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I will be eligible for Employee Stock Purchase Plan ESPP) at my employer in the next month.
Here is the way it works. They start a so called purchase cycle on June 1st and it lasts through December 1st. You select your contribution, it has to be a percentage of your gross salary, although contributions are made from your net earnings, of course. The percentage can be anywhere from 1 to 15%. This amount then gets deducted and put aside. No interest accumulates on it. At the end of the purchase cycle the cost of the stock for the ESPP is determined using the SMALLER of the cost on the first day of the purchase cycle and the last day. Then this gets discounted at 15% and your accumulated money are used to buy shares of the company. You can then sell stock right away or keep it for as long as you want.
Seems like a great way to make some money, because 15% discount is always there, even if the stock is cheaper at the end of the cycle.
One problem I have is that I don't have that much money to put aside. I would have to cut one of my regular savings channels. Contributing less to 401k seems dumb: we will be in 28% tax bracket this year, so not contributing full 18K for me will mean I will get $720 of every 1k I don't contribute. My husband is self employed and we plan to stash full 20% of his net earnings into his SEP IRA. Also seems like a better saving route than ESPP.
One thing I came up with was cutting our 529 contributions. Seems questionable, but if I can get a 15% return on the money, and put them right into 529 after I sell the stock, it looks better than state tax rate I save on every dollar I put there.
What am I missing here?
I would do that with every available cent I had. Seriously. Guaranteed 15% return can never be found! This is a no-brainer. Unfortunately I think the federal max is $25k for the plan you are describing, which while a nice perk, won't allow the makings of a large sum of cash from doing it.
With both the 529 and the IRA, you can contribute whenever you want during the tax year. So delay contributions to them until you get the proceeds from the sale on the stock in December. Free 15%, same or greater tax deduction.
With both the 529 and the IRA, you can contribute whenever you want during the tax year. So delay contributions to them until you get the proceeds from the sale on the stock in December. Free 15%, same or greater tax deduction.
That's a good point. I think I will start small by seeing if I can afford 3-5% into this plan without cutting my 401k contributions or maybe cutting them a smaller percentage (1-2%). Hopefully, I will be better prepared for the next cycle when I can increase my share. We are paying some debts down that, hopefully, will not be around in December.
I would do that with every available cent I had. Seriously. Guaranteed 15% return can never be found! This is a no-brainer. Unfortunately I think the federal max is $25k for the plan you are describing, which while a nice perk, won't allow the makings of a large sum of cash from doing it.
My 15% of salary is smaller than 25K, so, unfortunately, I don't have that problem
I would do that with every available cent I had. Seriously. Guaranteed 15% return can never be found! This is a no-brainer. Unfortunately I think the federal max is $25k for the plan you are describing, which while a nice perk, won't allow the makings of a large sum of cash from doing it.
It's even better: a 17.6% return! (Since you are buying at 15% discount, 1/0.85)
It's a good deal. We do it at my wife's job although have scaled back the buyin % recently in order to get her 401k to max contribution since we're in a high tax bracket. You will be taxed on the 15% discount. It'll show up on your W-2 as ordinary income but still free money. Obviously it's a stock so highly volatile so it should be a supplemental investment to your traditional retirement plan, not something you pour every cent into.
Keep in mind if you're going to sell you probably want to hold it at least a year to get long term cap gains rate, vs paying tax on the sale as ordinary income.
It's a good deal. We do it at my wife's job although have scaled back the buyin % recently in order to get her 401k to max contribution since we're in a high tax bracket. You will be taxed on the 15% discount. It'll show up on your W-2 as ordinary income but still free money. Obviously it's a stock so highly volatile so it should be a supplemental investment to your traditional retirement plan, not something you pour every cent into.
Keep in mind if you're going to sell you probably want to hold it at least a year to get long term cap gains rate, vs paying tax on the sale as ordinary income.
That's part of the problem in theory. It's not a free or risk free return if you have to have to hold it a year and if you sell right away pay short term cap gains plus income tax on the discount that 15% could be cut down considerably
That's part of the problem in theory. It's not a free or risk free return if you have to have to hold it a year and if you sell right away pay short term cap gains plus income tax on the discount that 15% could be cut down considerably
Right, that's why it should be a supplemental thing. People who go over board and put all their money into it at the expense of their 401k or IRA might regret it.
My company had a 75% match on shares purchased through the ESPP. Seemed like a no brainer.
Except there's was a requirement of holding the purchased shares for the match to vest(3 years)... and during that time, the price tanked. And yeah, the drop was bad enough that even the 75% match didn't cover it.
Make sure you're right about the ability to sell immediately.
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