Top 5 Differences Between Stock Options And Restricted Stock Units

Employees often have many ways to invest for retirement through their employer. You can use your 401(k) options to invest in the open market. You may also have the chance to set a price with an employee stock option. Finally, you may qualify to receive restricted stock units in the future.

What Stock Options Are

A stock option is a contract between you and your employer that will allow you to buy company stock at a future date for an agreed-upon price right now. If the stock goes up once the agreement is made, you have the chance to earn big gains with a single purchase.

What Restricted Stock Units Are

According to experts at SoFi, a restricted stock unit is a promise of stocks at a later date. It can be part of a package offering for a new employee, simply part of everyone’s hiring package, or a way to bring in great talent to a start-up.

The Differences

1) When reviewing stock options vs restricted stock units, you will need to carefully review your personal situation. If you are ten years from retirement, an option could be an excellent choice, but it will force you to time the market a bit. Additionally, if the stock value falls within the vesting period, your options will be worthless.

2) For younger workers, the chance to be given stocks after vesting in the form of restricted stock units may be the best way to build wealth over time. If you are one of the first hired in a start-up and know that your income options may be a bit limited, the promise of a restricted stock unit gift can keep you reaching for the brass ring.

3) Your ownership goals in your company also need to be considered. If you receive stock options, you will receive voting rights, but a restricted stock unit recipient will not. If you plan to be with this organization for an extended period of time, negotiate for stock options. If your career is winding down and you’re close to retirement, restricted stock units may be a better choice.

4) Your restricted stock unit value will be subject to income tax. If you are granted stocks and keep them for more than a full year, there may also be capital gains to pay. The choice to sell your restricted stock units may be the best way to both cover the tax and put that income into your retirement plan.

5) It is possible to defer the granted settlement for a time to reduce those taxes on restricted stock units but there will still be income taxes to pay on the value of the restricted stock units. For stock option recipients, taxes can be trickier and will likely include capital gains taxes.

Timing your options purchase can be dicey. Depending on your buying power, you may actually have an impact on the company’s bottom line. You can also exercise just a portion of your stock option and create a schedule for buying more stock over time.