{"componentChunkName":"component---src-templates-blog-post-js","path":"/2018-10-25_A-non-boring-advice-about-your-employee-stock-purchase-plan-3aa34f187cfb/","webpackCompilationHash":"c86fe1faba64503a70e5","result":{"data":{"site":{"siteMetadata":{"title":"Effai.me","author":"Leon Tager"}},"markdownRemark":{"id":"1d981808-049a-5639-b8ce-fcbbf089ac43","excerpt":"My employer offers many generous perks. One of them is called an ESPP or employee stock purchase plan. It is a scheme by which the employer incentivizes you to…","html":"

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My employer offers many generous perks. One of them is called an ESPP or employee stock purchase plan. It is a scheme by which the employer incentivizes you to purchase its stock using a portion of your salary. The incentive is usually some sort of a discount or top up.

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One question that frequently comes up is what to do once the shares are vested into your account.

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You can go down one of two roads. First, you can sell all the shares immediately and purchase something else. Spoiler alert, I’m in this camp.

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Second, you can keep the shares.

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The reasoning for keeping the shares is actually quite solid. If you’ve made money on the stock market and you’ve held the shares for less than a year, you are subject to good old fashion income tax. If, on the other hand, you held it for more than a year, you are subject to shiny new capital gains tax; and you guessed it, the shiny new capital gains taxes are usually lower.

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This is exactly the argument I was having with my friend Aaron at work yesterday. Our shares from ESPP are set to vest in November and he was inquiring about my plans for the money. I told him I was going to sell everything and purchase a boring and dull index fund. He told me I was crazy for throwing my money away.

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This discussion went on for longer then I am ready to admit but I thought I can summarize the lessons here. Also, since this is my blog, my opinion is right.

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Let’s start with an example: Since Aaron is a well paid executive of a small company, his household income is $300,000. That puts Aaron at the 24% tax bracket. Aaron’s company offers a 15% discount on the share price. Finally, Aaron commits $20,000 to the ESPP plan.

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First, it’s important to note that only your gains are taxed — not your entire investment. In this case, if you were to sell the shares immediately after vesting, your discount would be your only gain. In other words, 15% of $20,000 or $3000.

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Second, uncle Sam would come calling for his portion of those $3000 at the end of the year. His share would be 24% of $3000 or $720 — that’s what you owe the government.

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Third, if you were to keep the shares for a year, you are still not scot-free. The capital gains tax is still 15% of $3000 or $450.

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By holding on to the shares for an entire year, you’ve saved yourself less than $270 ($720 minus $450) or roughly 1% of the entire sum. To put that into perspective, my company’s stock went down 4% yesterday (and up 17% today).

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I don’t know about you but that does not seem like a good deal to me. Putting money in a single company is notoriously volatile. Doing it with the company you work for is a potential disaster.

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Of course, this is a somewhat contrived example. There are many other things to take into account

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  1. If you’re filing individually and earning above $200,000, the gap between the income tax and capital gains tax is 20% instead of 9%. If you’re earning $38,000, the gap is actually negative (the income tax is lower). You can find the latest rates here.
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  2. If you contribute significantly more than $20,000 into the ESPP program your tax loss might be greater. Of course, that also means you must keep more money in a single stock.
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  3. If the incentive from your employer is larger, your tax could be greater. For example, when purchasing ESPP shares, my employer uses either the price today or the one from 6 months ago — whichever one is lower. As of this writing, the stock is up 10% from 6 months ago. My taxable gain is now higher.
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It is worth evaluating your exact situation to determine how much money you are actually saving.

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Also, I don’t want to imply that saving a couple of hundred bucks isn’t worth the time — it certainly is. I will gladly give my insurance company a call if it saves me money. That lizard has been good to me.

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However, these savings don’t come for free. You are leaving a significant amount of money in a stock that you may or may not want to own.

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Therefore; my advice to you is this. Sell the damn shares. Put them in betterment. You can thank me later.

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