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Best ways to take advantage of an ESPP

1,633 Views | 10 Replies | Last: 3 yr ago by one MEEN Ag
500,000ags
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AG
I'm new to an ESPP. Seems like a solid deal, but I'm completely unfamiliar with the best ways to take advantage of them as far as taxes, maximizing compensation. My new firm has no 401k match, so I'm considering maximizing the ESPP instead of the 401k.
Diggity
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AG
Max it out and sell it as soon as it vests
I bleed maroon
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AG
Diggity said:

Max it out and sell it as soon as it vests
Seconded. Then with the proceeds, fund a Roth IRA to the max, then a regular IRA (or 529, if appropriate for your situation).
Casey TableTennis
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AG
Is it a qualified or non-qualified ESPP? Before taking anyone's advice on this topic, you need to know/share this. Qualified is most common.
500,000ags
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AG
Documentation states it is "generally intended to qualify under S423 of the Internal Revenue Code."

Is that what qualified means?


$30,000 Millionaire
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AG
I max the ESPP - $25K annually. I hold the shares though until they become long term capital gains.
Casey TableTennis
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AG
Yes, that is a qualified plan. Next up, what is the discount and the formula for how price is determined?

If you are bullish on the company, and the contribution isn't too much of your wealth, it may make sense to hang on for LTCG treatment.

If the discount is relatively high and/or you aren't very bullish on the stock, and/or it is a somewhat high portion of your wealth, and/or you are in lower tax brackets, selling immediately as other suggested is worth considering, despite a likely less favorable tax treatment.

500,000ags
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AG
It is 15% off the lowest price of either the first day or last day of the purchase period. I can contribute up to 15% of my salary.

I am bullish on the company.

Casey TableTennis
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AG
With the facts presented, my neutral advise is typically selling half immediately, holding the other half for LTCG treatment.

Selling all right away isn't bad advice and it removes some bad tail risk events. However, averages and taxes should work in your favor if you hold a bit longer, consistently.
gggmann
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AG
$30,000 Millionaire said:

I max the ESPP - $25K annually. I hold the shares though until they become long term capital gains.


Ditto
CorpusAg09
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Does anyone know if the company purchases shares in the open market on the employee's behalf, OR if the shares are newly issued/minted by the employer?

Same question on RSUs or ghost shares.
one MEEN Ag
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AG
An ESPP is basically an option given to an employee. Its nice when stock prices rise over the vesting period (say six months), and its also nice when stock prices fall, that you're still locked into 15% gains.

One big fundamental issue when holding ESPP stocks long term is that your wealth becomes extremely concentrated in one company. Losing your job and needing cash usually coincide with poor stock price performance. So right when you need your cash the most, its performing its worst. Now if you think your company stock price is basically a rocketship, and not the chinese kind that just crashed, it might be worthwhile to buy and hold.

Its most conservative to take the house money, cash it immediately and then dump it into whatever investment vehicle you want.

Also, I've never gotten an ESPP tax statement that had the correct information on it. The IRS reporting rules on ESPP's are terrible.
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