Should I participate in an ESPP?
This is the question that I have been pondering on lately. Should I participate in my company’s ESPP? What is an ESPP you might ask? It is short for Employee Stock Purchase Plan. I have read a lot of people’s opinion on this subject and the opinions cover the full spectrum between yes and no.
One of the biggest points that stood out to me was against participating in an Employee Stock Purchase Plan because you already count on the company for one source of your income. So why would you want to count on it for another source of your income? Well I am going to lay out my plan in regards to this matter.
I have decided that I am going to participate in my companies Employee Stock Purchase Plan because it is a great company. Now I am currently collecting a check for earned income from them but why shouldn’t I earn more from them while I can? I mean I already maximize the income from them in the fact that I contribute 5% of my income to my 401k and they do a 100% match on that, I also contribute money to my HSA which they also contribute to on an annual basis, so why shouldn’t I also buy stock in the company?
My plan starting out will be to deduct $25-$50 per week from my paycheck to apply toward the Employee Stock purchase. Each quarter that will allow me $300-$600 to purchase company stock. As part of the plan I will be able to obtain these shares at a 15% discount of the daily average at the end of the quarter. Now during the accumulation stage there are no fees included but once I go to sell my shares the broker does require like a $15 trade commission plus a small amount per share. Now while I’m not a huge fan of paying these fees, I do believe that the 15% discount on shares of a great company will make up the difference.
Even though I am electing to participate in this plan I am also well aware of the fact that I don’t want it to allow my portfolio to get too overweighted in shares of this particular company. Since the money will be deducted from my paycheck before I ever see it, I will still continue to save money and buy stock in my personal account so that it helps maintain the balance of the portfolio.
This will allow me to save some money while investing in a good company and to continue on my journey of accumulating wealth. As always I welcome any comments. Thanks and have a great day!
I’m a big fan of ESPP plans and especially ones that are generous and give the maximum allowed 15% discount. That 15% discount is hard to beat. Taxes are a bit more of a mess but it’s not too difficult, really it’s just more information to keep track off. You hit the nail on the head though that the big thing is to make sure you don’t get over exposed to your employer since they’re your income source and you don’t want them to be a huge part of your wealth too. So you need to have a plan in place to divest of your shares. My plan with my ESPP shares was to hold for a year to reach the qualified disposition status and get taxed less on the gains. It’s a shame the commission is so high which is really surprising considering that’s at least 50% higher than most of the brokerage options available here in the US.
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Thanks for the comment JC. I hope things have been going well for you. So basically your plan is to just use the 15% discount and then sell for the long term gains. Thats smart. Truthfully I will probably end up doing something very similar. I’m like you and just couldn’t pass up the 15% deal. Yeah the broker is E*Trade. I have never dealt with them before but I see that they are on the high side with normal trade fees of $9.99 per trade. I am curious to know how the taxes are a bit more of a mess by doing this. Can you shed some light on this for me please?
There’s essentially 3 different scenarios your shares can fall into when you sell with each one having the taxes treated a bit differently. Each scenario is based off the timing of different things.
Disqualifying w/ Short Term Capital Gains
Disqualifying w/ Long Term Capital Gains
Qualifying
In order to be a qualifying disposition you must satisfy these 2 requirements otherwise it’s a disqualifying disposition.
1. Sale date is at least 1 year after the purchase date.
2. Sale date is at least 2 years after the grant date.
So if we say the offering period was 1/1/16 to 6/30/16 then the earliest you could sell the shares in the best tax treatment would be the latest of
1. 6/30/17 or
2. 1/1/18
The taxation is different depending on if it’s a disqualifying or qualifying disposition. It essentially changes how your discount gets treated for taxes. If it’s a disqualifying disposition then the discount is calculated in one way. If it’s qualifying then there’s two calculations and the income portion is the lesser of the two.
This post covers the taxes in more detail and there should be a link to a spreadsheet that can calculate it as well.
http://www.passive-income-pursuit.com/2013/07/espp-taxation.html
I try to at least hold the shares until it’s a disqualifying disposition with long term capital gains in order to reduce taxes.
Hope that helps.
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Wow, thank you for the clarification. That is a very nice article that you wrote that explains the taxation situation very well. Thank you for taking the time to share it with me. I was not aware that the taxes on an ESPP got so complicated. The taxation on my ESPP will be strongly considered before I decide to sell but I have some time before I have to plan that exit strategy.