Vesting Events: A Financial Planning Perspective

Vesting events are important milestones in your wealth creation and financial planning journey. They can play a key role in helping you achieve your goals—whether you want cash now, plan to hold your stock based on your commitment to your company and the growth you’d like to see, or are wrestling with complex wealth management needs. In thinking through the choices, it’s important to understand how to incorporate vesting events into your wider financial plan.

How to Plan for Vesting

• Understand your awards: Get familiar with the type of equity you’ll receive, how your plan is structured, then brainstorm how this can fit into your wider financial planning.

 

• Confirm key dates: Know when your awards are granted, when they vest, and when they generate a taxable event.

 

• Build your team: Connect with a financial advisor and a tax professional to develop a personalized strategy to manage your vesting awards.

 

• Plan ahead: Decide ahead of time what you’ll do with your vesting awards.

 

Be Prepared

If you receive equity awards such as restricted stock, performance shares, or stock options, you have most likely experienced a vesting event (or will in the future): This is when the equity you receive from your company is transferred to your ownership, usually in a whole share amount over a predetermined timeframe. Your vesting schedule might release shares monthly, quarterly, annually, over a certain span of years or on a specified date, or as a lump sum all at once.

Regardless of the design of your plan, the consistent principle is that each vesting event unlocks a specified number of shares and allows you to act on that equity. While your vesting schedule determines the timeline, what happens next in terms of financial decisions depends on you.

For example, you may choose to roll your shares from a restricted stock vesting event into your brokerage account and convert the stock into cash—or, in the case of in-the-money options or stock appreciation rights, choose to exercise for cash or shares. A key consideration when deciding which direction to go is how much of your overall financial health and tax liability will be tied up in one company. This is called single stock risk (or “concentration risk”), where your position in your company stock can be overweight relative to the other assets you hold in your portfolio.

The most important actions to take before and after vesting will depend largely on your personal financial situation, and many of your choices will hinge upon the type of equity award you receive.

Related links: Equity award types

• Understanding restricted and performance stock

 

• Understanding stock options

 

Tax Considerations

Vesting events also have important tax implications. Over time, the value of the shares you keep will fluctuate with the markets, and any future gain (over the cost basis and adjusted for any ordinary income tax incurred) will be taxed. And when taking action on your shares, waiting for long-term capital gains vs. making short-term sales can have enormous tax liability implications. For example, if you hold shares longer than one year from the date of an options exercise, any gains upon selling those shares will be taxed as a preferential long-term capital gain. If you hold those same shares for one year or less after the exercise date, ordinary income tax rates may apply upon selling.

Taking action on shares in a vesting event can also make it necessary to come up with cash or determine how to cover a large future tax bill. You may also want to strategize how to best minimize, defer, and/or delay the potential tax impact.

Additionally, if your employer offers this option, you may consider a 83(b) election, which can accelerate taxes but may provide a tax advantage. For example, if your grant has a fair market value (FMV) and you make an 83(b) election, you would pay tax when the shares are granted. However, this event creates cost basis which can be used in the future to measure capital gains. Given the complexities involved, it makes sense to consult with a tax advisor about 83(b) elections and whether the election makes sense for your specific situation.

Your tax obligations and timetable will largely depend on your company’s plan and the type of equity you receive. When restricted stock vests, the value of your restricted shares is usually taxed as ordinary income, with some of the income tax due withheld. For stock options, vesting is not a taxable event, but exercise is. At vesting, you can decide to hold your stock options unexercised (not taxable), exercise and hold (taxable), or exercise and sell (taxable). There’s a lot to pay attention to, so it’s worth taking the time to make sure you’re comfortable with the basics.

If you have questions regarding your tax situation, be sure to reach out to a tax advisor who can help you explore your tax liability and any strategies to maximize the impact of your equity compensation. E*TRADE from Morgan Stanley does not provide tax advice, but we can help you identify tax implications around vesting, exercising, or selling your shares.

Related links: Equity award types

• Employee Stock Options Tax Considerations (video - login required)

 

• Restricted Stock Tax Considerations (video - login required)

 

Next Steps

Once your equity vests, you are usually free to do whatever you wish with your shares as long as you are not in a “blackout period” (where trading is prohibited) or subject to any other restriction that may limit your ability to sell.

Your equity compensation will only grow in importance—not only as a source of connection to your employer and an ownership stake in your company, but as a strategic tool for meeting your individual financial goals and tax planning needs. That’s why it’s so important to keep tabs on your vesting schedule, know your key dates, and plan accordingly.

You can view your vesting schedule by going to the Holdings tab and selecting View by Type. From there you can expand the information under your holdings to view your vest schedule and key dates:

Remember, there’s no one-size-fits-all formula when it comes to your equity compensation. Working with a financial advisor and tax planner can help you see the big picture and figure out the best strategy for managing your equity comp.