Emp Stock Purchase vs 401k increase

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Topic Author
AverageInvestor1982
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Joined: Mon Sep 16, 2019 9:59 am

Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

Hello! This is my first post on the site, so be gentle!

My Scenario: My new employer offers an Employee Stock Purchase Program(ESPP). I can defer up to $25,000 of my annual income to this program. The deferral accrues for a 6-month period, and then executes a purchase to buy company stock at a 15% discount of the average daily value over the 6 month accrual period. At that point I can do whatever I want with stock, but believe holding for an additional 12 months moves it into a 'long term holding' status that I believe avoids taxes on any cap gains. (Could be wrong, feel free to correct.)

I've participated in this type of program at previous employers, but the maximum contribution was much lower. I always maxed out that program and just treated it like an 18 month deferred comp program. The 'forced savings' was great - it helped me save up for a down payment on a new house, and the return was always very positive - though I realize the risk associated with holding a single stock for 18 months.

I'm currently deferring $15,000 annually for my new company (I picked the number out of a hat when i started because I had 3 days to commit. You can only change contribution amount during windows that open every 6 months.) My wife and I currently are contributing $30,000 annually toward employer 401k programs.

My question: If I decide to defer an additional amount from my pay check, where should I put it? My knee jerk reaction is to put it towards the ESPP because after the 18th month holding period I can sell and and use it to offset the cash flow cost of increasing my 401k savings at that time.

Also, is my balance way out of whack? Aka, if I don't change my total savings, is the 30k/15k ratio way out of line?

This question has been nagging at me since I started my new job. I'm new to Bogleheads but really agree with the BH 'philosophy' and have really appreciated the thoughtfulness of BH users as they ask and answer questions on this forum. Thanks!
ColoradoRick
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Re: Emp Stock Purchase vs 401k increase

Post by ColoradoRick »

If it were me.....

I'd max out to get 401K employer contribution (most companies ~ 50% of your first 6%). That's a higher return (50%). After maxing that out and you can afford it, go up to the $30,000 ESPP. Just be careful not to allow your company stock > 5% of total net worth after liquidating. Consider GE/Enron/Sears as poster children. You always think you can get out in time, but many retirees complain that CEO said company was rock solid. They have a vested interest to be cheerleaders. Congrats, sounds like you are well on your way to fiscal responsibility and a secure retirement.
ColoradoRick
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Re: Emp Stock Purchase vs 401k increase

Post by ColoradoRick »

I am assuming your 401K contributions and matches ARE NOT in company stock.
sharx
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Re: Emp Stock Purchase vs 401k increase

Post by sharx »

I utilize my ESPP to the maximum because you're almost guaranteed to make at least 15% ROI (but if your stock has appreciated over the period you might make more than that!) but I sell the first day I can. I'd rather not take risk of the stock tanking just to get the favorable tax rate. Up to you but food for thought.
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

Thanks for the replies already.

There is no company stock in my 401k portfolios. The total value of the company stock in my ESPP might exceed 5% of my total holdings, but not by much, and not for long. I would convert it to something else as soon as I can without a tax penalty. Basically, at the absolutely most (assuming the stock price is flat) I would be holding no more than $27,600 before executing a sale of $13,800, and re-buying with $12,500 that I had been accruing for the 6 month period. And in theory, and with discipline, i could use the sale of that period's company stock to max out the IRS contribution limits for whatever year it is.

I have already maxed out the company match within my employers' 401k plans, so I'm making full use of that. In my mind, it's the "buy stock at 15% discount" vs "tax deferral benefit" of a 401k. With an added risk of carrying $27k of a single stock .
shiftleft
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Re: Emp Stock Purchase vs 401k increase

Post by shiftleft »

Have you calculated how much you would really save waiting the extra 18 months? For me, it worked out to something like $100 on a $10,000 contribution, so in my mind it was no brainer in my case to sell immediately. YMMV. Some say don't let the tax tail wag the dog.
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

shiftleft wrote: Mon Sep 16, 2019 3:42 pm Have you calculated how much you would really save waiting the extra 18 months? For me, it worked out to something like $100 on a $10,000 contribution, so in my mind it was no brainer in my case to sell immediately. YMMV. Some say don't let the tax tail wag the dog.
No - I emailed my tax accountant to ask the question "If I sell immediately, what is the tax penalty?" but haven't heard back yet. I didn't realize it could be so little. Any suggestions on how to calculate myself instead of waiting?
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Wiggums
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Re: Emp Stock Purchase vs 401k increase

Post by Wiggums »

I don’t believe you are right about the taxes from the sale of the stock.

Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. A lot depends on how long you held the asset before selling.

Short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. Short-term capital gains tax rates equal your ordinary income tax rate — your tax bracket.

Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. Long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.
ososnilknarf
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Re: Emp Stock Purchase vs 401k increase

Post by ososnilknarf »

If you are already getting the maximum employer match on your 401k, I would put the additional funds into the ESPP because that is basically just more free money. But sell it immediately when the shares are purchased to guarantee that you get that 15% (or more) increase.
Don't worry about the taxes. You'll just be taxed on the gains as though they were normal income. So you'll be paying more tax than if you held for over a year, but the risk involved of holding the stock for a year could cost you a LOT more than the difference between short and long-term capital gains taxes!
Take the money from the sale of that stock and put it in a Roth IRA, up to the maximum ($6000 for 2019). Or if there is excess after the Roth and you want it to go into a tax advantaged account, just increase the amount of your 401k contribution and keep the stock gains for your living expenses.
That would be my recommendation.
toast0
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Re: Emp Stock Purchase vs 401k increase

Post by toast0 »

Qualified disposition vs non-qualified disposition doesn't make enough difference in my opinion to justify holding employer stock for the required holding period to get a qualified disposition.

In the happy case, where you paid less than fair market value, and sold for more than fair market value, there's no difference in tax treatment: for either disposition, the difference between FMV and what you paid (the discount/bargain element) is recognized as ordinary income on the date of sale, and the difference between purchase FMV and your sales price (net comissions and fees) is recognized as a capital gain (short or long term, based on the sales and purchase dates). Selling soon after purchase makes the capital gain probably small, so long term vs short term rates are less significant. Note, your employee affiliated brokerage is very likely to report the cost basis as what you paid, but since the ordinary income portion will be reported on your W-2, your cost basis is the purchase FMV; be sure to check this, and don't rely on your accountants to check this properly for you.

In the unhappy case where you paid less than FMV, but you sold for less than the purchase FMV; in a disqualified disposition, you still have the ordinary income for the full discount, and then a capital loss. If you meet the holding period, and the sales price is less than FMV at purchase, you'll only get charged ordinary income up to the sales price, or if it went down a lot, you won't have any ordinary income, it will all be a capital loss. Depending on what's going on with your taxes, you probably can deduct the capital loss from your income and the overall thing works out pretty similarly, but not if you hit the cap on deductible capital losses and have to carry it over to future years.

For some ESPPs, there is a company enforced holding period, where early sales will get you disenrolled from further purchases; if that were the case, at the end of that period, you may wish to consider the benefits of holding out for long term capital gains if the gains are significant, or holding out for a qualifying disposition if the losses are significant and your tax situation is such that recognizing income with an offsetting loss is materially worse than recognizing less income.

I'm assuming your plan has some carve out for if the discounted average daily value over the period is more than the FMV on the purchase date (it would not make sense to purchase at the end of the period if the purchase price is more than the FMV), otherwise there's a lot more risk here than usual.

In terms of budgeting; assuming you take our advice and sell as soon as possible, your ESPP deferral period is on average three months; if you're confident you'll follow through on the sales, it makes sense to me to pull from your emergency fund during the period (if needed) to make up for the deferred income, as long as you replenish the fund immediately at the end of the period; the discount should help you build your balance here. When I had access to ESPP, you could pull out at any time before the purchase and get your deferred income back immediately, too.

Assuming you have a big enough emergency fund to make it through the first period, 401k contribution can be a separate decision.
shiftleft
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Re: Emp Stock Purchase vs 401k increase

Post by shiftleft »

shiftleft wrote: Mon Sep 16, 2019 3:42 pm Have you calculated how much you would really save waiting the extra 18 months? For me, it worked out to something like $100 on a $10,000 contribution, so in my mind it was no brainer in my case to sell immediately. YMMV. Some say don't let the tax tail wag the dog.
Just to clarify, the difference in mine (~$100) was just between long-term and short-term capital gains. The wage portion of the ESPP discount would be the same in either case, so I didn't count that in the equation. Also, my company stock isn't one of those that moves much, so that may make a difference too.
GuyInFL
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Re: Emp Stock Purchase vs 401k increase

Post by GuyInFL »

AverageInvestor1982 wrote: Mon Sep 16, 2019 3:44 pm I emailed my tax accountant to ask the question "If I sell immediately, what is the tax penalty?" but haven't heard back yet. I didn't realize it could be so little. Any suggestions on how to calculate myself instead of waiting?

Check out
https://sites.google.com/site/excel1040/
to estimate the tax impact. You can download the 2018 version and compare to your tax return to get the feel of it.
HomeStretch
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Re: Emp Stock Purchase vs 401k increase

Post by HomeStretch »

My suggestion would be to max out your/spouse’s 401k contributions before contributing to the ESPP if you are going to hold the stock purchased through the ESPP until long-term capital gains rate applies. The safer choice is to sell the stock on the day of purchase, pay the taxes and treat the small profit as a bonus.
FS51
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Re: Emp Stock Purchase vs 401k increase

Post by FS51 »

sharx wrote: Mon Sep 16, 2019 11:20 am I utilize my ESPP to the maximum because you're almost guaranteed to make at least 15% ROI (but if your stock has appreciated over the period you might make more than that!) but I sell the first day I can. I'd rather not take risk of the stock tanking just to get the favorable tax rate. Up to you but food for thought.
This. My income already comes from my employer I don't need to put any of my investment money into them as well. I get a 15% discount with a 6 month contribution period and 6 month lookback. I sell on day 1 and pay income tax on it and call it a day. My Max is 10k annually so it's not much but when the stock does well, it's a nice added bonus.
GT99
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Re: Emp Stock Purchase vs 401k increase

Post by GT99 »

I'm kind of surprised at the answers here - IF the funds are intended for retirement and you don't need near term liquidity, funding 401k first seems like a no-brainer.
Lets assume you're single and make $100k year, putting you in the 24% tax bracket (I'm going to ignore state taxes, but that should push this more in favor of 401k).
Now lets say we're talking about a $10k increase in funding. To make it apples to apples, lets start with $10k in pre-tax dollars for both. 401k funding is obviously pre-tax, so to put in $10,000, I only have to put in...$10,000.
The stock purchase is post tax. So starting with the same $10k, I now have $7600 post tax to buy stock with. Assuming the present value of stock is equal the the 6 month average, I can now buy $7600/.85 = $8941 worth of company stock with the same pre-tax $10k I could have put in my 401k.

Unless I think I'm going to be in a much higher tax bracket in retirement, 401k seems like the obvious choice (IF you don't need the liquidity) - especially if you're going to sell the company stock and reinvest elsewhere - in that case, you've added at least 1 more level of taxes (capital gains on the stock sale) before any taxes on the final investment sale.
milktoast
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Re: Emp Stock Purchase vs 401k increase

Post by milktoast »

I strongly recommend any ESPP purchases be sold the day after purchase. Just treat the 15% as a cash bonus.

Two problems with holding ESPP shares. First: diversification. Company shares falling and you losing job are highly correlated. Second: annual return. The annual return from that 15% discount can be huge. If you contribute evenly every paycheck, the last contribution earns 15% over two weeks. Every day you hold reduces your annual return.

If it was me, I'd try to max the 401k and restructure my budget to max ESPP as well. Keep in mind, you just need to lend yourself that ESPP for six months.
Busdrvr
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Re: Emp Stock Purchase vs 401k increase

Post by Busdrvr »

IIRC...The 25k annual max is based on the FMV of the shares when purchased, it is not the amount you are able to contribute. So if you have a 15% discount your annual contribution is limited to 21,250 in total. I would certainly go all in on the 401k and then add to the espp as able. I sell my shares as soon as I am able and reinvest.
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

GT99 Makes a great point. A hypothetical increase in the 401k program reduces my taxable income which saves me tax dollars in the current year.

By not increasing my ESPP to it's max, i'm forgoing $1500 of total compensation. (The 15% on the additional $10k I could allocate). To do that, I would have to sell ESPP shares immediately to offset the decrease in bi-weekly cashflow. There is no minimum holding period for ESPP.

I did some math, and it looks like by selling immediately (instead of holding the stock for 12 months) I would pay an additional $135 in taxes per $10,000. I would also forgo the dividends the stock pays (1.9% annual yield). Pretending the stock tracked exactly with my portfolio, that's a 3.25% 'reward' I would get for the concentration 'risk.'

I think my strategy will be to sell immediately in the short term. I'll use the proceeds to 1) keep my budget balanced, 2) increase the ESPP to the $25k max. 3) starting in July 2020, use the proceeds from that 6-month sale to max out my 401k deferrals to the $38,000 (married filing jointly), and then in January 2021 see if I have enough left over to hold some of the stock until it is taxed at the Long Term Cap Gains rate.

Awesome forum!
Busdrvr
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Re: Emp Stock Purchase vs 401k increase

Post by Busdrvr »

Not to belabor the point, but you don't have an additional 10k to put into the espp. More like an additional 6,250 which gets you to the 25k in Fair market value of the shares. (25*.85)=21250..minus the 15k you already do. :sharebeer
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

AverageInvestor1982 wrote: Tue Sep 17, 2019 1:26 pm GT99 Makes a great point. A hypothetical increase in the 401k program reduces my taxable income which saves me tax dollars in the current year.

By not increasing my ESPP to it's max, i'm forgoing $1500 of total compensation. (The 15% on the additional $10k I could allocate). To do that, I would have to sell ESPP shares immediately to offset the decrease in bi-weekly cashflow. There is no minimum holding period for ESPP.

I did some math, and it looks like by selling immediately (instead of holding the stock for 12 months) I would pay an additional $135 in taxes per $10,000. I would also forgo the dividends the stock pays (1.9% annual yield). Pretending the stock tracked exactly with my portfolio, that's a 3.25% 'reward' I would get for the concentration 'risk.'

I think my strategy will be to sell immediately in the short term. I'll use the proceeds to 1) keep my budget balanced, 2) increase the ESPP to the $25k max. 3) starting in July 2020, use the proceeds from that 6-month sale to max out my 401k deferrals to the $38,000 (married filing jointly), and then in January 2021 see if I have enough left over to hold some of the stock until it is taxed at the Long Term Cap Gains rate.

Awesome forum!
So I read this article on ESPPs from Wealthfront:https://blog.wealthfront.com/good-espp-no-brainer/ and it helped drive home a point Toast0 made earlier that went over my head. I would pay regular income tax on the 15% discount price regardless of how long I held the stock. That pretty much removes any desire I have to hold the stock. I will sell ASAP.
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

Busdrvr wrote: Tue Sep 17, 2019 1:54 pm Not to belabor the point, but you don't have an additional 10k to put into the espp. More like an additional 6,250 which gets you to the 25k in Fair market value of the shares. (25*.85)=21250..minus the 15k you already do. :sharebeer
So your comment made me dive into the Plan Information Document provided on the brokerage site that administers the plan (Boy do I need that beer now!) It reads that I can accrue up to $25,000 annually (12,500 semi-annually). And that "...an option to purchase a number of Shares determined by dividing such Employee’s Contributions accumulated by the applicable Purchase Price" - With Purchase price defined as 85% of the FMV on the day the purchase is executed. (Not the average daily value I stated earlier in the post)

So I think I do have an additional 10k I could put into the ESPP... Or I'm not understanding your point very well. :confused
HomeStretch
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Re: Emp Stock Purchase vs 401k increase

Post by HomeStretch »

AverageInvestor1982 wrote: Tue Sep 17, 2019 1:26 pm I did some math, and it looks like by selling immediately (instead of holding the stock for 12 months) I would pay an additional $135 in taxes per $10,000. I would also forgo the dividends the stock pays (1.9% annual yield). Pretending the stock tracked exactly with my portfolio, that's a 3.25% 'reward' I would get for the concentration 'risk.'
Good plan to sell ESPP shares immediately.

I think it’s just a 1.35% “reward” (additional tax savings). If you sold the stock, you would earn ~2% on the proceeds in a bank account or from VTSAX dividend (for example) if invested in your portfolio.
ryman554
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Re: Emp Stock Purchase vs 401k increase

Post by ryman554 »

Good grief.

The answer is to do both.

You are putting $30/48k into 401k.
You are putting $15k into ESPP. You should sell the 15000*(1.15) immediately. What do you do with this $$ now?

Regardless, put the whole $12.5k (5k) more next period. The following period sell the 12.5k, put your gains somewhere and use the 12.5k of contribution for the next six months. (Money is fungible, you can equate next six month withholding with the 12.5k returned from the previous period). Therefore, you can increase 401(k) contribution by at least 5k for the second six months, (that's how much more you are not contributing today) if not the entire 12.5 k if you can budget.

That's atleast 10k more per year (or up to $25k) you can contribute, bringing you close to the 401(k) maximum.

There, do both.
milktoast
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Re: Emp Stock Purchase vs 401k increase

Post by milktoast »

ryman554 wrote: Tue Sep 17, 2019 4:32 pm Good grief.

The answer is to do both.
Thanks for stating better what I was trying to say above.

The 12,500 - 15% is $10,625 that the OP needs to set aside. The purpose of that money is to keep maxing the ESPP and throwing off the free $1875 every six months.

Every time you next day sell the ESPP, put away $10,625 in savings to cover the next six months. Deliver $885 to your checking account twice a month on payday. Now you have maxed ESPP without any reduction in payroll.

Then take the free $1875 (on average) and use it to give yourself an extra $275 / month to save in Roth or after-tax. Or use it to increase your pre-tax 401k contribution by $312 / month.

[Edit: $1875 only yields $1650 in after tax]
thepicard1
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Re: Emp Stock Purchase vs 401k increase

Post by thepicard1 »

Consider that contributing to an ESPP may significantly decrease your month-to-month cashflow. If you're contributing 12.5k per 6 months, assuming that's 13 paychecks, you're talking about roughly $1k post-tax per paycheck.

Otherwise, yes, it is free money (up to the federally mandated limit of $25k) and generally you'll be taxed on the price difference from market price as soon as the shares are deposited into your brokerage account. I.e. your $12.5k making a ~15% return is counted as $1875 income which you'll be taxed on at normal income rates. Thus if you choose to hold or sell is immaterial. It's as if you purchased those shares at that time.
ryman554
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Re: Emp Stock Purchase vs 401k increase

Post by ryman554 »

thepicard1 wrote: Tue Sep 17, 2019 9:48 pm Consider that contributing to an ESPP may significantly decrease your month-to-month cashflow.
No, it does not. Excepting for the first ESPP period, contributing to the ESPP is completely self-sustaining and requires no new money. You get a return of contributions at the end of every period + whatever gain you get from the discount.

If you have any budgeting skills at all, you use the return of contributions to offset the funding of ESPP for the next period. You might even be able to setup a special savings account with transfers every two weeks if that helps with the mental accounting, but that's completely unnecessary.

This is why I always recommend, if there is a choice between ESPP with at least 10% guarenteed gain every six month and no other holding period, versus contributing to some tax advantaged space, do the ESPP first, and then up the tax advantaged space after the first six months. Best of both worlds.
Busdrvr
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Re: Emp Stock Purchase vs 401k increase

Post by Busdrvr »

AverageInvestor1982 wrote: Tue Sep 17, 2019 2:15 pm
Busdrvr wrote: Tue Sep 17, 2019 1:54 pm Not to belabor the point, but you don't have an additional 10k to put into the espp. More like an additional 6,250 which gets you to the 25k in Fair market value of the shares. (25*.85)=21250..minus the 15k you already do. :sharebeer
So your comment made me dive into the Plan Information Document provided on the brokerage site that administers the plan (Boy do I need that beer now!) It reads that I can accrue up to $25,000 annually (12,500 semi-annually). And that "...an option to purchase a number of Shares determined by dividing such Employee’s Contributions accumulated by the applicable Purchase Price" - With Purchase price defined as 85% of the FMV on the day the purchase is executed. (Not the average daily value I stated earlier in the post)

So I think I do have an additional 10k I could put into the ESPP... Or I'm not understanding your point very well. :confused

It looks to me like there are a lot of questions wrt how the ESPP plans work and a lot of the practical aspects of how they work is not entirely intuitive not to mention the fact that each company plan is set up with different rules. In terms of the IRS 25K limit this is found in Section 423 (b) (8) of the CFR and states:

(8) under the terms of the plan, no employee may be granted an option which permits his rights to purchase stock under all such plans of his employer corporation and its parent and subsidiary corporations to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time.

Further explanation of the final rules on ESPP’s found here:

https://www.shrm.org/resourcesandtools/ ... eregs.aspx
https://www.shrm.org/ResourcesAndTools/ ... -27452.pdf

This link states it more clearly:
You can't purchase in any calendar year more than $25,000 in shares under the plan (valued at the undiscounted stock price on first day of the offering period). Unused amounts can be carried forward if the offering period spans more than one year.
https://www.mystockoptions.com/content/ ... -espp-work

And here is a Bogleheads thread from earlier in the year discussing the same:
viewtopic.php?f=2&t=270805&p=4342537&hi ... x#p4342537

I have been a participant in my plan for 2.5 years now and have been surprised at how much I did not know about the intricacies of its application. Like the person in the above thread, I had the experience last September of receiving fewer shares than I thought I would because I was contributing the full 25k in deferrals. I did receive the roughly 4K refund check within a day or two, but afterwards I adjusted my deferral percentage to ensure I was not providing the company/custodian with an interest free loan. When I look at the two 2018 offerings I see that multiplying the # of shares obtained for each period by the FMV at the beginning of the respective offering period yields a few dollars shy of 25k.

In addition, in response to one of the other posts above, in my case, the company places an ESPP Disposition amount on a year end paycheck, which reflects the total of the “bargain element” (15%) for the year so that regular tax will be paid on those dollars. As discussed in other ESPP threads, if one sells ESPP shares during the year care must be taken when income taxes are prepared so that you do not get double taxed on the discount and this requires some extra steps to correct the basis reported on the 1099 -B. Regulations mandate that custodians report an incorrect basis on these forms so you or your accountant must manually correct the basis...In any case, first world problems.....
sorry for the length of this, and feel free to correct any inaccuracies found here. I realize I can only speak to how the plan works at my employer and that YMMV...cheers
Topic Author
AverageInvestor1982
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Re: Emp Stock Purchase vs 401k increase

Post by AverageInvestor1982 »

Thanks again to all for contributing to the topic. I really appreciate the thought and insight!
toast0
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Re: Emp Stock Purchase vs 401k increase

Post by toast0 »

thepicard1 wrote: Tue Sep 17, 2019 9:48 pm Otherwise, yes, it is free money (up to the federally mandated limit of $25k) and generally you'll be taxed on the price difference from market price as soon as the shares are deposited into your brokerage account.
You're only taxed on the price difference when you sell the stock. It will be taxed as ordinary income whenever that happens, unless the price went down from there and you meet the holding requirements for a qualified disposition. But I agree, sell it ASAP and do something more appropriate with the money than buy company stock.
thepicard1
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Re: Emp Stock Purchase vs 401k increase

Post by thepicard1 »

toast0 wrote: Thu Sep 19, 2019 11:57 pm
thepicard1 wrote: Tue Sep 17, 2019 9:48 pm Otherwise, yes, it is free money (up to the federally mandated limit of $25k) and generally you'll be taxed on the price difference from market price as soon as the shares are deposited into your brokerage account.
You're only taxed on the price difference when you sell the stock. It will be taxed as ordinary income whenever that happens, unless the price went down from there and you meet the holding requirements for a qualified disposition. But I agree, sell it ASAP and do something more appropriate with the money than buy company stock.
I don't think this is true (quick look at my paystub proves this). The X% discount is already counted as ordinary income. Once you have the shares, if they move up and you sell - capital gains. If they move down and you sell, capital losses.
Busdrvr
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Re: Emp Stock Purchase vs 401k increase

Post by Busdrvr »

I think it may depend on your company plan. Mine includes the discount amount in a pay stub at year end when shares are sold during the year.

From our ESPP Q&A

“ Ordinary Income is reported on your W-2 from your employer. The disposition amount required to be reported by your employer will be recorded on a payroll advice in Peoplesoft at the end of the calendar year in which you sold the shares. You will receive a 1099-B for the sale of shares acquired from ESPP shares from Schwab. (See Q14 for information on tax implications)”
toast0
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Location: Puget Sound

Re: Emp Stock Purchase vs 401k increase

Post by toast0 »

thepicard1 wrote: Sat Sep 21, 2019 2:44 am
toast0 wrote: Thu Sep 19, 2019 11:57 pm
thepicard1 wrote: Tue Sep 17, 2019 9:48 pm Otherwise, yes, it is free money (up to the federally mandated limit of $25k) and generally you'll be taxed on the price difference from market price as soon as the shares are deposited into your brokerage account.
You're only taxed on the price difference when you sell the stock. It will be taxed as ordinary income whenever that happens, unless the price went down from there and you meet the holding requirements for a qualified disposition. But I agree, sell it ASAP and do something more appropriate with the money than buy company stock.
I don't think this is true (quick look at my paystub proves this). The X% discount is already counted as ordinary income. Once you have the shares, if they move up and you sell - capital gains. If they move down and you sell, capital losses.
If you meet the holding requirements for a qualified disposition, the IRS directs you to include in your ordinary income the lesser of

The excess of the FMV of the share at the time the option was granted over the option price, or
The excess of the FMV of the share at the time of the disposition or death over the amount paid for the share under the option.

This is not calculable until you've disposed of the shares (or died), since FMV at that point is not yet known, so your employer should not be including this on your paystub until you've disposed of the shares. It's been way too long since I had access to ESPP, so I don't have those paystubs anymore to confirm, but I recall getting ESPP shares in Q4, and sometimes waiting to sell them until Q1, and the disqualifying disposition discount amount would be noted in Q1 paystubs, and that year's W-2.
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1789
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Re: Emp Stock Purchase vs 401k increase

Post by 1789 »

AverageInvestor1982 wrote: Mon Sep 16, 2019 10:26 am Hello! This is my first post on the site, so be gentle!

My Scenario: My new employer offers an Employee Stock Purchase Program(ESPP). I can defer up to $25,000 of my annual income to this program. The deferral accrues for a 6-month period, and then executes a purchase to buy company stock at a 15% discount of the average daily value over the 6 month accrual period. At that point I can do whatever I want with stock, but believe holding for an additional 12 months moves it into a 'long term holding' status that I believe avoids taxes on any cap gains. (Could be wrong, feel free to correct.)

I've participated in this type of program at previous employers, but the maximum contribution was much lower. I always maxed out that program and just treated it like an 18 month deferred comp program. The 'forced savings' was great - it helped me save up for a down payment on a new house, and the return was always very positive - though I realize the risk associated with holding a single stock for 18 months.

I'm currently deferring $15,000 annually for my new company (I picked the number out of a hat when i started because I had 3 days to commit. You can only change contribution amount during windows that open every 6 months.) My wife and I currently are contributing $30,000 annually toward employer 401k programs.

My question: If I decide to defer an additional amount from my pay check, where should I put it? My knee jerk reaction is to put it towards the ESPP because after the 18th month holding period I can sell and and use it to offset the cash flow cost of increasing my 401k savings at that time.

Also, is my balance way out of whack? Aka, if I don't change my total savings, is the 30k/15k ratio way out of line?

This question has been nagging at me since I started my new job. I'm new to Bogleheads but really agree with the BH 'philosophy' and have really appreciated the thoughtfulness of BH users as they ask and answer questions on this forum. Thanks!
For 401k vs ESPP

I would go for max 401k ( if plan has good funds)
Then the rest of the money you have can be used for ESPP . I recommend you to do quick sell and than use the money to buy diversified low cost index fund in taxable.

I am assuming you maxing hsa and roth ira already before espp.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
thepicard1
Posts: 18
Joined: Sun Jul 23, 2017 9:29 pm

Re: Emp Stock Purchase vs 401k increase

Post by thepicard1 »

toast0 wrote: Sun Sep 22, 2019 12:14 am
thepicard1 wrote: Sat Sep 21, 2019 2:44 am
toast0 wrote: Thu Sep 19, 2019 11:57 pm
thepicard1 wrote: Tue Sep 17, 2019 9:48 pm Otherwise, yes, it is free money (up to the federally mandated limit of $25k) and generally you'll be taxed on the price difference from market price as soon as the shares are deposited into your brokerage account.
You're only taxed on the price difference when you sell the stock. It will be taxed as ordinary income whenever that happens, unless the price went down from there and you meet the holding requirements for a qualified disposition. But I agree, sell it ASAP and do something more appropriate with the money than buy company stock.
I don't think this is true (quick look at my paystub proves this). The X% discount is already counted as ordinary income. Once you have the shares, if they move up and you sell - capital gains. If they move down and you sell, capital losses.
If you meet the holding requirements for a qualified disposition, the IRS directs you to include in your ordinary income the lesser of

The excess of the FMV of the share at the time the option was granted over the option price, or
The excess of the FMV of the share at the time of the disposition or death over the amount paid for the share under the option.

This is not calculable until you've disposed of the shares (or died), since FMV at that point is not yet known, so your employer should not be including this on your paystub until you've disposed of the shares. It's been way too long since I had access to ESPP, so I don't have those paystubs anymore to confirm, but I recall getting ESPP shares in Q4, and sometimes waiting to sell them until Q1, and the disqualifying disposition discount amount would be noted in Q1 paystubs, and that year's W-2.
It’s not an option and the FMV is computed as of then end of trading on the day the offering period ends. It’s possible employers may use different rules in reporting income to the IRS (no idea about this) but my employer reports it. In other words even if you hold onto he shares, you need to pay income tax.
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