Participate in ESPP?

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Topic Author
brademac
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Participate in ESPP?

Post by brademac » Sun Jun 28, 2020 10:09 am

I work for S&P 500 company that offers an employee stock purchase plan and am trying to decide whether or not to participate. I know there is incredible risk in investing in an individual stock but was curious if the perks from the plan might mitigate some of the risks and if I should participate. Below are specifics of plan.

- buy stock at 15% discount
- purchase happens over two periods based on what I have withdrawn from paycheck Jan through June and July through December
- for first period the stock purchases is made in July and strike price is lower of price as of Jan 1 or June 30 (for example if price $20 on Jan 1 and $25 on June 30 I get stock for $20 or vice versa)
-must hold shares one year before can sell
- if sell between years 1 and 2 the gain is taxed at ordinary tax rate
- if sell after two years I pay capital gains tax rate on gain
- can put in maximum of $25,000 a year or as little as $100 a year

My entire portfolio now is in broad based index funds and I am 60% stocks 40% bonds

I had read somewhere not have more than 5% of portfolio in individual stocks so one thing I am considering is to take advantage but don’t let this stock reach more than 5% of portfolio

Just was curious of what others do for their ESPP or if am better off turning this down and not participating?

evancox10
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Re: Participate in ESPP?

Post by evancox10 » Sun Jun 28, 2020 10:18 am

100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.

sailaway
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Re: Participate in ESPP?

Post by sailaway » Sun Jun 28, 2020 10:20 am

The plans with a hold period are a bit harder to judge, because you are required to have a higher stake in your company's stock. A lot can happen in a year.

I think I would reluctantly pass, but then, that is an easier decision to make when you expect to bow out of the rat race in two years.

If you do participate, have a sell plan in place before you buy. You don't want to end up riding it all the way down just because you were waiting on it to go up, but you don't want to panic sell against your plan, either. Tough call, again.

sailaway
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Re: Participate in ESPP?

Post by sailaway » Sun Jun 28, 2020 10:22 am

evancox10 wrote:
Sun Jun 28, 2020 10:18 am
100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.
Not for OP, they have a one year hold period.

random_walker_77
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Re: Participate in ESPP?

Post by random_walker_77 » Sun Jun 28, 2020 10:39 am

brademac wrote:
Sun Jun 28, 2020 10:09 am
- buy stock at 15% discount
- purchase happens over two periods based on what I have withdrawn from paycheck Jan through June and July through December
- for first period the stock purchases is made in July and strike price is lower of price as of Jan 1 or June 30 (for example if price $20 on Jan 1 and $25 on June 30 I get stock for $20 or vice versa)
-must hold shares one year before can sell

- can put in maximum of $25,000 a year or as little as $100 a year
So for the 2nd period, is it again the lowest of the beginning/end of that 6 months, or does your price lookback to the beginning of the year if that's the lower price?

25K seems like an unusually large amount to allow, unless this represents 10% of your salary. I believe there's a federal regulation that caps contributions to 25K, but most companies further limit it as far as I know.

Sounds like a pretty good plan w/ the only catch being the 1 year holding period. If you're ok w/ risk of keeping 12-18 months of contributions in the stock, the carrot is pretty good. 15% off the lowest price at the beginning/end is pretty good. If it's a 1 year lookback, that's even better. Once you reach the point where you're immediately selling, consider that even if all you get is 15%, the return rate on those funds is over 60%*. If you get more than 15%, then it just gets better. It's certainly way more generous than any other investment you'll find, but you have the single-stock risk in your employer. I'd think of it as an 18 month buy-in (w/ a nice 15+% bonus to compensate for risk), and after that, you sell immediately and harvest this ESPP. If you're going to be there for many years, this should turn out well. On the other hand, if you're a recent grad w/ little money invested elsewhere, then the concentration of risk makes it a tougher choice, but I'd go with it if I thought the company was a decent bet.

* 15% in 6 months is a little more than 30%. But unlike a CD where you put in all the money upfront, you're doing payroll contributions over time, so on average, the funds are in for 3 months. 15% in 3 months is over 60%

Topic Author
brademac
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Re: Participate in ESPP?

Post by brademac » Sun Jun 28, 2020 10:55 am

random_walker_77 wrote:
Sun Jun 28, 2020 10:39 am
brademac wrote:
Sun Jun 28, 2020 10:09 am
- buy stock at 15% discount
- purchase happens over two periods based on what I have withdrawn from paycheck Jan through June and July through December
- for first period the stock purchases is made in July and strike price is lower of price as of Jan 1 or June 30 (for example if price $20 on Jan 1 and $25 on June 30 I get stock for $20 or vice versa)
-must hold shares one year before can sell

- can put in maximum of $25,000 a year or as little as $100 a year
So for the 2nd period, is it again the lowest of the beginning/end of that 6 months, or does your price lookback to the beginning of the year if that's the lower price?

25K seems like an unusually large amount to allow, unless this represents 10% of your salary. I believe there's a federal regulation that caps contributions to 25K, but most companies further limit it as far as I know.

Sounds like a pretty good plan w/ the only catch being the 1 year holding period. If you're ok w/ risk of keeping 12-18 months of contributions in the stock, the carrot is pretty good. 15% off the lowest price at the beginning/end is pretty good. If it's a 1 year lookback, that's even better. Once you reach the point where you're immediately selling, consider that even if all you get is 15%, the return rate on those funds is over 60%*. If you get more than 15%, then it just gets better. It's certainly way more generous than any other investment you'll find, but you have the single-stock risk in your employer. I'd think of it as an 18 month buy-in (w/ a nice 15+% bonus to compensate for risk), and after that, you sell immediately and harvest this ESPP. If you're going to be there for many years, this should turn out well. On the other hand, if you're a recent grad w/ little money invested elsewhere, then the concentration of risk makes it a tougher choice, but I'd go with it if I thought the company was a decent bet.

* 15% in 6 months is a little more than 30%. But unlike a CD where you put in all the money upfront, you're doing payroll contributions over time, so on average, the funds are in for 3 months. 15% in 3 months is over 60%
Thanks the the reply

The 2nd half of year is 6 month look back so get lower price of July 1 or Dec 31

I am tempted to hold two years because the difference in tax rate is 25% ordinary tax rate versus 15% capital gains so I can capture an extra 10% by holding another 12 months.

So holding 24 months I would potentially gain the 15% stock price discount and an additional 10% in federal income tax savings on any gain. Of course the big risk is the stock would dip 15% or more from my strike prices which would put mean a loss if sold then.

fogalog
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Re: Participate in ESPP?

Post by fogalog » Sun Jun 28, 2020 12:08 pm

I have participated in a few ESPP programs in the past which were all pretty much as you describe - free money, very low risk - but I have never seen this condition:
brademac wrote:
Sun Jun 28, 2020 10:09 am
-must hold shares one year before can sell
There are certainly withholding period restrictions as it relates to qualifying / non-qualifying disposition but I have never encountered this before.

If $25k is a lot of money versus your income, I would probably not do it. If it were a small portion, I might - depends on confidence in the company and only you can answer that.

Good luck!

novemberrain
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Re: Participate in ESPP?

Post by novemberrain » Sun Jun 28, 2020 12:17 pm

brademac wrote:
Sun Jun 28, 2020 10:09 am
-must hold shares one year before can sell
This clause makes it not worth it. I would advise to not participate in your ESPP.

dcabler
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Re: Participate in ESPP?

Post by dcabler » Sun Jun 28, 2020 12:35 pm

I have never had an ESPP with a holding period before. I sell as soon as it appears in my account. Depending on the company, it is either the next morning or up to 5 days. And those 5 days alone make me nervous. I'm more than happy to take what is essentially "free money" and pay short term capital gains on it. My investment policy includes never buying individual stocks, so I don't see any reason to increase my overall risk by both working for my employer and investing in them for any length of time.

With a holding period, I would not participate.

Cheers.

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Re: Participate in ESPP?

Post by geerhardusvos » Sun Jun 28, 2020 12:55 pm

evancox10 wrote:
Sun Jun 28, 2020 10:18 am
100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.
+1

ESPP has proven to be very valuable on my path towards my goals. Max it out! Every raise makes it an even better benefit.
VTSAX and chill

Starfish
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Re: Participate in ESPP?

Post by Starfish » Sun Jun 28, 2020 8:24 pm

sailaway wrote:
Sun Jun 28, 2020 10:22 am
evancox10 wrote:
Sun Jun 28, 2020 10:18 am
100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.
Not for OP, they have a one year hold period.
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.

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1789
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Re: Participate in ESPP?

Post by 1789 » Sun Jun 28, 2020 8:50 pm

No don’t do it. You are not able to sell it immediately so that is not good. Instead, any other way you can invest this money? For example, it’s not your question but does your company offers after tax 401k option with in plan rollovers/distributions? Look for this option and if it is available prioritise it over ESPP, as you probably don’t want to HOLD a company stock you are working for.
Last edited by 1789 on Sun Jun 28, 2020 8:51 pm, edited 1 time in total.
"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)

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1789
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Re: Participate in ESPP?

Post by 1789 » Sun Jun 28, 2020 8:51 pm

Starfish wrote:
Sun Jun 28, 2020 8:24 pm
sailaway wrote:
Sun Jun 28, 2020 10:22 am
evancox10 wrote:
Sun Jun 28, 2020 10:18 am
100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.
Not for OP, they have a one year hold period.
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.
No I sell immediately and I am sure most do same.
"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)

Starfish
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Re: Participate in ESPP?

Post by Starfish » Sun Jun 28, 2020 8:56 pm

1789 wrote:
Sun Jun 28, 2020 8:51 pm
Starfish wrote:
Sun Jun 28, 2020 8:24 pm
sailaway wrote:
Sun Jun 28, 2020 10:22 am
evancox10 wrote:
Sun Jun 28, 2020 10:18 am
100% worth it. Do the maximum amount and then sell immediately after the purchase. You can move the funds into your regular investment portfolio. Very little risk in this case, just the time between when the plan “purchases” the stocks and when you are able to sell them. This is typically same day or next business day.
Not for OP, they have a one year hold period.
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.
No I sell immediately and I am sure most do same.
Once you fill the pipleine is exactly the same.
Of course you can argue you are more exposed to risk with the quantity in the pipeline. But the absolute amounts in ESPP are small and irrelevant. Even if you are young and ESPP over a year becomes a large percentage of your total assets, you still have the human capital.
On the other hand marginal tax rate on ESPP in short term is really punishing.
Finally it depends on the company. In some companies I would be easier convinced to hod ESPP than in others.

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1789
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Re: Participate in ESPP?

Post by 1789 » Sun Jun 28, 2020 8:58 pm

Let me help a bit more. Let’s assume about a year ago you were working for Boeing and you purchased ESPP at 300$. You have your sell period coming. What are you going to do? Will you hold it now or sell at 160$? Remember there is very high chance you will lose your job in a month at this company.
"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)

Starfish
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Re: Participate in ESPP?

Post by Starfish » Sun Jun 28, 2020 9:04 pm

1789 wrote:
Sun Jun 28, 2020 8:58 pm
Let me help a bit more. Let’s assume about a year ago you were working for Boeing and you purchased ESPP at 300$. You have your sell period coming. What are you going to do? Will you hold it now or sell at 160$? Remember there is very high chance you will lose your job in a month at this company.
Or you could work for Amazon or Apple. Cherry picking examples is irrelevant. It's just a matter of how acceptable the risk is, downside vs upside. Can you afford the risk if the company goes under? If no, don't do it. How much do you gain if everything goes well? if not much, don't do it.

ridebikeseveryday
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Re: Participate in ESPP?

Post by ridebikeseveryday » Sun Jun 28, 2020 9:05 pm

Starfish wrote:
Sun Jun 28, 2020 8:56 pm
1789 wrote:
Sun Jun 28, 2020 8:51 pm
Starfish wrote:
Sun Jun 28, 2020 8:24 pm
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.
No I sell immediately and I am sure most do same.
Once you fill the pipleine is exactly the same.
Of course you can argue you are more exposed to risk with the quantity in the pipeline. But the absolute amounts in ESPP are small and irrelevant. Even if you are young and ESPP over a year becomes a large percentage of your total assets, you still have the human capital.
On the other hand marginal tax rate on ESPP in short term is really punishing.
Finally it depends on the company. In some companies I would be easier convinced to hod ESPP than in others.
No, it is not the same; you hold a non-trivial amount of $$ (that you have already paid income tax on) in your company's stock. I agree with the poster you replied to: "everybody" does not hold for one year.

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1789
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Re: Participate in ESPP?

Post by 1789 » Sun Jun 28, 2020 9:07 pm

Starfish wrote:
Sun Jun 28, 2020 9:04 pm
1789 wrote:
Sun Jun 28, 2020 8:58 pm
Let me help a bit more. Let’s assume about a year ago you were working for Boeing and you purchased ESPP at 300$. You have your sell period coming. What are you going to do? Will you hold it now or sell at 160$? Remember there is very high chance you will lose your job in a month at this company.
Or you could work for Amazon or Apple. Cherry picking examples is irrelevant. It's just a matter of how acceptable the risk is, downside vs upside. Can you afford the risk if the company goes under? If no, don't do it. How much do you gain if everything goes well? if not much, don't do it.
Starfish,

How do you know me/my spouse not working for one of those two you mentioned? Indeed I already answered your question. I put my money where my mouth is. It is a mistake to lock money to a single company, let it be Apple or Amazon.
"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)

Starfish
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Re: Participate in ESPP?

Post by Starfish » Sun Jun 28, 2020 9:09 pm

ridebikeseveryday wrote:
Sun Jun 28, 2020 9:05 pm
Starfish wrote:
Sun Jun 28, 2020 8:56 pm
1789 wrote:
Sun Jun 28, 2020 8:51 pm
Starfish wrote:
Sun Jun 28, 2020 8:24 pm
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.
No I sell immediately and I am sure most do same.
Once you fill the pipleine is exactly the same.
Of course you can argue you are more exposed to risk with the quantity in the pipeline. But the absolute amounts in ESPP are small and irrelevant. Even if you are young and ESPP over a year becomes a large percentage of your total assets, you still have the human capital.
On the other hand marginal tax rate on ESPP in short term is really punishing.
Finally it depends on the company. In some companies I would be easier convinced to hod ESPP than in others.
No, it is not the same; you hold a non-trivial amount of $$ (that you have already paid income tax on) in your company's stock. I agree with the poster you replied to: "everybody" does not hold for one year.


You hold 15% of you salary (usually) or less if you hit the limit.
If it is trivial or non trivial is an individual calculation, not a general rule.

Starfish
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Re: Participate in ESPP?

Post by Starfish » Sun Jun 28, 2020 9:15 pm

1789 wrote:
Sun Jun 28, 2020 9:07 pm
Starfish wrote:
Sun Jun 28, 2020 9:04 pm
1789 wrote:
Sun Jun 28, 2020 8:58 pm
Let me help a bit more. Let’s assume about a year ago you were working for Boeing and you purchased ESPP at 300$. You have your sell period coming. What are you going to do? Will you hold it now or sell at 160$? Remember there is very high chance you will lose your job in a month at this company.
Or you could work for Amazon or Apple. Cherry picking examples is irrelevant. It's just a matter of how acceptable the risk is, downside vs upside. Can you afford the risk if the company goes under? If no, don't do it. How much do you gain if everything goes well? if not much, don't do it.
Starfish,

How do you know me/my spouse not working for one of those two you mentioned? Indeed I already answered your question. I put my money where my mouth is. It is a mistake to lock money to a single company, let it be Apple or Amazon.
I also put money where my mouth is, and historically I did better than the other option, with the attached risk.
I am not sure what do you mean by locking money in a single company. Do you mean ALL your money? I definitely agree with you. Or generally lock some money in a single company? How else do you buy stock?

kxl19
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Re: Participate in ESPP?

Post by kxl19 » Sun Jun 28, 2020 9:19 pm

ridebikeseveryday wrote:
Sun Jun 28, 2020 9:05 pm
Starfish wrote:
Sun Jun 28, 2020 8:56 pm
1789 wrote:
Sun Jun 28, 2020 8:51 pm
Starfish wrote:
Sun Jun 28, 2020 8:24 pm
Everybody keeps ESPP for 1 years at least, for tax purposes.
You make a pipeline.
No I sell immediately and I am sure most do same.
Once you fill the pipleine is exactly the same.
Of course you can argue you are more exposed to risk with the quantity in the pipeline. But the absolute amounts in ESPP are small and irrelevant. Even if you are young and ESPP over a year becomes a large percentage of your total assets, you still have the human capital.
On the other hand marginal tax rate on ESPP in short term is really punishing.
Finally it depends on the company. In some companies I would be easier convinced to hod ESPP than in others.
No, it is not the same; you hold a non-trivial amount of $$ (that you have already paid income tax on) in your company's stock. I agree with the poster you replied to: "everybody" does not hold for one year.
The decision to hold for a year really depends on your total assets, your stock as a % of total assets and tax rate. If your ESPP is a small fraction of total assets and your tax rate is in the top brackets (and high income tax state), it could sometimes make sense to hold for a year to convert gains from being taxed as income (potentially 40% at highest brackets) to 20% LTCG.

poker27
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Re: Participate in ESPP?

Post by poker27 » Sun Jun 28, 2020 9:24 pm

I would invest, may not max out, but would certainly put $ in. 25% discount is a lot, even with the holding period, I would feel good about putting some $ in it.

I also work for a s&p 500 company, and get a whopping 5% discount. I still invest a few bucks, albeit with no holding period.

inbox788
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Re: Participate in ESPP?

Post by inbox788 » Sun Jun 28, 2020 10:49 pm

brademac wrote:
Sun Jun 28, 2020 10:55 am
The 2nd half of year is 6 month look back so get lower price of July 1 or Dec 31

I am tempted to hold two years because the difference in tax rate is 25% ordinary tax rate versus 15% capital gains so I can capture an extra 10% by holding another 12 months.

So holding 24 months I would potentially gain the 15% stock price discount and an additional 10% in federal income tax savings on any gain. Of course the big risk is the stock would dip 15% or more from my strike prices which would put mean a loss if sold then.
I would do it and invest the max you can. Is that $25k before or after the discount (more = better)? You'll might only need $21.25k year one, and another $21.25k year two if you decide to hold that long, but after that, you'll be raking in the benefits rolling over past years to buy current year (sell $25k more or less, buy cost $21.25; account for taxes due or make up losses). Only decision is whether to sell after year 1 or 2. Be sure you're clear about the details, because I don't think it's what you're saying. https://support.carta.com/s/article/qua ... fied-espps Holding a 2nd year may not be worth it. If the stock prices doesn't change at all, what is the difference in tax you pay by holding it an extra year? Figure out exact amounts for say $10000 investment. Compare to stock going up exactly 10% one day after you buy and no change after that to see tax effects after 1 vs 2 years (i.e. $1000 gain).
- if sell between years 1 and 2 the gain is taxed at ordinary tax rate
- if sell after two years I pay capital gains tax rate on gain
Is it a qualified plan?
https://www.fidelity.com/products/stock ... hase.shtml

If the stock dips 15% or more, aren't you buying at another 15% discount to that? The longer you intend on being at the company the better the chance things average out. There is increased risk from single stock, but IMO, it's not huge.

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8foot7
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Re: Participate in ESPP?

Post by 8foot7 » Mon Jun 29, 2020 11:15 am

I would do this up to the 25k max. I would only hold for a year, though. That's a substantial discount and will represent an increasingly small part of your overall portfolio assuming you continue to invest elsewhere.

the way
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Re: Participate in ESPP?

Post by the way » Mon Jun 29, 2020 12:38 pm

If this is a standard ESPP, then your holding period is 18 months for a qualifying sale, not 2 years. Ie the qualifying period is 2 years from grant and 1 year from purchase, making it 18 months from purchase in your case.

Note if you sell between 12-18 months after purchase, you'll still get LTCG on the increase from the purchase date price (FMV), but it'll be a disqualifying sale (so the rest of the gain is all wage income). If you sell after 18 months, then you have a qualifying sale and 15% of the grant date price is wage income, the rest is all LTCG.

The 6 month lookback is nice because if your stock rises during that time, then you'll have an instant profit of much >15% when you purchase. This would serve as some buffer while you hold, but holding stock of course has risks. Many plans also let you pull out and get your money back before the purchase date, eg. if the stock has been dropping during the 6 months and you don't want to risk a purchase anymore.

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Re: Participate in ESPP?

Post by Jack FFR1846 » Mon Jun 29, 2020 12:57 pm

Holding period of one year? Sorry, non starter. I would pass.
Bogle: Smart Beta is stupid

inbox788
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Re: Participate in ESPP?

Post by inbox788 » Mon Jun 29, 2020 1:35 pm

the way wrote:
Mon Jun 29, 2020 12:38 pm
If this is a standard ESPP, then your holding period is 18 months for a qualifying sale, not 2 years. Ie the qualifying period is 2 years from grant and 1 year from purchase, making it 18 months from purchase in your case.

Note if you sell between 12-18 months after purchase, you'll still get LTCG on the increase from the purchase date price (FMV), but it'll be a disqualifying sale (so the rest of the gain is all wage income). If you sell after 18 months, then you have a qualifying sale and 15% of the grant date price is wage income, the rest is all LTCG.

The 6 month lookback is nice because if your stock rises during that time, then you'll have an instant profit of much >15% when you purchase. This would serve as some buffer while you hold, but holding stock of course has risks. Many plans also let you pull out and get your money back before the purchase date, eg. if the stock has been dropping during the 6 months and you don't want to risk a purchase anymore.
The benefit of qualifying vs non-qualifying isn't clear to me, but it didn't seem like much. It seems it's only difference was between grant date vs purchase date, which was confusing to me, because I always considered them essentially the same. If I understand this ESPP correctly, the grant date is 6 months before the purchase date, so the benefit of holding an extra year is getting LTCG treatement for the gain during these 6 months. If the gain is small, there isn't really any other benefit to holding that extra year, which is often the case. If so, generally sell it after 1 year for the 15% discount and lookback benefit, and if the stock rises dramatically, then consider holding it an extra year for the additional tax benefit, but it would have to go up 25% (50% annualized, which is rare event) for me to consider it. Wouldn't worry much either way whether the sale disqualifies or is qualifying unless there was a significant price change. Nice to be able to look backwards and make adjustments after some of the facts are known.

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CyclingDuo
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Re: Participate in ESPP?

Post by CyclingDuo » Mon Jun 29, 2020 2:56 pm

brademac wrote:
Sun Jun 28, 2020 10:09 am
I work for S&P 500 company that offers an employee stock purchase plan and am trying to decide whether or not to participate. I know there is incredible risk in investing in an individual stock but was curious if the perks from the plan might mitigate some of the risks and if I should participate. Below are specifics of plan.

- buy stock at 15% discount
- purchase happens over two periods based on what I have withdrawn from paycheck Jan through June and July through December
- for first period the stock purchases is made in July and strike price is lower of price as of Jan 1 or June 30 (for example if price $20 on Jan 1 and $25 on June 30 I get stock for $20 or vice versa)
-must hold shares one year before can sell
- if sell between years 1 and 2 the gain is taxed at ordinary tax rate
- if sell after two years I pay capital gains tax rate on gain
- can put in maximum of $25,000 a year or as little as $100 a year

My entire portfolio now is in broad based index funds and I am 60% stocks 40% bonds

I had read somewhere not have more than 5% of portfolio in individual stocks so one thing I am considering is to take advantage but don’t let this stock reach more than 5% of portfolio

Just was curious of what others do for their ESPP or if am better off turning this down and not participating?
I participate in mine. Can do up to 10% of salary, but also get the 15% discount for the 6 month period off the lowest price (beginning or end price, whichever is lower). It's a nice little salary boost on that portion of the pay and represents such a small portion of our overall portfolio - it's not such a high risk. Spouse and I sock so much away in our 401k and 403b/457b plans (use the over age 50 catch ups) that AGI is low enough to absorb the capital gains (and dividends) for little to no hassle.

You don't have to post up what percentage of your portfolio in the ESPP purchases per 6 months or year would represent, but that's a good way to calculate and understand your risk. Keep in mind the TSM or S&P 500 Index fund also holds a certain percentage of your company's stock inside of it. Factor in that as well so you know what percentage of your overall portfolio is invested in Company XYZ.

Example of the top 10 holdings in Vanguards S&P 500 Index and the percentage weighting (the rest of the weightings are available at Vanguard's website):

Microsoft Corp. 5.50%
Apple Inc. 5.20%
Amazon.com Inc. 4.00%
Alphabet Inc. 3.40%
Facebook Inc. 2.10%
Johnson & Johnson 1.50%
Berkshire Hathaway Inc. 1.40%
Visa Inc. 1.30%
Procter & Gamble Co. 1.10%
UnitedHealth Group Inc. 1.10%

Also factor in your RSU's to get the clearest picture of what percentage you have invested in your company stock. Our IPS states what percentage limit we can hold in a single stock, and we trim if that percentage is breached.

Once you do all of that, you can weigh the risk reward scenario for holding stock in the company that also pays you so you are clear what percentage of your investments are at risk and whether or not the ESPP makes sense for you or not. For the one I participate in, it makes perfect sense and I don't sweat it.

CyclingDuo
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Beehave
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Joined: Mon Jun 19, 2017 12:46 pm

Re: Participate in ESPP?

Post by Beehave » Mon Jun 29, 2020 3:11 pm

In general - - do it!

The discount is compelling. You work for the company and should have a general idea (but not insider info) as to whether it is getting into some big problem, at which time dump any large holdings, but keep buying at discount, possibly reduced amounts.

Generally, I'd strongly suggest holding if you can until you get favorable cap gains treatment. Then try to use this for vehicle, education, and similar large and significant expenses that periodically arise. That's what I did. I still hold some, but not very much after many years of work and now retirement -- I used the other parts as I suggested and am very happy with the process and results. The remainder stays as a souvenir or last ditch emergency fund, and otherwise will go with step up in valuation as inheritance.

I hope you have a long successful career and get to buy vehicles, pay for (if any) childrens' education, pay off mortgage, etc.!

Best wishes.

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