Anyone Have Experience with Employee Stock Purchasing Programs (ESPP)?

[s0me0nesmind1]

Hello ATOT -

I was wondering if anyone here has experience with an employer that offers an employee stock purchasing program (ESPP).

For once my new employer is the first I've had that offers one. In this case, they are offering 15% off the stock price as a discount and I can contribute up to 10% of my paycheck to this.

The only catch for my employer is that the stock has to be held for 3 months I believe before it can be sold.


Just doing some initial research, it sounds like it's stupid NOT to do it when don't require any holding time, since you can just sell the stock the next day for the full price and easily pocket the 15% discount. But since my employer requires it to be held for 3 months, I'm curious what others here have done.

 

[JTsyo]

My wife does it for her work. We haven't actually sold any yet and are just letting it accumulate. She only does 2% of her pay though. Usual advice is to not put too much of your saving into the company you work at since if the company does bad and you lose your job, you get hit with a double whammy. Doing it for 3 months shouldn't be that much of a risk and 15% in 3months is pretty good. If the company stock isn't volatile I would go for it.

 

[Tormac]

I once worked for a place that had a similar deal. I took advantage of it, and it worked out for me (I did get lucky though and sold the stock, along with other stock that I had to purchase a new car at the beginning of 2007.)

As long as the company's stock is not very volatile, or they don't use a broker with very high transactions fees, you are getting a built in return after 3 months.

Research the stock before you go for it, but baring high volatility or high fees it sounds like a good deal.

 

[child of wonder]

Where I work we can purchase up to $25,000 worth of stock per year (going down to $15,000 soon) and the 15% discount is either off the price today or at any 6 month look back point during the ESPP program window of 2 years.

Last month I got ~800 shares worth $22 each for $8.84.

We can't sell immediately either since our earnings call is a couple weeks after so we have to hold until after that.

If your wife's program is anything close to this and you're bullish on her employer, throw every dollar you can into the ESPP! Better still, if you're confident the stock will grow over time, hold it for one year beyond the look back period and you'll only pay LTCG tax on the profits.

 

[ultimatebob]

You work for a place that still offers a 15% discount? I thought that most places no longer offer more than 5% thanks to tax regulations.

 

[s0me0nesmind1]

You work for a place that still offers a 15% discount? I thought that most places no longer offer more than 5% thanks to tax regulations.

Yeap, new job has it with a 15% discount. Honestly if it was just 5% I wouldn't touch it. Not worth the risk and not worth the fees.

What tax regulations are you referring to? I don't have a history of ESPP prior to this job.

 

[BurnItDwn]

I get a 10% discount on stock where I work. I tend to put 10% of my gross income into it and sell some shares each year when I think the stock is at a decent price. I sell enough no max out my annual ROTH IRA contribution, and then usually some more to pay for whatever major project/expense I have ...
In recent years ... buying a furnace, putting in new concrete, stoops & sidewalks, paying off car early, paying down mortgage.

 

[Cuular]

That 90 day window has been the standard at the two places I've worked that offered it. It's not meant to be a quick flip, it's meant to be an investment. And at larger corporations it was required by the rules/laws surrounding their offering it.

 

[Red Squirrel]

My company has it, and they will contribute 1% for every 2% that you put in, up to 3%, I think... my numbers may be off. You can put up to 12% into it. The stocks have to be held for 2 years, but really it's technically 3 years, because the stocks you put at the end of the 1st year won't be 2 years old at the 2 year mark. If that makes sense. So really, you can only take out every 3 years, you CAN take out any time you want, but you lose the portion that the company contributes. The 2 year rule is new as of several years ago though, it used to be 1 year and you could take them out every year.

I put in 12% myself, and I see it as a long term savings/emergency account. If my car craps out and I need a new car, or I have a serious house related repair to do, etc I will then cash whatever I'm eligible to cash. I have about 25k in stocks so far. I did cash 5k of them not that long ago as I do have some house projects I want to do this summer. But ultimately what I want to use this money for is to eventually buy an off grid property.

But yeah it's a good deal, especially if the company contributes extra stocks too. There's a small risk factor to it though if the stocks tank but if you're confident your company is doing ok then you're probably fine. Just don't bank on it, like don't use that for your life savings, use it more for "extra" savings.

 

[herm0016]

we do. 15% discount on the lower price either last day or first day of the quarter, buys quarterly. i have done well at it. i would not hesitate even with the holding period. you can basically use it as a savings account that makes better interest, long as you account for the taxes.

 

[Brainonska511]

You work for a place that still offers a 15% discount? I thought that most places no longer offer more than 5% thanks to tax regulations.

My company is also only 5%, the purchase price is the price on the last day of the quarter, and company stock is pretty flat, so overall it's pretty crappy. I just don't bother.

 

[s0me0nesmind1]

My company is also only 5%, the purchase price is the price on the last day of the quarter, and company stock is pretty flat, so overall it's pretty crappy. I just don't bother.

Yeah I have to admit if it was 5% I wouldn't touch it. The extra 10% definitely makes the difference for me...

With the 5% - Between paying tax on the 5%, fees from the broker for withdrawing, and the general risk of the stock I would argue it's just not worth it.

 

[itaos]

We get a 10% discount and can purchase up to 15% of salary.

It takes about 7 days for the shares to get deposited after purchase and can be sold immediately (for a $35 fee). In the last 2 quarter the stock lost >10% in that week but it usually works out for a quick easy profit.

 

[repoman0]

My GF does it, I think 7% of her pay at 15% off. Her company stock is up over 200% since she started four years ago and her pay is close to 40% stock as it is ... she makes way more than me

All the stock stuff makes taxes extremely painful though and hard to figure out, and both of us regularly do way more complicated shit at work.

 

[Red Squirrel]

I always forget to account for taxes, what is the percentage that stocks are typically taxed at? I assume you get taxed less for smaller amounts as well? Like cashing 1k probably does not get taxed as bad as cashing 50k? Or is it based on your overall income? If you cash and the return % is less than the tax % then you lose money.

I don't think my company offers any kind of "discount" but guess since they contribute too it sorta comes up the same I guess.

 

[rcpratt]

I always forget to account for taxes, what is the percentage that stocks are typically taxed at? I assume you get taxed less for smaller amounts as well? Like cashing 1k probably does not get taxed as bad as cashing 50k? Or is it based on your overall income? If you cash and the return % is less than the tax % then you lose money.

I don't think my company offers any kind of "discount" but guess since they contribute too it sorta comes up the same I guess.

In the US it's your usual marginal tax rate unless you hold for at least a year, in which case it's at the capital gains rate (15% for most people). Only your profits are taxed, so it's impossible for your return to be less than the taxable amount.

This ESPP sounds like a stupidly good deal and the OP should contribute as much as possible. Automatic 15% return.

 

[s0me0nesmind1]

In the US it's your usual marginal tax rate unless you hold for at least a year, in which case it's at the capital gains rate (15% for most people). Only your profits are taxed, so it's impossible for your return to be less than the taxable amount.

This ESPP sounds like a stupidly good deal and the OP should contribute as much as possible. Automatic 15% return.

I wouldn't call it "stupidly good deal", nor would I call it an automatic 15% return.

Based on my understanding I will have the following:
1) I will have to pay the 15% discount that my employer gives me as if it is additional income. So, basically will have to pay at least 22% in tax.
2) I will have to pay fees anytime I want to sell - I think I read that the minimum fee to sell is $35... So... obviously, I can't be doing that every 3 months or anything.
3) I run the (obvious) risks of the company stock doing poorly
4) If there is a gain, I will need to pay capital gains tax on it.

Lot of factors, and while I agree overall it sounds like a net gain (particularly because I find my company will probably be a fairly stable stock), the 4 factors I listed above definitely eat-into that "automatic 15% return"

But yeah, because I have plenty of income I'll likely max it out with the maximum allowed 10% contribution.

 

[rcpratt]

Well, call it what you want. Of course it's subject to some risk like any equity, but the only three month holding period makes that risk pretty minimal. Yes, the return would be less than 15% after taxes and sales commissions.

 

[s0me0nesmind1]

Well, call it what you want. Of course it's subject to some risk like any equity, but the only three month holding period makes that risk pretty minimal. Yes, the return would be less than 15% after taxes and sales commissions.

Based on the $35 sale fee It doesn't sound feasible to sell every 3 months anyhow That would be $140 in fees alone.

At minimal would have to wait a year - partially to not pay as much in fees and partially to have long term capital gains.

Ideally maybe I'll get comfortable keeping all of it long term. We will see.

 

[itaos]

Based on the $35 sale fee It doesn't sound feasible to sell every 3 months anyhow That would be $140 in fees alone.

At minimal would have to wait a year - partially to not pay as much in fees and partially to have long term capital gains.

Ideally maybe I'll get comfortable keeping all of it long term. We will see.

Even after paying the income tax, $140 in annual sales fees and capital gains (if things go well) I get a 7% return for minimal work. Selling once per year vs quarterly would increase my return ~ 0.5% just to give you an example.

 

[Red Squirrel]

What is considered when they calculate capital gain? Like how is that calculated, does it go by tax years? So I pay tax on whatever I take out this year, minus what I put the year before? Or is there more to it than that? Like say I buy 5k worth of stocks in 2018 and then take out 6k worth in 2019, do I only pay tax on 1k?

 

[itaos]

What is considered when they calculate capital gain? Like how is that calculated, does it go by tax years? So I pay tax on whatever I take out this year, minus what I put the year before? Or is there more to it than that? Like say I buy 5k worth of stocks in 2018 and then take out 6k worth in 2019, do I only pay tax on 1k?

Canada does things differently which is not surprising. Say you buy 5K of stock and it increased in value to 10k and you sell that particular lot of stocks for 10k. 50% of the profit/capital gains, or 2.5k, will be added to your income and taxed at your normal tax bracket rate

 

[dr150]

ESPP is free money. Do it! Max your contribution allowed into it.

After the stock is distributed, sell it ASAP for a ~15% gain. I know you can hold onto that stock for a year for less mandated tax hit, but it's better to be conservative (unless the stock is on a good rise, but it's still risky as you can lose more than that 15%). Take your gains and put it into your IRA or whatever.

 

[rh71]

Yes at my previous job and it was worth it because IBM stock has always been stable and I still have my shares. The discount was well worthwhile, but it really depends on your company's volatility and if you can afford to lose. It's still gambling after all. I believe our hold period was 6 months compared to your 3. Selling in that period meant I can't buy any for the rest of it. Honestly though, I only cashed out once to help pay for my car after year 8 and haven't touched it in the following 10 years.

One negative I always had to deal with was Computershare and their wonky authentication. Sites like Mint could never connect to it consistently.

 

[s0me0nesmind1]

What is considered when they calculate capital gain? Like how is that calculated, does it go by tax years? So I pay tax on whatever I take out this year, minus what I put the year before? Or is there more to it than that? Like say I buy 5k worth of stocks in 2018 and then take out 6k worth in 2019, do I only pay tax on 1k?

Sort of. You pay a Capital Gains tax based on the amount of profit you made (Difference between Buy price and sell price).

If you made a gain in selling the stock, you pay the tax
If you made a loss in selling the stock, that will subtract from your net gain.

Thus you pay the tax only on the net amount you gained (after accounting for losses). My point being is when you're buying stocks multiple times throughout the year, you're obviously going to have some weeks where you bought it low and made profit, some weeks you might have bought high and lost a bit.

In addition, there are short term capital gains and long term capital gains. If you sell the stocks after waiting at least a year (365 days - buying in December and selling in January doesn't count), it is a long term capital gain and it gets taxed at different (lower) rates. If you sell the stocks within 1 year, it is a short term capital gain and it is taxed at normal income tax levels.

EDIT: Listen to @itaos since he knows Canada.