Selling Off Employer Stock

[jmvar]

Both my wife and I have been buying our employer's discounted (5%) stock for several years.  Mine used to be 15% but got lowered to 5% several years back.  After recently finding this forum I have done a lot of reading and have moved both our 401k holdings and future contributions to low cost domestic stock index funds.  I'd like to sell our stock and move the proceeds to the same low cost domestic stock index funds and I want to make sure I am doing it in the smartest way possible.

At the same time we are making big adjustments in our spending but some of this will take a couple more months to take effect.  Currently we are not on pace to max out our joint 401K contribution of $36,000 per year.  I was thinking that I could sell our stock, and use the cash to cover our expenses while raising our 401K and HSA contributions in order to max them out by the end of the year.  What ever is left over from the sale of the stocks and the covering of living expenses would go into an after tax account purchasing the same low cost domestic stock index funds.  By next year we will have made enough budget changes to max out our 401K and HSA accounts without the need for outside sources of cash like the stock sale.

These are out numbers from 2016, and for year to date 2017 we are pretty much on the same track up to May when we made significant changes to our budget:

Married filling jointly
Itemized deduction with a mortage, a child, and my mother in law as dependents
Total income: 168,500
our 401K contributions: 12,100
employer match for 401K: 10,700
my stock value: 43,000
wife's stock value: 8,000

What is the best method for converting the stock value to a low cost domestic stock index fund?  Is what I outlined above a sound plan or is there a better way to go about it?  My main concern is the tax implications which is why I posted it in this forum instead of the investing forum.

Thanks in advance.

[MDM]

Married filling jointly
Itemized deduction with a mortage, a child, and my mother in law as dependents
Total income: 168,500
our 401K contributions: 12,100
employer match for 401K: 10,700
my stock value: 43,000
wife's stock value: 8,000

What is the best method for converting the stock value to a low cost domestic stock index fund?  Is what I outlined above a sound plan or is there a better way to go about it?  My main concern is the tax implications which is why I posted it in this forum instead of the investing forum.

Increasing your 401k contributions to $36K would be a great first step towards reducing whatever tax bite the stock sale would cause.

[shuffler]

Going forward, either sell your stock immediately taking the short term 5% gain, or wait 1 year if you want long term gains and are willing to risk that the stock will go down.

The discount given on the purchase (5% in this case) is always ordinary-income.  Even if you wait.

https://forum.mrmoneymustache.com/ask-a-mustachian/espp-help/msg1228076/?PHPSESSID=vvij09pu1r29dbo77vlnlvikk2#msg1228076

[runewell]

If you were in the 15% tax bracket and waited a year you could pay zero capital gains tax. 
If that is not going to be the case anytime soon I would just consider selling off the stock and taking the tax hit.
Even though my company's stock has done well, I usually sell it off immediately. 

[jmvar]

I have been buying the stock for several years to there are lots that I purchased at both a significant amount above and below the current price.  Should I just start selling off those that bought at the higher prices compared to today's trading value or should I try and even it out with those bought high and low?

[MDM]

I have been buying the stock for several years to there are lots that I purchased at both a significant amount above and below the current price.  Should I just start selling off those that bought at the higher prices compared to today's trading value or should I try and even it out with those bought high and low?

You can offset up to $3K/yr of ordinary income with capital losses.  If your ordinary income is taxed at >15%, that should be the first priority.

[sisto]

I know we talk often in these forums about not being overly invested in company stock, but I wonder if things are slightly different if you work for a fortune 100 company.

[MDM]

I know we talk often in these forums about not being overly invested in company stock, but I wonder if things are slightly different if you work for a fortune 100 company.

Or a Fortune 5 company, such as FORTUNE 5 in 2002: Enron

[shuffler]

I know we talk often in these forums about not being overly invested in company stock, but I wonder if things are slightly different if you work for a fortune 100 company.

I do.  It's not different.

What have I already invested in my company, and could I lose if my current company hit hard times?
  *  My salary and bonuses.
  *  Significant portion of the value of my house (as can happen with the gravitational pull of Fortune 100 companies)
  *  Significant portion of the value of several hundred thousand dollars of non-vested stock options/awards (as Fortune 100 companies are wont to give out)
 
If I should get laid off due to those hard-times, what further costs would I incur at a time when I could least afford them?
  *  Cost of moving.
  *  Cost of retraining, since my skills are somewhat specialized to the needs of my large company.
  *  Healthcare/Cobra/etc.

I already have so much invested in and riding on the success of my company, why should I put more at stake?
It can't possibly be that I happen to be employed at the one company that coincidentally also happens to be the single best place for my available investment dollars, to the point that I should add further to my already over-weighted allocation in that company.

[sisto]

I know we talk often in these forums about not being overly invested in company stock, but I wonder if things are slightly different if you work for a fortune 100 company.

Or a Fortune 5 company, such as FORTUNE 5 in 2002: Enron

Thanks MDM, I didn't realize Enron was a fortune 5 company. I guess I need to bite the bullet and start actively selling off some stock. I've been sitting on way too much for a while now and had been originally planning on using it to bride the 5 year income gap for ROTH ladder. I need to reevaluate my plans.

[sisto]

I know we talk often in these forums about not being overly invested in company stock, but I wonder if things are slightly different if you work for a fortune 100 company.

I do.  It's not different.

What have I already invested in my company, and could I lose if my current company hit hard times?
  *  My salary and bonuses.
  *  Significant portion of the value of my house (as can happen with the gravitational pull of Fortune 100 companies)
  *  Significant portion of the value of several hundred thousand dollars of non-vested stock options/awards (as Fortune 100 companies are wont to give out)
 
If I should get laid off due to those hard-times, what further costs would I incur at a time when I could least afford them?
  *  Cost of moving.
  *  Cost of retraining, since my skills are somewhat specialized to the needs of my large company.
  *  Healthcare/Cobra/etc.

I already have so much invested in and riding on the success of my company, why should I put more at stake?
It can't possibly be that I happen to be employed at the one company that coincidentally also happens to be the single best place for my available investment dollars, to the point that I should add further to my already over-weighted allocation in that company.

All fair points. Personally for me I'm at the point where I have FU money and I'm fairly close to FIRE. If this were to happen I'd be OK as I have emergency money and plans.

[Spork]

While I don't know that I'd want to have a SIGNIFICANT holdings in company stock... there really are good reasons to buy it.  It sounds like you bought it at a discount.  That, alone, is a reasonable reason to buy.  It may not be a good reason to HOLD it... but a reasonable reason to BUY it.

Without other mitigating factors, I'd buy it and hold it for a year and then sell it as a long term gain.  Now... that depends on what your tax situation is.. and how you view your company's future outlook.  Since you already have a big chunk... I'd whittle it down.  I might still buy it (as long as you are buying at a discount and selling long term lots).

[ixtap]

DH's previous employer fell off the top lists while he was working there. He gets his current stock at the discounted rate and sells immediately so that he doesn't get burned again. I was actually wondering if the day traders might mess with prices around the vesting dates, this seems like such a common practice.

If you are working for a Fortune 100/500 company, you likely already have their stock via your index funds.

[shuffler]

It sounds like you bought it at a discount.  That, alone, is a reasonable reason to buy.  It may not be a good reason to HOLD it... but a reasonable reason to BUY it.

Without other mitigating factors, I'd buy it and hold it for a year and then sell it as a long term gain.

Agree buying and then selling is good, to take advantage of the discount, particularly if your ESPP plan doesn't require you to hold the stock for any period.

Disagree that holding it for a year is required or beneficial.  The discount in an ESPP plan will always be treated as ordinary income, regardless of holding period.
Here's a post from a while ago, with external links.
https://forum.mrmoneymustache.com/ask-a-mustachian/espp-help/msg1228076/?PHPSESSID=vvij09pu1r29dbo77vlnlvikk2#msg1228076

[Spork]

It sounds like you bought it at a discount.  That, alone, is a reasonable reason to buy.  It may not be a good reason to HOLD it... but a reasonable reason to BUY it.

Without other mitigating factors, I'd buy it and hold it for a year and then sell it as a long term gain.

Agree buying and then selling is good, to take advantage of the discount, particularly if your ESPP plan doesn't require you to hold the stock for any period.

Disagree that holding it for a year is required or beneficial.  The discount in an ESPP plan will always be treated as ordinary income, regardless of holding period.
Here's a post from a while ago, with external links.
https://forum.mrmoneymustache.com/ask-a-mustachian/espp-help/msg1228076/?PHPSESSID=vvij09pu1r29dbo77vlnlvikk2#msg1228076

I had no idea.  It's been years since I had an ESPP...  And I will assume they gave me documentation to report that as ordinary income and I was just clueless enough to plug that into turbotax without connecting the dots.

In my case, I was holding more than a year because the stock was seriously undervalued.  It was a large tech company that started pre-tech bubble crash.  The bubble popped and all the stock was purchased at pennies on the dollar post-crash.  It was really obvious we were likely buying at a price that was going to give us 10-20x return if held for a few years.  Sadly the plan didn't last.  It was designed with purchase price based on dollars but only had a fixed amount of shares set aside.  When stock went "on sale", the shares ran out in about 6 months.

[jtriplett]

Wealthfront (http://wlth.fr/1TeRdqS)  has a Stock Selling plan.  You can transfer in shares of stock to them and set a schedule to sell it.  So if you have 1200 shares of some company, they can automatically sell 100 shares per month over a year to diversify into the market. 

[sisto]

I had a death in the family, so it's been a while since I logged in. Some great points made here.

@Spork, yes I did buy it at a 15% discount of the lowest price at the beginning or end of the ESPP period. So definitely will continue to buy it, since it's free money. We used to be allowed to invest 10% of our pay into ESPP, but a few years ago they capped it at 5%. I used to hold it to avoid capital gains. I also used it like an emergency fund at times and even sometimes sold shares at a loss to offset taxes for various reasons.

@Shuffler, yes the discount is ordinary, but not the rest of the gains if you hold it as far as I remember. I hope I don't have to pay ordinary taxes on the shares I've been sitting on for years. The fact that I've been trying to keep taxes low is the main reason I haven't been selling it.

@Spork, I also use Turbo Tax. I feel like I get hit hard in taxes when I've sold in the past which is partly why I've been sitting on it too.

@ixtap, I know that whenever my company announce earnings even though we are always doing better than expected the stock price drops. I believe this is due to all the trading that occurs.

@jtriplett, I'll look into that. Right now it's managed through UBS.

@Moustaches, My company has been at least in the top 500 on Fortune since 1979. While I understand that thing can change as MDM pointed out Enron is a great example.

I also should have mentioned that I've been using my dividends for my vacation fund, time to change things up. I really do enjoy this forum lots of great advice and great conversations.