Mega backdoor roth vs Keeping company issued stock

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bostonboglehead123
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Joined: Wed Sep 05, 2018 9:16 pm

Mega backdoor roth vs Keeping company issued stock

Post by bostonboglehead123 » Wed Sep 12, 2018 12:07 pm

Hi all,

I just have a quick theoretical question here. I'm moving to one of the big tech co.'s (FAANGs) and I'll have ~40% of my comp in terms of RSUs that vest every month. So let's say I have a base salary of 100k and RSU grant of 80k / yr. These vest monthly like I mentioned before and I have the option of selling them all as soon as they vest (or) leaving them in my taxable investment account.

The company also offers a mega backdoor roth IRA (i.e., The 401k plan is setup to handle post-tax contributions over 18k) and I'm planning to take advantage of that. My understanding is that even if I'd like to keep the company issued stock (and not buy VTSAX or what have you with the money), I should sell the stock as soon as it vests, move it to my 401k -> Roth IRA. This is better than just keeping them in a taxable account because at a minimum, I'd be liable for a 15% capital gains tax if the investment value appreciates. Of course, I lose some flexibility because I can't withdraw from my IRA but in theory, this should always make me more $$ over a 30 year period than just leaving the stock in my taxable account.

Is that correct?

Thanks!

magicrat
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Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega backdoor roth vs Keeping company issued stock

Post by magicrat » Wed Sep 12, 2018 12:23 pm

I don't see these issues as related. Yes, you should sell RSUs as soon as they vest. Yes, you should take advantage of backdoor Roth opportunities.

foodhype
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Re: Mega backdoor roth vs Keeping company issued stock

Post by foodhype » Wed Sep 12, 2018 12:27 pm

I also work at one of those. AFAIK you probably cannot treat the vested stock as a contribution to a 401(k). I believe that has be some percentage of your salary. That said, there are other valid reason to sell immediately even when contributing to taxable--namely correlated risk and the fact that you would not pay capital gains in the case of immediately selling.

bostonboglehead123
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Joined: Wed Sep 05, 2018 9:16 pm

Re: Mega backdoor roth vs Keeping company issued stock

Post by bostonboglehead123 » Wed Sep 12, 2018 12:59 pm

magicrat wrote:
Wed Sep 12, 2018 12:23 pm
I don't see these issues as related. Yes, you should sell RSUs as soon as they vest. Yes, you should take advantage of backdoor Roth opportunities.
I understand that it's not very boglehead'y of me to hold a single company' stock, but this is assuming I still wanted to hold my company's stock after it vests. In theory, my understanding is that it should be better to just hold that stock in a Roth IRA than just leaving it in a taxable account. Is that correct?

bostonboglehead123
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Re: Mega backdoor roth vs Keeping company issued stock

Post by bostonboglehead123 » Wed Sep 12, 2018 1:06 pm

foodhype wrote:
Wed Sep 12, 2018 12:27 pm
I also work at one of those. AFAIK you probably cannot treat the vested stock as a contribution to a 401(k). I believe that has be some percentage of your salary. That said, there are other valid reason to sell immediately even when contributing to taxable--namely correlated risk and the fact that you would not pay capital gains in the case of immediately selling.
I see.. I wasn't aware that I couldn't treat vested stock as a contribution to the 401k. Even still, I assume you could still make it work by contributing most of your base pay (say 55k + 18k = 73k =~ 70%) towards your retirement accounts and just sell RSUs as they vest for normal income?

Re: the diversification bit: I understand in theory it doesn't make sense to try to beat market returns, but working inside the company, I feel way more comfortable holding the company stock than I would about buying options on Robinhood or something. Not a great explanation, but it's worked pretty well and would like to continue to do this for a little bit more. Even if there's a broad tech stock correction and I lose ~30%, I wouldn't be too worried about it.

magicrat
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Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega backdoor roth vs Keeping company issued stock

Post by magicrat » Wed Sep 12, 2018 1:06 pm

bostonboglehead123 wrote:
Wed Sep 12, 2018 12:59 pm
magicrat wrote:
Wed Sep 12, 2018 12:23 pm
I don't see these issues as related. Yes, you should sell RSUs as soon as they vest. Yes, you should take advantage of backdoor Roth opportunities.
I understand that it's not very boglehead'y of me to hold a single company' stock, but this is assuming I still wanted to hold my company's stock after it vests. In theory, my understanding is that it should be better to just hold that stock in a Roth IRA than just leaving it in a taxable account. Is that correct?
Yes holding stock in a Roth IRA is better for tax purposes.

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tfb
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Re: Mega backdoor roth vs Keeping company issued stock

Post by tfb » Wed Sep 12, 2018 1:15 pm

bostonboglehead123 wrote:
Wed Sep 12, 2018 12:07 pm
My understanding is that even if I'd like to keep the company issued stock (and not buy VTSAX or what have you with the money), I should sell the stock as soon as it vests, move it to my 401k -> Roth IRA.
You can only contribute from your paychecks. So contribute, move to Roth IRA, buy company stock in the Roth IRA, and then sell vested stocks to live on.
Harry Sit, taking a break from the forums.

bradpevans
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Re: Mega backdoor roth vs Keeping company issued stock

Post by bradpevans » Wed Sep 12, 2018 2:05 pm

Once RSU's vest, that $ value is yours, it just happens to be in company stock.
Roughly, for every $100 in value, upon vesting, you have ~ $61 remaining.
The taxes have been paid on your behalf (and will be reflected at W2 time)

So, it's "like" a bonus check, taxed down to 61%.

If you like the company stock, you can leave it.

If you don't, then sell at the day of vest for ~ zero tax impact.
You might even have a loss based on the commission cost and your sell price vs. the price when vested to you.

If you hold, you may then wish to hold for over a year to avoid Short Term Cap gains.

foodhype
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Re: Mega backdoor roth vs Keeping company issued stock

Post by foodhype » Sun Sep 16, 2018 3:13 am

bostonboglehead123 wrote:
Wed Sep 12, 2018 1:06 pm
foodhype wrote:
Wed Sep 12, 2018 12:27 pm
I also work at one of those. AFAIK you probably cannot treat the vested stock as a contribution to a 401(k). I believe that has be some percentage of your salary. That said, there are other valid reason to sell immediately even when contributing to taxable--namely correlated risk and the fact that you would not pay capital gains in the case of immediately selling.
I see.. I wasn't aware that I couldn't treat vested stock as a contribution to the 401k. Even still, I assume you could still make it work by contributing most of your base pay (say 55k + 18k = 73k =~ 70%) towards your retirement accounts and just sell RSUs as they vest for normal income?

Re: the diversification bit: I understand in theory it doesn't make sense to try to beat market returns, but working inside the company, I feel way more comfortable holding the company stock than I would about buying options on Robinhood or something. Not a great explanation, but it's worked pretty well and would like to continue to do this for a little bit more. Even if there's a broad tech stock correction and I lose ~30%, I wouldn't be too worried about it.
That's what I do. I contribute 75% of my salary income to fill up the 401(k) and do in-plan Roth conversions as quickly as possible and then sell RSUs cover the lost cash flow.

retiredjg
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Re: Mega backdoor roth vs Keeping company issued stock

Post by retiredjg » Sun Sep 16, 2018 7:51 am

The idea of keeping that much company stock is just not very smart. Having both your income and your nest egg dependent on the same entity, even one of the FAANG companies, is very risky.

Good companies do fail from time to time and you could lose both your job and your retirement savings at the same time. This would be a tragedy, maybe even a catastrophe, and it is completely avoidable by making smart choices.

Keep 5% of your portfolio in your employer's stock. No more unless forced to by holding requirements. Even 5% should make you a good deal of money over time unless things go south. And if things go south, you'll be glad you only have 5% to lose.

Sell the stock as soon as it vests and use the money to live on while you put more of your salary into the mega-backdoor to Roth.

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