• She will have a $10k-15k annual limit in purchases.
• 15% discount on the purchase price.
• Payroll deductions are made throughout each quarter, and the stock purchase is made on the last trading day of the quarter.
• Shares can be sold at any time after purchase.
• No mention of any lookback provision (at least not yet), so I assume that is inapplicable.
• We max out both of our IRAs, 401ks, etc. Have very healthy, balances in these and other accounts.
• Aggressive investors (~90% equities), hoping to retire early in 5-10 years.
• Her company is very large and solid (but I am aware of Enron, Bear Stearns, and the like). We don't own any other company stock, except as part of index funds.
• This would be a very small portion of our portfolio. I’m not concerned about putting investment/employment eggs in the same basket. If the company stock crashes, it obviously would be unfortunate, but wouldn’t impact our financial situation, at least not for a few years.
• Willing to take the risk that that stock crashes in the seconds/minutes/day (option 1 below) or year+ (options 2, 3 below) between the time she's eligible to sell and the time when the sale actually is completed.
• Likely to be in the 32% income tax bracket and 15% long-term capital gains bracket.
Our options, as I see them, with the ESPP:
- (1) Immediately cash out each quarter: Make a near-guaranteed 15% profit (or 17.5% as I vaguely recall), minus 33% ordinary income taxes.
(2) Let it ride with the company stock for a while: Make whatever the stock makes (or loses), minus 15% LTCG.
(3) Hedge, using some combination of 1 and 2. Maybe start an annual practice of selling whatever stock we own that has been held for more than 1 year?
What to do?
We are leaning towards option 3, but definitely think we'll be keeping at least some shares for at least a year. It seems to me that not only does keeping the stock have the higher potential return (obviously with greater potential risk), but we’d also be paying half as much taxes (15% vs 32%).
I have read several similar threads about this topic but would welcome others’ thoughts here.