Implementing ESPP into Financial Plan

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Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Implementing ESPP into Financial Plan

Post by y4rivera »

My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. I would sell the shares right away so capital gains wouldn't really be a factor. The taxes for the discount would be automatically deducted from my next paycheck following the payout.

They allow a maximum contribution of $7500 per 6 month period, so $15k annually. I want to do the full amount because it seems like a great deal, but I don't know if there is something I'm missing.

I'm trying to figure out how to implement this into my plan. I'm worried that I'm tying up too much income in post tax money which would impact my pre-tax savings. I want to get to the point where I can max out my retirement accounts.

I have 9k in emergency fund.
I currently make 100k/year.
Below is a breakdown of where my money would be going.

Taxes, Dental and Medical ~30%
Traditional 401k ~10%
ESPP ~15% (I plan to use 6% of this to fund my Roth IRA leaving me with 9%)
Expenses ~40%

Total ~ 95%

As you can see I only have ~5% remaining to fund my HSA. To max out my HSA I would need ~7%. I could use the remaining 9% of the ESPP, but then that would be with FICA taxes already taken out. How should I approach this?
Jack FFR1846
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Re: Implementing ESPP into Financial Plan

Post by Jack FFR1846 »

Here's how I plan for my ESPPs.

1: during the saving period, I account for nothing.
2: when the ESPPs buy, I sell immediately with tax with held.
3: when the trades settle and the cash is able to be transferred out, I transfer it to my checking account. I then continue with whatever my plan was to buy ETFs.

This is very simple as I don't have to do anything wrt planning with my ESPP shares.

Note that I do exactly the same thing with my RSUs and my bonus money. For me, all these "percs" can be significant.....nearly doubling my base salary. But I also know from past experience that all of it can go to zero in an instant when the company does something stupid. That has happened in the last 2 years for me. I only know that something is zero'd a week before the scheduled payout. So I've become a very "don't count your chickens" guy. To me, everything is zero until I can actually put money in my own checking account.
Bogle: Smart Beta is stupid
pasadena
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Location: PNW

Re: Implementing ESPP into Financial Plan

Post by pasadena »

You can contribute more to your 401(k) and use the ESPP money to live on. Unless you already have enough saved, it will take one ESPP cycle to set up.

Ex at the end of the first 6 months. Numbers are just an illustration, I'm on mobile so I couldn't do the math :)

- Get $9,375 back from your ESPP contributions (buy 468 shares at $16, sell them at $20)
- Save that money in a savings account
- Contribute up to $1,500 additional after tax dollars to your 401(k) each month
- Withdraw $1,500 each month from your savings account to finance the gap in income

And just like that, you've maxed out your 401(k). Just make sure you do the exact math so your paycheck has enough money after taxes and deductions to max out the ESPP. The hard part is figuring out how much to put in the pre-tax 401(k) that's equal to $1,500 after tax.
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

pasadena wrote: Tue Oct 13, 2020 10:44 am You can contribute more to your 401(k) and use the ESPP money to live on. Unless you already have enough saved, it will take one ESPP cycle to set up.

Ex at the end of the first 6 months. Numbers are just an illustration, I'm on mobile so I couldn't do the math :)

- Get $9,375 back from your ESPP contributions (buy 468 shares at $16, sell them at $20)
- Save that money in a savings account
- Contribute up to $1,500 additional after tax dollars to your 401(k) each month
- Withdraw $1,500 each month from your savings account to finance the gap in income

And just like that, you've maxed out your 401(k). Just make sure you do the exact math so your paycheck has enough money after taxes and deductions to max out the ESPP. The hard part is figuring out how much to put in the pre-tax 401(k) that's equal to $1,500 after tax.
I didn't know I could make after tax contributions to a 401k. Would I be able to claim those contributions on my taxes?
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

Jack FFR1846 wrote: Tue Oct 13, 2020 10:43 am Here's how I plan for my ESPPs.

1: during the saving period, I account for nothing.
2: when the ESPPs buy, I sell immediately with tax with held.
3: when the trades settle and the cash is able to be transferred out, I transfer it to my checking account. I then continue with whatever my plan was to buy ETFs.

This is very simple as I don't have to do anything wrt planning with my ESPP shares.

Note that I do exactly the same thing with my RSUs and my bonus money. For me, all these "percs" can be significant.....nearly doubling my base salary. But I also know from past experience that all of it can go to zero in an instant when the company does something stupid. That has happened in the last 2 years for me. I only know that something is zero'd a week before the scheduled payout. So I've become a very "don't count your chickens" guy. To me, everything is zero until I can actually put money in my own checking account.
I agree, I try not to count on the bonuses and overtime opportunities.
pasadena
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Location: PNW

Re: Implementing ESPP into Financial Plan

Post by pasadena »

y4rivera wrote: Tue Oct 13, 2020 10:50 am
pasadena wrote: Tue Oct 13, 2020 10:44 am You can contribute more to your 401(k) and use the ESPP money to live on. Unless you already have enough saved, it will take one ESPP cycle to set up.

Ex at the end of the first 6 months. Numbers are just an illustration, I'm on mobile so I couldn't do the math :)

- Get $9,375 back from your ESPP contributions (buy 468 shares at $16, sell them at $20)
- Save that money in a savings account
- Contribute up to $1,500 additional after tax dollars to your 401(k) each month
- Withdraw $1,500 each month from your savings account to finance the gap in income

And just like that, you've maxed out your 401(k). Just make sure you do the exact math so your paycheck has enough money after taxes and deductions to max out the ESPP. The hard part is figuring out how much to put in the pre-tax 401(k) that's equal to $1,500 after tax.
I didn't know I could make after tax contributions to a 401k. Would I be able to claim those contributions on my taxes?
No that's not what I meant. You're still doing pre-tax contributions.

The idea is, you have $1,500 a month ($9,000 for 6 months, rounding down) that you can use to supplement your income. So you increase your PRE-TAX 401(k) contribution up to whatever amount will leave you with a $1,500 deficit on your net pay (while still allowing for all taxes and after-tax deductions to go through, including max ESPP contribution)
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

pasadena wrote: Tue Oct 13, 2020 10:55 am
y4rivera wrote: Tue Oct 13, 2020 10:50 am
pasadena wrote: Tue Oct 13, 2020 10:44 am You can contribute more to your 401(k) and use the ESPP money to live on. Unless you already have enough saved, it will take one ESPP cycle to set up.

Ex at the end of the first 6 months. Numbers are just an illustration, I'm on mobile so I couldn't do the math :)

- Get $9,375 back from your ESPP contributions (buy 468 shares at $16, sell them at $20)
- Save that money in a savings account
- Contribute up to $1,500 additional after tax dollars to your 401(k) each month
- Withdraw $1,500 each month from your savings account to finance the gap in income

And just like that, you've maxed out your 401(k). Just make sure you do the exact math so your paycheck has enough money after taxes and deductions to max out the ESPP. The hard part is figuring out how much to put in the pre-tax 401(k) that's equal to $1,500 after tax.
I didn't know I could make after tax contributions to a 401k. Would I be able to claim those contributions on my taxes?
No that's not what I meant. You're still doing pre-tax contributions.

The idea is, you have $1,500 a month ($9,000 for 6 months, rounding down) that you can use to supplement your income. So you increase your PRE-TAX 401(k) contribution up to whatever amount will leave you with a $1,500 deficit on your net pay (while still allowing for all taxes and after-tax deductions to go through, including max ESPP contribution)
Oh ok, I think I understand. Use the first cycle to increase my savings. After the first cycle increase my retirement contributions. My monthly cash flow would be negative, but the savings from the first cycle would offset that.
sailaway
Posts: 2526
Joined: Fri May 12, 2017 1:11 pm

Re: Implementing ESPP into Financial Plan

Post by sailaway »

ESPP is a way to boost your income. It makes sense to use the proceeds to increase participation in tax sheltered savings! Your breakdown kind of gets this (send 6% to IRA) and kind of doesn't (ahhh, I don't have enough for HSA). The first six months might be tight, but after that, it is just lumpy income that allows you to deduct more from your paycheck because you have a cash reserve to cover expenses.

The only taxes you will owe on ESPP is the income taxes on the discount. Income and payroll taxes were withheld for the amount you contributed with each paycheck.

We participate in the ESPP and decide what to do with the actual money every six months. Our default is to use the funds to buy ETFs. However, if our cash reserves are low or we have a big expense coming up, we will just move it to checking or savings. Between ESPP and RSUs, we make this decision four times a year, so we really only keep one as cash if we need to; there is always another lump sum in a few months.
pasadena
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Location: PNW

Re: Implementing ESPP into Financial Plan

Post by pasadena »

y4rivera wrote: Tue Oct 13, 2020 11:07 am
pasadena wrote: Tue Oct 13, 2020 10:55 am
y4rivera wrote: Tue Oct 13, 2020 10:50 am
pasadena wrote: Tue Oct 13, 2020 10:44 am You can contribute more to your 401(k) and use the ESPP money to live on. Unless you already have enough saved, it will take one ESPP cycle to set up.

Ex at the end of the first 6 months. Numbers are just an illustration, I'm on mobile so I couldn't do the math :)

- Get $9,375 back from your ESPP contributions (buy 468 shares at $16, sell them at $20)
- Save that money in a savings account
- Contribute up to $1,500 additional after tax dollars to your 401(k) each month
- Withdraw $1,500 each month from your savings account to finance the gap in income

And just like that, you've maxed out your 401(k). Just make sure you do the exact math so your paycheck has enough money after taxes and deductions to max out the ESPP. The hard part is figuring out how much to put in the pre-tax 401(k) that's equal to $1,500 after tax.
I didn't know I could make after tax contributions to a 401k. Would I be able to claim those contributions on my taxes?
No that's not what I meant. You're still doing pre-tax contributions.

The idea is, you have $1,500 a month ($9,000 for 6 months, rounding down) that you can use to supplement your income. So you increase your PRE-TAX 401(k) contribution up to whatever amount will leave you with a $1,500 deficit on your net pay (while still allowing for all taxes and after-tax deductions to go through, including max ESPP contribution)
Oh ok, I think I understand. Use the first cycle to increase my savings. After the first cycle increase my retirement contributions. My monthly cash flow would be negative, but the savings from the first cycle would offset that.
Exactly. It does take quite a bit of discipline, but given your numbers, assuming you don't have huge pre-tax and after-tax contributions that you didn't mention, this should allow you to max-out your 401(k) and a single-person HSA. You just need to do the math to see the exact numbers and make sure it all fits.
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

sailaway wrote: Tue Oct 13, 2020 11:07 am ESPP is a way to boost your income. It makes sense to use the proceeds to increase participation in tax sheltered savings! Your breakdown kind of gets this (send 6% to IRA) and kind of doesn't (ahhh, I don't have enough for HSA). The first six months might be tight, but after that, it is just lumpy income that allows you to deduct more from your paycheck because you have a cash reserve to cover expenses.

The only taxes you will owe on ESPP is the income taxes on the discount. Income and payroll taxes were withheld for the amount you contributed with each paycheck.

We participate in the ESPP and decide what to do with the actual money every six months. Our default is to use the funds to buy ETFs. However, if our cash reserves are low or we have a big expense coming up, we will just move it to checking or savings. Between ESPP and RSUs, we make this decision four times a year, so we really only keep one as cash if we need to; there is always another lump sum in a few months.
Yeah I'll probably do something similar. When possible I'll invest it, but if some unexpected expenses come up I'll use it for that.
dcabler
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Re: Implementing ESPP into Financial Plan

Post by dcabler »

y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. I would sell the shares right away so capital gains wouldn't really be a factor. The taxes for the discount would be automatically deducted from my next paycheck following the payout.

They allow a maximum contribution of $7500 per 6 month period, so $15k annually. I want to do the full amount because it seems like a great deal, but I don't know if there is something I'm missing.

I'm trying to figure out how to implement this into my plan. I'm worried that I'm tying up too much income in post tax money which would impact my pre-tax savings. I want to get to the point where I can max out my retirement accounts.

I have 9k in emergency fund.
I currently make 100k/year.
Below is a breakdown of where my money would be going.

Taxes, Dental and Medical ~30%
Traditional 401k ~10%
ESPP ~15% (I plan to use 6% of this to fund my Roth IRA leaving me with 9%)
Expenses ~40%

Total ~ 95%

As you can see I only have ~5% remaining to fund my HSA. To max out my HSA I would need ~7%. I could use the remaining 9% of the ESPP, but then that would be with FICA taxes already taken out. How should I approach this?
For me, all tax advantaged accounts get funded first: 401K, HSA, Money I set aside for Ibonds.
Then I have a fixed amount I save each month into my taxable account.
Then I max out ESPP and sell as soon as it appears in my account. Profits made from this, after tax, are then also deposited into my taxable account once-per quarter. Do I plan how much this will be? No, at least not for guessing future personal wealth. I suppose I could take the most conservative path and assume that I only get the 15% discount, but it won't change anything I actually do. So I treat it the same way as I do for my RSU's and any annual bonuses. That is, I don't plan for them at all in terms of potential wealth - I take the money, consider it as a bonus and then immediately deposit the proceeds into my taxable investment account.

Now all of that said, at the beginning of the year, I do need to make some guesstimates for my W4 with-holdings. I usually base that on the previous year's returns I got from ESPP. But each quarter, I review things and and adjust my with-holdings accordingly, adjusting based on what I actually received.

Cheers.
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

dcabler wrote: Tue Oct 13, 2020 11:26 am
y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. I would sell the shares right away so capital gains wouldn't really be a factor. The taxes for the discount would be automatically deducted from my next paycheck following the payout.

They allow a maximum contribution of $7500 per 6 month period, so $15k annually. I want to do the full amount because it seems like a great deal, but I don't know if there is something I'm missing.

I'm trying to figure out how to implement this into my plan. I'm worried that I'm tying up too much income in post tax money which would impact my pre-tax savings. I want to get to the point where I can max out my retirement accounts.

I have 9k in emergency fund.
I currently make 100k/year.
Below is a breakdown of where my money would be going.

Taxes, Dental and Medical ~30%
Traditional 401k ~10%
ESPP ~15% (I plan to use 6% of this to fund my Roth IRA leaving me with 9%)
Expenses ~40%

Total ~ 95%

As you can see I only have ~5% remaining to fund my HSA. To max out my HSA I would need ~7%. I could use the remaining 9% of the ESPP, but then that would be with FICA taxes already taken out. How should I approach this?
For me, all tax advantaged accounts get funded first: 401K, HSA, Money I set aside for Ibonds.
Then I have a fixed amount I save each month into my taxable account.
Then I max out ESPP and sell as soon as it appears in my account. Profits made from this, after tax, are then also deposited into my taxable account once-per quarter. Do I plan how much this will be? No. I suppose I could take the most conservative path and assume that I only get the 15% discount, but it won't change anything I actually do. So I treat it the same way as I do for my RSU's and any annual bonuses. That is, I don't plan for them at all in terms of potential wealth - I take the money, consider it as a bonus and then immediately deposit the proceeds into my taxable investment account.

Now all of that said, at the beginning of the year, I do need to make some guesstimates for my W4 with-holdings. I usually base that on the previous year's returns I got from ESPP. But each quarter, I review things and and adjust my with-holdings accordingly.

Cheers.
That's something I need to do as well. I never adjusted my w4 and every year I always get a large refund. I used the nerdwallet calculator and I'm projected to get around $7k for 2020. That's around $500 a month I'm overspending in taxes.
dcabler
Posts: 1707
Joined: Wed Feb 19, 2014 11:30 am

Re: Implementing ESPP into Financial Plan

Post by dcabler »

y4rivera wrote: Tue Oct 13, 2020 11:31 am
dcabler wrote: Tue Oct 13, 2020 11:26 am
y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. I would sell the shares right away so capital gains wouldn't really be a factor. The taxes for the discount would be automatically deducted from my next paycheck following the payout.

They allow a maximum contribution of $7500 per 6 month period, so $15k annually. I want to do the full amount because it seems like a great deal, but I don't know if there is something I'm missing.

I'm trying to figure out how to implement this into my plan. I'm worried that I'm tying up too much income in post tax money which would impact my pre-tax savings. I want to get to the point where I can max out my retirement accounts.

I have 9k in emergency fund.
I currently make 100k/year.
Below is a breakdown of where my money would be going.

Taxes, Dental and Medical ~30%
Traditional 401k ~10%
ESPP ~15% (I plan to use 6% of this to fund my Roth IRA leaving me with 9%)
Expenses ~40%

Total ~ 95%

As you can see I only have ~5% remaining to fund my HSA. To max out my HSA I would need ~7%. I could use the remaining 9% of the ESPP, but then that would be with FICA taxes already taken out. How should I approach this?
For me, all tax advantaged accounts get funded first: 401K, HSA, Money I set aside for Ibonds.
Then I have a fixed amount I save each month into my taxable account.
Then I max out ESPP and sell as soon as it appears in my account. Profits made from this, after tax, are then also deposited into my taxable account once-per quarter. Do I plan how much this will be? No. I suppose I could take the most conservative path and assume that I only get the 15% discount, but it won't change anything I actually do. So I treat it the same way as I do for my RSU's and any annual bonuses. That is, I don't plan for them at all in terms of potential wealth - I take the money, consider it as a bonus and then immediately deposit the proceeds into my taxable investment account.

Now all of that said, at the beginning of the year, I do need to make some guesstimates for my W4 with-holdings. I usually base that on the previous year's returns I got from ESPP. But each quarter, I review things and and adjust my with-holdings accordingly.

Cheers.
That's something I need to do as well. I never adjusted my w4 and every year I always get a large refund. I used the nerdwallet calculator and I'm projected to get around $7k for 2020. That's around $500 a month I'm overspending in taxes.
I used to do likewise considering that anywhere that was between +/- $4K or so owed or as a refund was considered a success. But these days, I like to plan also for an additional $5K Ibond purchase through my tax refund, so I try my darndest to shoot for $6K ($5K + $1K buffer) each year, so I'm a lot more careful with my planning. I usually get pretty close but the December ETF/Mutual fund distributions can create some unexpected surprises (like last year), without much time to react before my final paycheck of the year. And I'm just not up to doing quarterly estimated taxes - I'll wait until after I'm retired for that.
kxl19
Posts: 123
Joined: Wed Mar 13, 2013 12:41 am

Re: Implementing ESPP into Financial Plan

Post by kxl19 »

This might be a controversial answer, but if you can indeed sell immediately after receiving the discount, you could potentially borrow money for the ESPP and still come ahead.

The 15% discount over 6 month period is an effective annualized return of 91% / year
(source: https://thefinancebuff.com/employee-sto ... pp-is.html)

So if you can borrow for less than 91% (ie, a HELOC would be 3-5%), and use that to found your expenses while you put the same amount into your ESPP, you'd still come out ahead.
AB609
Posts: 55
Joined: Thu Oct 17, 2019 9:02 am

Re: Implementing ESPP into Financial Plan

Post by AB609 »

After one cycle, it is just rolling back into the budget as a lump sum. Nothing changes other than having a few more dollars to play with. I cash mine out as soon as they land in my account.
AnEngineer
Posts: 237
Joined: Sat Jun 27, 2020 4:05 pm

Re: Implementing ESPP into Financial Plan

Post by AnEngineer »

y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount.
Others have covered that you should obviously do this. It's free money (well, part of your expected compensation) as long as you can manage the cash flow. If not, it's just a matter of getting it rolling.

A couple notes:
1) Other people have ESPP where the discount could be from the share price at an earlier date, which can incentivize holding the share long enough for a qualifying disposition, which can reduce taxes. Some argue against this. Either way, it's irrelevant for you. Trading fees are now $0*, sell immediately.
2) When you get a 1099B at the end of the year, pay attention. It is required by law to be incorrect. Your brokerage will likely provide supplemental information on how to adjust the cost basis to account for the fact that the 20% discount is taxable as income, not capital gains.
KlangFool
Posts: 19052
Joined: Sat Oct 11, 2008 12:35 pm

Re: Implementing ESPP into Financial Plan

Post by KlangFool »

y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share.
y4rivera,

<<On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. >>

1) Please verify that this is true.

I had seen many variations in the pricing of ESPP.


A) Price at the end of the period.


B) The minimum of the price at the beginning of the period and the end of the period.


C) The average of the price at the beginning of the period and the end of the period.

Please read the fine print.


2) Please note that you are giving an interest-free loan to the employer for 6 months.

KlangFool
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

KlangFool wrote: Wed Oct 14, 2020 3:34 pm
y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share.
y4rivera,

<<On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount. For example, if the stock is $20 per share, I would get it for $16 per share. >>

1) Please verify that this is true.

I had seen many variations in the pricing of ESPP.


A) Price at the end of the period.


B) The minimum of the price at the beginning of the period and the end of the period.


C) The average of the price at the beginning of the period and the end of the period.

Please read the fine print.


2) Please note that you are giving an interest-free loan to the employer for 6 months.

KlangFool
I double checked and it is true, they don't do a "look back" regarding the price. Whatever it is on the final day is what it is purchased at. Regarding the interest free loan wouldn't it technically be a loan where I make 20%? Also wouldn't it be a little better than a loan because usually a loan would be the full amount being paid up front? I would be making payments biweekly from my check. The opportunity cost would be most on the first payment and would reduce with each payment as I get closer to the end of the 6 month period. Not sure how to calculate that but I think that's what it is, right?
Topic Author
y4rivera
Posts: 48
Joined: Fri May 26, 2017 7:20 am

Re: Implementing ESPP into Financial Plan

Post by y4rivera »

AnEngineer wrote: Wed Oct 14, 2020 3:26 pm
y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount.
Others have covered that you should obviously do this. It's free money (well, part of your expected compensation) as long as you can manage the cash flow. If not, it's just a matter of getting it rolling.

A couple notes:
1) Other people have ESPP where the discount could be from the share price at an earlier date, which can incentivize holding the share long enough for a qualifying disposition, which can reduce taxes. Some argue against this. Either way, it's irrelevant for you. Trading fees are now $0*, sell immediately.
2) When you get a 1099B at the end of the year, pay attention. It is required by law to be incorrect. Your brokerage will likely provide supplemental information on how to adjust the cost basis to account for the fact that the 20% discount is taxable as income, not capital gains.
The company will immediately take the taxes on the discount out of my first check after the 6 month period. That should cover me, right?
AnEngineer
Posts: 237
Joined: Sat Jun 27, 2020 4:05 pm

Re: Implementing ESPP into Financial Plan

Post by AnEngineer »

y4rivera wrote: Thu Oct 15, 2020 2:46 pm
AnEngineer wrote: Wed Oct 14, 2020 3:26 pm
y4rivera wrote: Tue Oct 13, 2020 10:31 am My company offers a stock purchase program where post tax income is deducted from your paycheck for a six month period. On the final day of the 6 month period they use those funds to purchase shares of the company stock at a 20% discount.
Others have covered that you should obviously do this. It's free money (well, part of your expected compensation) as long as you can manage the cash flow. If not, it's just a matter of getting it rolling.

A couple notes:
1) Other people have ESPP where the discount could be from the share price at an earlier date, which can incentivize holding the share long enough for a qualifying disposition, which can reduce taxes. Some argue against this. Either way, it's irrelevant for you. Trading fees are now $0*, sell immediately.
2) When you get a 1099B at the end of the year, pay attention. It is required by law to be incorrect. Your brokerage will likely provide supplemental information on how to adjust the cost basis to account for the fact that the 20% discount is taxable as income, not capital gains.
The company will immediately take the taxes on the discount out of my first check after the 6 month period. That should cover me, right?
This likely covers your withholding requirements, but not what you actually owe. The taxes due are not separate taxes like property taxes or sales taxes. Instead, it is income tax, and when you file you must fill out Schedule D and Form 8949 to adjust the cost basis, otherwise you'll pay income tax on both the discount as regular income (as it's reported on your W2), as well as capital gains taxes. There's a slight possibility that because you don't have a lookback that you won't face this complication, but it should be obvious based on your tax forms.
simas
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Joined: Wed Apr 04, 2007 5:50 pm

Re: Implementing ESPP into Financial Plan

Post by simas »

y4rivera wrote: Tue Oct 13, 2020 10:31 am As you can see I only have ~5% remaining to fund my HSA. To max out my HSA I would need ~7%. I could use the remaining 9% of the ESPP, but then that would be with FICA taxes already taken out. How should I approach this?
you are way overthinking this IMHO. 15k a year max, 20% benefit target, 3k additional comp.

So , if you think of it your question is - if I were making 103k vs 100k , how do I implement it into the Financial Plan??

I am with others who say that you may consider capturing tax advanced space vs trying to earn extra $3000 a year..
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