What to do with company ESPP shares?

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351M
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What to do with company ESPP shares?

Post by 351M »

Hi All

My company has an employee stock purchase plan that allows employees to purchase company stock at a discount twice a year. I have been maxing my allowable contributions to the ESPP. I then wait until the capital gains period has ended on shares, sell and have using the money to purchase VTSAX in a taxable account and plan to hold long term. I am looking for advice on whether or not this is the most logical use of the ESPP or if there are other more efficient places I should put the money.

I currently max my 401k, have a old Roth IRA that has been neglected and a taxable account. I am wondering if I should use the money from selling the ESPP shares to max the Roth IRA each year and then put the rest in the taxable account. I am not very familiar with all the ins and outs of investing and tax so I am wondering if I used the ESPP money if I would be getting double taxed if used to fund a Roth IRA. I do not recieve any of the tax benefits from a regular IRA due to having an household income above the deduction limit. This is why I have leaned towards the Roth IRA but again I am not super knowledgeable on if this the most beneficial option.

Any advice is much appreciated.
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grabiner
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Re: What to do with company ESPP shares?

Post by grabiner »

Welcome to the forum!

You should definitely max out a Roth IRA in preference to investing in a taxable account (unless you are investing money to be spent before retirement). You will be taxed on capital gains when you sell your ESPP shares (or if you sell shares in a mutual fund in your taxable account), but this is not double taxation, as this is a tax you must pay when you sell. Then, you have cash, and there is no extra tax cost for using cash to invest in either a Roth IRA or a taxable account. The advantage of the Roth IRA is that all future gains are tax-free as long as you don't withdraw the gains until you reach 59-1/2.

If you do have a taxable account, VTSAX (Vanguard Total Stock Market Index) is an excellent choice to hold there, because you get to keep almost all of the stock market returns. The low expenses mean that Vanguard takes very little of your money, and the low tax cost (almost all dividends qualified, and likely no capital gain until you sell) means that the IRS and state also take only a small portion.
Wiki David Grabiner
backpacker61
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Re: What to do with company ESPP shares?

Post by backpacker61 »

Investigate if you are eligible to contribute to a Health Savings Account.

https://www.bogleheads.org/wiki/Health_savings_account
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
KyleAAA
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Re: What to do with company ESPP shares?

Post by KyleAAA »

Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
pasadena
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Re: What to do with company ESPP shares?

Post by pasadena »

A Roth IRA is always funded with after-tax money. Since ESPP proceeds are also after-tax money, you won't be "double-taxed". Being above the income threshold simply means that you need to use the backdoor method. The only thing you need to be aware of if the pro-rata rule if you already have pre-tax money in a tIRA (from an old 401(k) rollover, for example).

Selling ESPP shares as soon as one is able to is usually the best thing to do (unless, as someone posted above, you're in one of those rare situations where it would make sense to wait until you pass the long term threshold for capital gains tax).

Once sold, it's just normal old regular after-tax money.
dcabler
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Re: What to do with company ESPP shares?

Post by dcabler »

KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
A good point. I've never had the look back provision so I sell as soon as the shares hit my account. Yep I take a tax hit for doing that but a year is a long time to wait given that the stock could literally go anywhere during that time and owning individual stocks hasn't been part of my plans for a couple of decades now. It's free money and I consider it equivalent to a bonus. If I did have such a provision I'd likely not participate.
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Re: What to do with company ESPP shares?

Post by sailaway »

dcabler wrote: Sat Dec 05, 2020 4:13 pm
KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
A good point. I've never had the look back provision so I sell as soon as the shares hit my account. Yep I take a tax hit for doing that but a year is a long time to wait given that the stock could literally go anywhere during that time and owning individual stocks hasn't been part of my plans for a couple of decades now. It's free money and I consider it equivalent to a bonus. If I did have such a provision I'd likely not participate.
DH got burned holding at a previous employer, so we sell immediately. A bird in hand and all that. We meet all of our goals and pretend that our taxes only go to the programs we support.
AnEngineer
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Re: What to do with company ESPP shares?

Post by AnEngineer »

KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
The benefit of holding ESPP shares for a qualified plan with a look back provision (better price of now or a set earlier date) is not long term capital gains. Instead, it is to wait two years from the start of the offering period (depends on your plan, may be a year before your purchase, or earlier or later), then only the discount from the look back price is taxed as income, instead of the entire discount from value of purchase date. If the look back did not decrease the price there's no tax advantage to hold.
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Re: What to do with company ESPP shares?

Post by KyleAAA »

AnEngineer wrote: Sat Dec 05, 2020 6:56 pm
KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
The benefit of holding ESPP shares for a qualified plan with a look back provision (better price of now or a set earlier date) is not long term capital gains. Instead, it is to wait two years from the start of the offering period (depends on your plan, may be a year before your purchase, or earlier or later), then only the discount from the look back price is taxed as income, instead of the entire discount from value of purchase date. If the look back did not decrease the price there's no tax advantage to hold.
Uh yeah, that's what I said. The discount attributable to the look back is race as a LTCG for qualifying dispositions.
dcabler
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Re: What to do with company ESPP shares?

Post by dcabler »

AnEngineer wrote: Sat Dec 05, 2020 6:56 pm
KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
The benefit of holding ESPP shares for a qualified plan with a look back provision (better price of now or a set earlier date) is not long term capital gains. Instead, it is to wait two years from the start of the offering period (depends on your plan, may be a year before your purchase, or earlier or later), then only the discount from the look back price is taxed as income, instead of the entire discount from value of purchase date. If the look back did not decrease the price there's no tax advantage to hold.
Ah, thanks for the definition of lookback period, which I had confused for a holding period, which some ESPP plans have. I did have one with a lookback provision at a company I worked for once. Best one I ever had and was different than the others I've had in a couple of ways. First, the basic period was 6 months instead of 3. So price set on the lower of the first day or last day of the 6 month period with the 15% discount added. In the next 6 month period, price was set on the lower of beginning or end of the period unless that price is higher than the previous 6 month period, in which case the previous 6 month's price applied. I still sold as soon as it hit my account, but if your company's stock is on a roll, it could make ESPP quite lucrative.
AnEngineer
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Re: What to do with company ESPP shares?

Post by AnEngineer »

KyleAAA wrote: Sun Dec 06, 2020 2:26 am
AnEngineer wrote: Sat Dec 05, 2020 6:56 pm
KyleAAA wrote: Sat Dec 05, 2020 1:32 pm Do you have a look back provision on your ESPP? In general you should sell ESPP shares immediately, but there are very, very limited scenarios where it might make sense to hold for LTCG rates.
The benefit of holding ESPP shares for a qualified plan with a look back provision (better price of now or a set earlier date) is not long term capital gains. Instead, it is to wait two years from the start of the offering period (depends on your plan, may be a year before your purchase, or earlier or later), then only the discount from the look back price is taxed as income, instead of the entire discount from value of purchase date. If the look back did not decrease the price there's no tax advantage to hold.
Uh yeah, that's what I said. The discount attributable to the look back is race as a LTCG for qualifying dispositions.
I read, perhaps, the same general conclusion, but not the reasons why. For example, some could think that the ESPP discounts are capital gains, which is mostly not true, except as I described.
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