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When & How is a Grant of Railroad Restricted Stock or RSUs Taxed? Thumbnail

When & How is a Grant of Railroad Restricted Stock or RSUs Taxed?

Tier 1 Tier 2 Video Retirement Financial Planning Taxes


Learn about the taxes coming your away when your railroad retirement stock vests

Welcome everyone to another edition of the Highball Advisors, railroad retirement whiteboard, my name's John McNamara, Highball Advisors. And today we're going to talk about taxation and specifically how it relates to railroaders, who are granted a restricted stock awards or restricted stock units. All right.; because taxation is a big part of the planning for you when, when these come due. So let's just talk about the timing of taxation, right? So you pay the tax when the restrictions are lifted, not at the grant, right? So the railroad gives you the stock. There's no taxes implied that you have to pay, right. It's when those restrictions start to come off. So to give you example, most stock restrictions are, you know, four year vesting, which means you get 25% of the grant once a year on the anniversary date of the granting.

So that's when the restrictions are granted, right? And so once the vesting requirements are satisfied and you're given the stock, you got to pay the tax. So you have got to pay tax in year one, year, two, year, three, year four, assuming a four year vesting cycle. Right? So that's the timing of the taxation. Now let's talk about what kind of taxes are we really talking about here? Right? So it's you get taxed on the value of the stock when you receive it, the market value, right? Not at the grant. So if it's if the stock's at $10 when it's granted, but then it vests at $20, you're going to get taxed on the $20 when you get the stock, right. Then the income that you receive from that, right. Because it's considered income, right. That's considered income is subject to federal and employment taxes, right?

So it's ordinary income taxes and the employment taxes. So that means paying into railroad retirement, tier one and tier two. All right. And then also the Medicare tax. Additionally, those are all part of employment taxes. All right. And then on, you'll see those taxes of the income and then the taxes that you paid, those will all be on your W2 form. So let's work through an example here. I'm a big fan of examples. So let's say you're you're awarded a grant of 400 shares and you'll get a hundred of those shares, right. 25% a year. So every year on the anniversary date, you'll get a hundred shares. So let's say at the grant, the stock price was $180 at the grant, right? So the railroad says here's a 400 shares stocks trading 180. Okay, great. So on the first anniversary date, let's say one year later, which is one year later, the stocks at $200, right?

You're now getting a hundred shares, but that's $20,000 of income. Right? You have to pay those taxes on the $20,000. The next year you get another a hundred shares. Right? All part of the 400 share grant. Okay. And the stocks at $25, you now have to pay taxes on $25,000. All right. So on, so forth. So stock keeps going up 30,000, 33,000. So at the end, right, those 400 shares that you were granted four years ago, you would have paid a total combined tax of a hundred on $108,000, right. Tax on a $108,000 Right now, what happens here is some people will say, well, they get the they get the grant and then they just sell the stock to pay the taxes, blah, blah, blah. Right? So however, some people will just pay the tax and you can hold onto the stock. So let's just take a look at this example.

Let's say you hold the stock at the at the end of the four years. And then you say another two years go by and let's say, you wind up selling all 400 shares at $50, right. At $50, you would have a pro you would have taken in $200,000, right. You've already would have been taxed on the $108,000. So all you would have left is to pay taxes on the long-term capital gains of the profit, on $92,000, right? So you would have no more taxes after you sold that because you've been selling, you've been paying the taxes all four years here. You would just have to pay long-term capital gains on the increase in the price from from the $108,000 that you already paid. So I hope this gives you a little primer on the tax. What taxes you have, nobody looks forward to, but that you're going to have on your restricted stock and your restricted stock units as always feel free to reach out to me you know, sign up for the boarding for railroad retirement process. This is part of the planning. If you're, if you're a railroad who gets these compensation awards, very, very important to understand how that's going to work into your overall retirement picture. Please subscribe to YouTube channel. Appreciate that. And 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.