Until recently, the availability of Nike Restricted Stock was limited to a select group of Nike Executives.  In 2018, Nike shifted its Stock Award program to include Restricted Stock Units (RSUs) to pair with the traditional Stock Options benefit.  This brought the concept of restricted stock to a wider base of Nike Executives, including more VPs and Directors.  With this broader availability, more questions have arisen about what Restricted Stock Units (RSUs) are, how to maximize this benefit, and what strategies should be considered.

RSU (Restricted stock units)

What exactly are RSUs?  An RSU is a form of stock-based compensation where the company grants the employee a specific number of shares of Nike stock that are restricted and will not be issued until they vest.  The shares are released and issued each year according to the vesting schedule, which is typically in equal installments over 3-4 years.  Each Nike executive has an individual account at Fidelity that is tied to the stock plan and receives and holds RSU shares as they vest.    

RSA (Restricted stock awards)

RSAs appear almost identical to RSUs and many executives may not notice the difference between them.  The main difference between the two is that with RSAs, shares are issued at the time of grant and you own them even before they vest.  With RSUs, the shares are not issued and owned until the shares vest and subsequently become available.  In either case, you cannot sell the shares until they vest.  RSAs at Nike are marginally better for one reason: they pay out dividends to the Executive even before the shares vest.  With RSUs, you only receive dividends after the shares vest.  

Taxes

As RSUs and RSAs vest, they are taxed as compensation and are subject to the same federal and state tax rates as your salary/bonus.  A portion of shares that vest is immediately sold to withhold taxes and are paid directly to the IRS and Oregon.  A common challenge that we see with tax planning is that the amount withheld for taxes is often much lower than what is needed for the high-income tax brackets that Nike Executives fall in to.  We typically see a tax withholding shortfall of up to 17%.  This can contribute to a frustrating experience during tax filing in April, where painful checks need to be written to the IRS and Oregon.  With proper tax planning and coordination with a CPA, this can be mitigated by calculating the tax shortfall and setting aside the cash necessary to cover that shortfall.

Once the shares vest and become available, they are identical to Nike stock shares that anyone could purchase on their own in an individual, joint, or trust account funded with money you have already paid taxes on, like a checking account.  The growth or decline of the stock from the day it vests is now subject to capital gain/loss tax rules, which is triggered when it is sold.  If the stock grows and you sell it in 12 months or less, it is subject to short-term capital gains rates, which is the same as your regular income.  If you hold the stock for more than 12 months, it would be subject to long-term capital gains, a rate that can be up to 20% lower than short-term capital gains.

Risk/Return

When compared to Nike stock options, Nike restricted stock is a more conservative form of stock compensation.  RSUs/RSAs will follow the exact movement, up or down, of Nike stock while stock option values move significantly higher or lower than the actual stock price.  Put simply, stock options have a much higher upside and downside than RSU/RSAs.  This difference is a significant factor in the decision that many Nike executives must make each year between RSUs, stock options, or a combination of the two. 

Planning Strategies

What planning strategies and opportunities exist for RSUs and RSAs?

1. Cash Needs – If you have needs for cash, whether for college expenses or a vacation and need to sell some of your Nike stock, RSUs/RSAs are typically your best option.  The tax impact is typically lower than Stock Options and ESPP shares.  Additionally, you are not sacrificing the significant growth opportunity that exists with stock options.

2. Tax Loss Diversification - Most Nike executives own a significant amount of Nike stock that makes up most of their overall net worth.  This may represent such a large portion within your overall investment portfolio that it poses a significant amount of risk.  Many want to diversify out of Nike stock into other investments, but the tax bill that would be generated by doing so is so painful that no action is taken.  Tax-Loss Diversifying is a way to diversify out of Nike by identifying and selling very specific stock shares that are at a loss during a market downturn. 

   We do not believe that you should sell an investment at the bottom of a market drop and leave it in cash, so it is important to execute the next step, which is reinvesting the proceeds. Proceeds should be reinvested by diversifying into many different stocks that have also dropped in value during the downturn.  This can come in the form of low-cost, diversified funds, that hold thousands of stocks in large, mid, small, and international stock companies.  In addition to diversifying, the tax loss that is created can lower your current or future taxes by offsetting capital gains or deducting up to $3,000/year from your ordinary income, like your salary.

3. Charitable Giving - Instead of using cash, make your charitable contributions from your RSUs/RSAs.  If you transfer this stock directly to the charity organization, you can still get the tax deduction for the value of the stock, and the charity can sell the stock to completely avoid any capital gains tax that would normally be due if you sold the stock on your own.  Please note that only stock that has been held for over 12 months is eligible for this preferential tax treatment.  For more details on utilizing Nike stock for charitable purposes see this article.

Nike RSUs and RSAs are an effective tool for Executives to both participate in the success of the company and to meet their personal financial goals.  They are a great compliment to Nike Stock Options and provide many planning opportunities to minimize the tax burden due to their flexibility.

If you want to know more about how to maximize your RSUs and RSAs, please get in touch.

You can schedule time with me on Calendly (click here to schedule an appointment), e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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