How to deal with ESPP/RSUs in portfolio, and other questions

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GrandDesigns
Posts: 83
Joined: Sat Jan 10, 2015 6:40 pm

How to deal with ESPP/RSUs in portfolio, and other questions

Post by GrandDesigns » Sat Jan 10, 2015 6:59 pm

Hi everyone. I am 24 years old, single, and have no debt, and an appropriate amount of emergency cash. I have recently decided to get serious about setting a budget and investing my money for retirement, and other purposes (fore example, buying a house some day). For my research I read: The Bogleheads' Guide to Investing, All About Asset Allocation (Richard Ferri), and The ETF Book (Richard Ferri). Although, after doing this research I decided ETFs are too complicated for me to use versus just putting my money into a vanguard account, so disregard that book perhaps.

To get my house of cards in order I have a few questions:

1) When I was 18 years old I opened an IRA with a couple thousand, assuming I would be far more likely to deposit money into it once I graduated if the account already existed. What I did not correctly plan for was that I graduated with a job that was over the AGI to contribute to a Roth IRA, and that my employer offers a Roth 401(k) with matching. However, I have stock from work through RSUs and ESPP (employee stock purchase plan), that I could move into a Roth IRA to save taxes. To keep my overall portfolio balanced, should I sell as much of that stock as I can to put into "tax inefficient" investments (REIT or bonds), and then put them into a normal IRA and then roll that over into a Roth?

2) Since my RSUs are taxed the day they vest as "cash value," I assume if I sell those that day I don't incur any extra taxes and am free to diversify the money into my index funds?

3) My ESPP is taxed as either short term of long term capital gains. I set aside 10% of my paycheck for ESPP and get the stock at a 15% discount. Since I do not want to sell these for 12 months (to pay the long term rate), should I reduce the amount of U.S. Large Cap index funds I own with the percentage of the ESPP shares to keep my portfolio balanced?

3) Should I really put as much money into my Roth 401(k) and Roth IRA as I can right now? The only downside I see to doing this is that I want to start building money for a down payment on a house as well. The upside is that the early I max them out the better, and I will still have a bit less than six figures worth of RSUs and ESPP shares to diversify even if I do max out my retirement accounts.

Thank you very much for your help! I realize there are still some important questions about how I am allocating my portfolio to answer, but the answers to these questions will give me enough information to start writing up a concrete budget and portfolio allocation.
Last edited by GrandDesigns on Sat Jan 10, 2015 11:42 pm, edited 1 time in total.

yosef
Posts: 337
Joined: Tue May 24, 2011 2:10 pm

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by yosef » Sat Jan 10, 2015 9:36 pm

Regardless of how it's acquired, the thing to keep in mind about employer stock is that you already have a lot of your livelihood tied up in that company simply due to the fact that you work there. So often, the prudent thing to do is sell the stock as soon as possible and reinvest in something more diversified. For the RSUs, you are correct that there is typically no tax advantage to holding them, as the mere vesting of them is a taxable event that will show up on your W2 whether you sell the shares or not. For the ESPP, IIRC you need to not only hold the shares for 12 months but it needs to be 24 months after the start of the offering period to get the most favorable tax treatment. You should consider carefully how much the taxes would actually cost vs what you would wind up with if the stock fell even a modest amount during that time. Finally, I would say you should weigh Traditional vs Roth IRA/401k carefully, and not just fall for the hype of the Roth. Particularly if you're making a good salary now as it seems like you are. The wiki has some a good article on weighing these options.

GrandDesigns
Posts: 83
Joined: Sat Jan 10, 2015 6:40 pm

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by GrandDesigns » Sat Jan 10, 2015 9:48 pm

yosef wrote:Regardless of how it's acquired, the thing to keep in mind about employer stock is that you already have a lot of your livelihood tied up in that company simply due to the fact that you work there. So often, the prudent thing to do is sell the stock as soon as possible and reinvest in something more diversified. For the RSUs, you are correct that there is typically no tax advantage to holding them, as the mere vesting of them is a taxable event that will show up on your W2 whether you sell the shares or not. For the ESPP, IIRC you need to not only hold the shares for 12 months but it needs to be 24 months after the start of the offering period to get the most favorable tax treatment. You should consider carefully how much the taxes would actually cost vs what you would wind up with if the stock fell even a modest amount during that time. Finally, I would say you should weigh Traditional vs Roth IRA/401k carefully, and not just fall for the hype of the Roth. Particularly if you're making a good salary now as it seems like you are. The wiki has some a good article on weighing these options.
Thanks, this is good advice and explains why some of my coworkers are adamant that they just pay the higher taxes and sell. For example, right now if I hold onto all of my companies stock of tax reasons, come February 45% of my portfolio is going to be tied into one company's stock. Yowzer!

I also did read the wiki on the benefits of Roth versus traditional 401k. I came out believe that I should invest into a Roth because I will probably retire at an even higher tax bracket than I am in now. Maybe my best bet is to split my contributions 50/50 between a traditional 401(k) and a roth 401(k). In my opinion, the best advice I ever received about Roth versus traditional was, "Tell me your income when you retire, what the tax brackets are and the tax code that year and I will tell you what account is best."

FB01
Posts: 521
Joined: Fri May 20, 2011 12:36 am

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by FB01 » Tue Feb 10, 2015 6:51 am

yosef wrote:Regardless of how it's acquired, the thing to keep in mind about employer stock is that you already have a lot of your livelihood tied up in that company simply due to the fact that you work there. So often, the prudent thing to do is sell the stock as soon as possible and reinvest in something more diversified. For the RSUs, you are correct that there is typically no tax advantage to holding them, as the mere vesting of them is a taxable event that will show up on your W2 whether you sell the shares or not. For the ESPP, IIRC you need to not only hold the shares for 12 months but it needs to be 24 months after the start of the offering period to get the most favorable tax treatment. You should consider carefully how much the taxes would actually cost vs what you would wind up with if the stock fell even a modest amount during that time. Finally, I would say you should weigh Traditional vs Roth IRA/401k carefully, and not just fall for the hype of the Roth. Particularly if you're making a good salary now as it seems like you are. The wiki has some a good article on weighing these options.
Hi Yosef,

You mentioned 'For the RSUs, you are correct that there is typically no tax advantage to holding them, as the mere vesting of them is a taxable event that will show up on your W2 whether you sell the shares or not'


Can you explain? I will be completing a year in my company in March and I will be able to sell 20% of the shares if I want to. Let's say 20% is 10,000. So you mean my taxable income will increase by 10000 even if I don't sell the shares ?

Thanks,
FB01

FoolStreet
Posts: 545
Joined: Fri Sep 07, 2012 12:18 am

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by FoolStreet » Tue Feb 10, 2015 10:37 pm

Hi. I personally like to sell the day of vesting, then transfer the cash to the appropriate savings vehicle. For example, I might then use the funds to sit as cash in my efund or deposit into IRA or in your case transfer it into an appropriate down payment savings bucket (perhaps not cash, but maybe not 100% stock, it depends on the number of years before you will need the money). Let me make a point about RSUs. Often, tax is due at vesting, meaning that your brokerage (eg, Etrade) will automatically sell enough shares to pay the expected taxes that will be due. Based on my income, I estimate receiving net of about 55% of the options that just vested. If I had 100 shares vesting, then I would expect to receive a net of 55shares deposited in my account.

For taxes, remember that you will be taxed on the initial gift as income. Then separately, you will be taxed on any stock gains as normal. Since RSUs are given 100%, the total value at vest is taxable at income rates. For ESPP, you already paid tax on that 10% of your income to buy. You won't pay tax on it again. But you will be taxed on the imputed discount you received. So that is about 17% of your ESPP balance if you get a 15% discount (1/15%).

Once your stock vests, you have already paid the tax. Now you are just asking yourself if you believe in buying individual stocks or whether you want to use the money to buy the appropriate bogle-headed index fund.

ryman554
Posts: 1096
Joined: Sun Jan 12, 2014 9:44 pm

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by ryman554 » Wed Feb 11, 2015 9:29 am

FB01 wrote: Can you explain? I will be completing a year in my company in March and I will be able to sell 20% of the shares if I want to. Let's say 20% is 10,000. So you mean my taxable income will increase by 10000 even if I don't sell the shares ?

Thanks,
FB01
Yes. But it's OK. The tax is typically with-held at whatever bonus rate you are at (typicaly 25%) + state + FICA by taking away some shares to pay for the tax you owe due to RSU vesting. So, assume you'll only get 60% of the shares that will vest anyhow. But at least you won't get a nasty surprise in April. There is no immediate tax-owed ramification for NOT selling immediately. There are other reasons to do so as outlined previously, but not to pay for owed tax.

wbrianwhite
Posts: 49
Joined: Fri Dec 19, 2014 9:44 am

Re: How to deal with ESPP/RSUs in portfolio, and other quest

Post by wbrianwhite » Wed Feb 11, 2015 8:41 pm

When I got RSUs the plan administrator withheld the estimated taxes by selling a portion of the RSU and withholding that to cover the taxes. . After that, when I sold the only thing I had to pay for was the increase in their price per share over the day that they vested. I've only experienced it at one job

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