Employee Stock Purchase Plan

Investing
#1

Hi there, love the Instagram account and glad you’re starting this forum.

My employer offers an employee stock purchase plan. We are able to allocate a percentage of our paychecks into a pseudo holding account, which is then used to buy our company’s stock at a 10% discount twice a year. The price is based on the closing price at the end of the six month period.

Do you have any thoughts on strategies for making the most of this benefit? I’m hesitant to put too much into one specific stock, but the discount does make it appealing. It’s a large stable company and the price has done well in recent years. Lots of advice out there is mixed and always appreciate how you can simplify these things!

#2

Hi eagle1124,

I have been taking advantage of ESPP for almost a decade now. It is a great way to make extra income and forced savings. If you auto sell (sell right away), then there is no way you would lose money. If you are feeling bullish on the company then you can hold too since you just got the shares at a discounted rate. My company also allows 10%, I wish it allowed more so I could take advantage of it. This is assuming you have all your ducks in order with emergency fund and other objectives.

I personally do not hold the ESPP funds because I don’t want to have my paycheck and my investments in the same company. Again this is just my opinion, hope it helps.

1 Like
#3

Aren’t there tax implications to selling off right away, especially with the discount? My understanding is there’s a ~ two year hold required otherwise it is taxed as a bonus, since that would essentially be what it is when sold off immediately.

That’s part of the reason why I’m hesitant to go all in-same issue of not wanting to put too many eggs in one basket.

#4

There are different implications for short term capital gains and long term capital gains. The point is, it would be taxed as income if you hold for less than a year as far as I understand. Even if it is taxed as a “bonus” that would just be “income”.

For example: If I get 10 shares and sell them right away, I would only pay tax on the gains correct? let me know if I am not understanding this correctly.

#5

I’m with @Nirav. Assuming you’re finances are generally healthy (out of debt except your mortgage and have some cash) I would generally max out that ESPP, then sell as soon as you’re allowed to bring that stock down to at most 10-20% of your portfolio. The guaranteed 10% return is a good deal, but like Nirav said, I wouldn’t want to put too many eggs in one basket. When you sell, take the proceeds and max out IRAs, HSAs and brokerage accounts in low fee index funds.

Regarding taxes, yes, you’re only taxed on what you gain so it’s a good problem to have. (I’d rather make 10% and get taxed than make 0%, right?!) But specific tax questions are generally better for your tax preparer as there’s lots of interconnected parts we may not be aware of.