Company stock purchase plan

[corn18]

My company offers a stock purchase plan where I can buy up to $21,500 of stock each year at a 5% discount. The company does an after tax payroll deduction and then holds the money until the buy period which is twice / year in June and Dec. I have not taken advantage of this yet for stupid reasons. I think it would be smart to do so.

If I contribute the max each year, that would gross 5% on $21,500 each year or $1,075. I would sell it immediately after receiving the stock. So I would have to pay the trade fee of $39 and then taxes. Seems like a smart investment and also forced savings. If I can manage to not touch the amount I put in, that would be an additional $21,250 + $1,000 a year into savings.

Any downside to doing this? Other than if the stock drops more than 5% between when they put it in my account and when I sell it. I talked to other folks that participate and they said they sell it the same day and take the 5% gain immediately. I have enough exposure to my company stock through the 401k match, so don't want any more.

Thanks,

Tom

[disneysteve]

As long as you are permitted to sell it immediately and you are religious about doing so, this is a no-brainer.

[corn18]

This will fund my vacation/gifts/camp annual expenses. Anything left over can go to EF. The only issue is the 6 months to get it funded before the first sale comes up.

[97guns]

company stock purchase plans are a great way to build wealth, i worked for home depot during the dot com run up. was only there 4 years and walked out with 100K in stock, parlayed it into the real estate i have now

company stock programs are great for the company too, it creates company people, people that truely care for the company and treat it as their own because they own a piece

[disneysteve]

Keep in mind that selling immediately would make it a short-term capital gain which I think is taxed at your regular income tax rate, not the 15% rate for long-term gains.

[TheKayla]

I have nothing really to add in terms of advice, but rather that I'm in the same boat, and missed the first opportunity to get involved my company's stock purchase plan right away too. I think I was afraid of debt repayment and having any funds go to something separately, but it will be a faster way to build wealth than even saving on interest, so I should start early, even if its only a very small contribution. I think were on the same page, I'd love to hear other advice as well. (Especially in the realm of debt payoff being #1 priority still)

[TheKayla]

This will fund my vacation/gifts/camp annual expenses. Anything left over can go to EF. The only issue is the 6 months to get it funded before the first sale comes up.

Keep in mind taxes if you're going this approach -- if you sell stock under a year, its a significantly higher tax rate to get it out than otherwise. The best approach overall is to buy stock and keep it for longer than a year minimum. You'll also have savings then that will give you the highest return on investment, so it makes sense to leave in as long as possible.

^ guess I did have a bit of advice to give

[disneysteve]

The best approach overall is to buy stock and keep it for longer than a year minimum. You'll also have savings then that will give you the highest return on investment, so it makes sense to leave in as long as possible.

I agree that holding it for a year results in lower taxes.

I don't agree that holding it "as long as possible" is the way to go. You want to make sure that company stock doesn't make up too much of your portfolio. 5-10% is the standard advice. Since OP is already getting company stock in the 401k you need to pay attention to this.

[corn18]

I am using this to fund my non-monthly expenses savings account. So instead of just putting say $1,500 / month in a savings account each month, I'm putting $1,500 / month into the stock purchase plan. Every 6 months, they buy the stock for me, I sell it + 5% and put that into the savings account. 2 great things for me:

1. It's a payroll deduction, so I never get to touch the money (good for me as I am an idiot). This is huge for me.
2. I get to make 5% on my "savings"

I decided to put more than I need to into the account. The intent is to let that build up and then do something useful with it later like an emergency fund or college savings. This goes hand in hand with #1. Take it before I can touch it. Put it somewhere I can only access twice a year. That's the plan anyway.

Only issue has been it takes 6 months to start getting money out because they only buy stock every 6 months. Luckily, the first 6 months of the year are not big expenses, so I can cover the float.

As for when to sell, it's right away in this case. I am exposed enough to my company stock in my 401k. I like my company, and it does ok stock price wise, but I don't need anymore downside risk to avoid the short term capital gains tax. This really works for me because it is a payroll deduction. The 5% is a bonus.

[disneysteve]

(good for me as I am an idiot)

I don't think anyone earning 300K likely qualifies as an idiot.

[corn18]

I don't think anyone earning 300K likely qualifies as an idiot.

Thanks. You guys have been very patient with me.

As a side note, running the data, for every dollar I want to save I need to make $1.54 more in salary. That sucks, right? But for every dollar I cut in spending, I get to save a dollar. The Millionaire Next Door taught me that. Changes my whole approach to income vs. wealth. Much higher return on investment to not buy that video game than to get an ever higher paying job. Very liberating.

Tom

[fruitbowlk]

I just enrolled in a company stock purchase plan myself. This would be the first for me so it will be a lesson learned. I will see how it goes. I think I will keep it and see how the investment goes. But this thread has been very insightful to me.

Thanks.

[LivingAlmostLarge]

So ESPP is a good savings plan but it's not cut and dry. If you sell at 6 months the 5% discount is taxed as income from the company. The gains above that is taxed at short term capital gains, your income tax. But it's still a decent deal.

However to change ESPP into a long term capital gains it it NOT 1 year. It depends on the by laws of your company. You have to read the rules and determine how to manage it. For my DH we have to hold it 2 years after the July 1st period or until the next july 1st period locking period. It's very complicated.

We personally had to hold it 2 years and now have a nice amount that comes due every 3 months that we can cash out but we had to wait a long time for long term capital gains to hit. Anyway though most of DH's coworkers cash it out and take the 15% discount which works out to about 10% after taxes.

It's a sweet deal. Enforced savings plan for us as well.

By the way what do you mean you are exposed in your 401k to company stock? I don't like the sound of that. What is going on with that? How much? Why? Can you sell it? I don't like that idea. Is that how the match is given in your 401k?

[disneysteve]

for every dollar I want to save I need to make $1.54 more in salary. That sucks, right? But for every dollar I cut in spending, I get to save a dollar.

That's a powerful lesson. Not spending a dollar is a lot better than earning an extra dollar.

[Goldy]

Do you have an option to buy every 6 months or are you locked in once you sign up?

We had a plan where we had payroll deductions for 2 years and after that were given the option to buy stocks at 15% less than the price from 2 years ago so you could easily see if you were going to make money or not and act accordingly. For a 5% gain I would not risk it if it were me. Its just too much risk for such a small amount of gain.