Investment Order & Employee Stock Plans

[BeginningToBudget]

Hello!

I recently got a new job with a larger company that has what they call a Global Employee Stock Ownership Plan (GESOP)! I'm really excited about the opportunity and am trying to evaluate the best way to fully optimize the plan!

The General Guidelines are as follows:
 - I "enroll" between 1-10% of my after-tax dollars during "enrollment periods"
 - The purchase price is defined as 85% of the market price from either the first or last day of the period whichever is lower. (Automatic 15% discount!)
 - I can sell shares at any time after the 3-month holding period (to ensure diversification I think? More of an EFT person than a Stock person)
 
My current hope is to max out my enrollment to the full 10%, as it seems like I'm getting discounted stocks (i.e. free money) However, in order to do that I have to lower some of my other investments/contributions. My initial gut response was just lower my 401(k) contribution percent as there is no reason to not view my new GESOP account as a retirement option. By decreasing my 401(k) contribution I think I would also be increasing my post-tax dollars which would increase the amount I can contribute to the GESOP plan as well. The only negative I see there would be if a portion of my income is then taxed at a higher rate as I have less pre-tax dollars being moved, but I don't think I'm even close to the next bracket.

Am I missing any other key items that I should be evaluating? Some of my other options to generate 10% would be to lower one of these instead:
- 401(k) contribution (15% w/ 6% company match - Pre-Tax Dollars)
- Roth IRA contribution (11% - Post Tax Dollars)
- Monthly Investment transaction (9%)
- HSA contribution (7%- Pre-Tax Dollars)

Thanks in advance.

[lutorm]

I haven't sold any ESPP stocks, but when I looked at the tax situation it's somewhat complicated. Depending on when you sell them and whether the plan is a "qualified" ESPP, either the "discount" part of the gain or all the gain is taxed as income, not as capital gains. Depending on your tax bracket, that could eat up a lot of the discount, compared to the tax-advantaged options. I think the only way to tell is to make up some scenarios and work through the numbers.

[yachi]

A lot of members use these accounts to cash in on the discount by reselling at the earliest opportunity.  If you do the same, then you don't have to reduce your other contributions.
You're already very invested in the company due to the fact that your paycheck relies on the company continuing to perform.  It's therefore even more prudent to diversify away from a single stock when that single stock is the company you work for, than when it is just one you selected to invest in.
ESOPS can be really good for employees, I had one that distributed company profits scaled by pay, so higher paid employees got more.  It was an additional benefit, and employees couldn't opt out.  Mine was a private company, so a yearly audit instead of public market prices determined the value.  Yours offers a discount to the trading price.  That can be good if the trading price is reasonable.  You do need to know that you're taking more risk because its a single company and not a whole-market or S&P 500 fund, and some additional risk because it's your employer. 

[ixtap]

You only have to make it through to your first sale. Then, the proceeds from that sale can be used to fund the next period, and so on. As such, consider participating at a reduced level the first time, knowing that you will increase contributions.

If you can reduce 401k contributions without affecting your match AND you will be able to increase contributions after your first sale to max out this account, that might be an option. However, the second caveat is unlikely for this year.

[Systems101]

The only negative I see there would be if a portion of my income is then taxed at a higher rate as I have less pre-tax dollars being moved, but I don't think I'm even close to the next bracket.

FWIW, it's not just a bracket issue.  Depending on the definition of the "offering period", and how soon after the start (or maybe end? I forget) of the offering period you sell, rates are different.  Some dollars are income, some capital gains.  There are a number of factors and it's been a handful of years since I've had to worry about it (no ESPP at my current employer), but I encourage you to read up fully on the rules as you consider some of the funding and timing considerations.  Nothing will bankrupt you, but it is good to recognize the different math as it can add up over time.

[the_gastropod]

If this weren't already complicated enough, another variable I think you need to consider is your expected tax burden post-retirement. If your spending is sufficiently low, your post-retirement tax burden should easily be 0—making 401k contributions really valuable, as they're completely avoiding taxation. Remember, your 401k contributions avoid taxation at your *top marginal tax rate*. E.g., if you're in the 22% tax bracket, maxing out your 401k saves you $4,290 in federal taxes + whatever state/local taxes you owe. So depending on your circumstance, this could be a much better deal than your 15% discounted GESOP. Especially once you consider short term capital gains taxes you'd have to pay following your strategy of selling asap.

[shuffler]

Depending on the definition of the "offering period", and how soon after the start (or maybe end? I forget) of the offering period you sell, rates are different.  Some dollars are income, some capital gains.  There are a number of factors and it's been a handful of years since I've had to worry about it (no ESPP at my current employer), but I encourage you to read up fully on the rules as you consider some of the funding and timing considerations. 

https://forum.mrmoneymustache.com/taxes/sell-or-hold-espp/msg1655961/#msg1655961

[Duke03]

Honestly I wish companies would beef up their 401k contributions instead of offering an ESPP.  My company has a pretty good ESPP plan where you can buy stock 40% less than the market price up to 10% of your yearly income.  It's a pretty good deal, but I let the decision makers know that it's creating a massive problem for folks that already buy the company stock in their 401k.  They have little to no diversification and I've seen it with my own eyes helping coworkers out with their 401k etc.  Granted buying at a 40% discount helps a whole lot, but still....

[yachi]

Honestly I wish companies would beef up their 401k contributions instead of offering an ESPP.  My company has a pretty good ESPP plan where you can buy stock 40% less than the market price up to 10% of your yearly income.  It's a pretty good deal, but I let the decision makers know that it's creating a massive problem for folks that already buy the company stock in their 401k.  They have little to no diversification and I've seen it with my own eyes helping coworkers out with their 401k etc.  Granted buying at a 40% discount helps a whole lot, but still....

Depending on how it's structured, it's likely the company doesn't see a direct cost from the stock discount the way they would from a 401k match.  Sort of like giving stock to the CEO, the company may create a new share and sell it to you at a 40% discount to the market price.  The only losers are existing shareholders that have their ownership diluted by the issuing of new shares.

[aetheldrea]

Thanks to everyone who posted here. My employer is starting an ESPP but it sounds terrible compared to the others here. Can now stop thinking about it.