Need advice on employer stock purchase plan

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clivebixby
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Joined: Mon Mar 03, 2014 10:52 am

Need advice on employer stock purchase plan

Post by clivebixby » Mon Mar 03, 2014 10:57 am

Hi All,

I'm new to the bogleheads investing philosophy and could really use some help regarding my employers stock purchase plan.
I'm 33 years old and currently make $115,000/yr.

In addition to the 15% I'm contributing to a 401k Roth with 3% employer match, I contribute 14% into an employer sponsored stock purchase plan. With the plan, I buy the stock at a 10% discount and am able to sell it each quarter. Since I typically sell the stock as soon as I get it, I'm taking a pretty big hit at the end of the year on short term capital gains so I'm starting to rethink this strategy. I'm just not sure if it's worth making the 10% on the stock sell since I'm paying short term cap gains on the earnings and I really don't want to hold the stock for more than a year because I like being able to immediately use the funds to invest in other areas.

What would be the recommendation here? Should I stop contributing to the ESPP plan and instead move the 14% from my paycheck directly into my brokerage account?

cwied
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Joined: Tue Aug 14, 2012 11:35 pm

Re: Need advice on employer stock purchase plan

Post by cwied » Mon Mar 03, 2014 12:03 pm

The 10% is free money. Why would you turn it down just because you have to pay taxes on it?

Your financial goal should be to make as much money as possible, not to pay as few taxes as possible. Let's say you're paying 40% taxes on this extra money. If you're getting a $1610 profit each year from the 10%, you'll be left with $966 after taxes. If instead you skip this program and invest the 14%, how much would you net, and at what risk? I can guarantee that your expected return would be less than the $966 at a much greater risk if you invest it in the stock market instead.

Here's the math: Remember that since you're taking the money out each quarter and paying it in over the quarter, the average amount of money invested in the ESPP over the whole year is only $115,000 * .14 / 4 / 2 = $2012.50 (one half of each quarter's contribution, since you're paying evenly over the whole quarter). You're getting a 48% return after taxes on your investment assuming a 40% marginal tax rate that's probably way higher than your actual rate.

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bogleblitz
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Re: Need advice on employer stock purchase plan

Post by bogleblitz » Mon Mar 03, 2014 12:08 pm

Keep doing it as it is free money.

Also your question seems to make me think you are paying double tax on that 10% discount. Please make sure you are doing your taxes correctly. If you sell the very next day, there should be no capital gains. You should not need to wait 1 year to sell it. Since you mentioned you pay short term gains, you are already doing it incorrectly.

ESPP can be very confusing during tax time and depending on the tax software. Turbo tax forces you to buy the premium version.

clivebixby
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Joined: Mon Mar 03, 2014 10:52 am

Re: Need advice on employer stock purchase plan

Post by clivebixby » Mon Mar 03, 2014 12:25 pm

bogleblitz wrote:Keep doing it as it is free money.

Also your question seems to make me think you are paying double tax on that 10% discount. Please make sure you are doing your taxes correctly. If you sell the very next day, there should be no capital gains. You should not need to wait 1 year to sell it. Since you mentioned you pay short term gains, you are already doing it incorrectly.

ESPP can be very confusing during tax time and depending on the tax software. Turbo tax forces you to buy the premium version.
Thanks for the reply. I must be doing my taxes wrong. I think next year I'll go to a tax professional instead of using the H&R Block online's service.

clivebixby
Posts: 8
Joined: Mon Mar 03, 2014 10:52 am

Re: Need advice on employer stock purchase plan

Post by clivebixby » Mon Mar 03, 2014 12:35 pm

cwied wrote:The 10% is free money. Why would you turn it down just because you have to pay taxes on it?

Your financial goal should be to make as much money as possible, not to pay as few taxes as possible. Let's say you're paying 40% taxes on this extra money. If you're getting a $1610 profit each year from the 10%, you'll be left with $966 after taxes. If instead you skip this program and invest the 14%, how much would you net, and at what risk? I can guarantee that your expected return would be less than the $966 at a much greater risk if you invest it in the stock market instead.

Here's the math: Remember that since you're taking the money out each quarter and paying it in over the quarter, the average amount of money invested in the ESPP over the whole year is only $115,000 * .14 / 4 / 2 = $2012.50 (one half of each quarter's contribution, since you're paying evenly over the whole quarter). You're getting a 48% return after taxes on your investment assuming a 40% marginal tax rate that's probably way higher than your actual rate.
Good point. It is free money even if I have to pay taxes on it. I'll keep doing what I'm doing and forget about the taxes I have to pay. Thanks!

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mhc
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Location: NoCo

Re: Need advice on employer stock purchase plan

Post by mhc » Mon Mar 03, 2014 12:55 pm

Be careful about the cost basis that the broker reports for ESPP sales. I believe they are still allowed to report an improper basis. I sell my ESPP shares immediately. I had a net -$26 short term cap gain from ESPP. If I would not have corrected the cost basis, I would have had several thousands of dollars of short term cap gains.

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bogleblitz
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Re: Need advice on employer stock purchase plan

Post by bogleblitz » Mon Mar 03, 2014 2:41 pm

clivebixby wrote:
Thanks for the reply. I must be doing my taxes wrong. I think next year I'll go to a tax professional instead of using the H&R Block online's service.
You can still fix this year on H&R block, and amend the tax return. It could be 1-2 thousand dollars you are paying extra on that short term gain which you don't need to. It is already paid for in your W2.

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