Planning your exit strategy may be one of the best things that you can do.
Now, if you are like me, you may not have much of an exit strategy on some investments because you may plan on holding them for a lifetime.
Recently, a question started waying heavy on me because I am enrolled in my company’s employee stock purchasing plan and I didn’t know the answer to a very important question.
That question was what happens to the stock in my employee stock purchasing plan if I decide to quit.
So I set out on a quest to find out the answers to some of my questions.
Let’s first address the issue of the money that has been set aside but hasn’t been used to purchase any shares yet. If you are in the cycle known as the offering period most of the time that money is refunded to the individual because you haven’t yet reached the purchase date. If this is the case it is like you have an extra paycheck headed your way because it is money that you weren’t technically accounting for.
But what happens to the stock that is held in the share purchase plan?
That is simple, you are faced with two options. Because the espp plan is for active employees, you will no longer be able to retain the stock in that particular account.
So you can either choose to sell all of the espp stock and deal with the espp tax that is involved with it. Or you can choose to transfer all of your holdings over into another account.
Unfortunately, a Roth IRA or a Traditional IRA is not an option because ESPP shares are not qualified for IRA rollovers.
So this will force you to transfer them into an individual investing account that you own. Which isn’t a big deal to me. I quickly noticed that when my espp stock paid dividends that they were transferred into an individual account that the broker had opened for me. So if you transfer your espp stock into that account it will just add that more to be able to compound your growth.
While an employee stock purchase plan is a great way to buy stock, I would advise the investor to be very aware of the holding periods for their espp stocks that have been purchased. If you have not met the holding periods on some of the espp stocks then your gains will be taxed as ordinary income instead of as long term capital gains.
While this may not amount to much if you only purchase a few shares but if you are holding thousands of shares in your espp the tax difference can really add up.
While it is a great opportunity to invest in an employee stock purchase plan, I can remember just a few years back when I asked the question Should I participate in an ESPP.
As it turned out my answer was yes! I have sold some of the espp stock along the way but I do always like to be aware of what the options are for an exit strategy.
From my current perspective, I would probably end up transferring my shares to the individual account that my dividends go into just so I can take advantage of the compounding factor!
If you are looking to possibly sell you espp stock it would be wise to check out a ESPP Calculator and figure out what kind of return that you can expect.
Do you currently participate in an employee stock purchase program? Because I would love to love to hear about your experiences down in the comments!!!
As always I look forward to reading all of your comments and questions, until then….. happy investing!
-Jason from MoreDividends.com
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