 4,000 restricted units. The price is at zero, or you get no share. The one year anniversary, the stock is trading at $20. You get a 1,000 shares. Then at the second year, another 1,000 shares at $25. Third year, stock goes up to $30, another 1,000 shares. Fourth year where the final 1,000 comes, and another 1,000 shares at $33. Over this whole period of time, because you got to do it every grant, you have paid ordinary income tax on $108,000. Now let's say, well I got the shares at least and I like the railroad. I think it's going to be doing well, you might say. Two years later, you sell it. Because the railroad stocks got up to $50 and you say, okay, I'm taking them out. I might sell my 4,000 shares at $50, I would receive $2 or $1,000 for that.

I've already paid a $108,000 on it. That's my tax basis for that, but I do have $92,000 in profit, which I can pay long-term capital gains on. Long-term capital gains, which was at a lower rate. You need to hold the stock for at least one year to get the long-term capital gains benefit from it. This is just a nice highlight strategy of the essentials of restricted stock units. There's a lot more into it as far as strategies, because at the end of the day, you start accumulating a bunch of RSUs. It starts building up your net worth. It starts throwing off your allocations because you have more and more equity in the company and everything is going to start revolving around how the performance of that stock is going to do. You want to look out for that.

I hope you found this helpful. Please subscribe to my YouTube channel as always, reach out to me. I have a boarding for railroad retirement process. It's a 15 minute process and we can start talking and discussing these things and all other things related to comprehensive financial planning as always everyone, please stay safe, stay on track and take care. So long everybody.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.