Stock purchase plan?

[m8547]

My company offers a stock purchase plan, but I'm not sure if I should participate?

• They match 20% of the first $5000 a year I put in, so up to $1,000 of free money.
• The matching contribution is counted as taxable income.
• The whole account is taxable, and can't be tax sheltered in any way that I know of. My contribution would be with after tax money.
• It costs $17 + $0.03 per share to sell, but I can sell at any time.
• The company's stock has been doing well in the recent past, but that may not always be the case.
• I guess I could contribute to get the match and then sell right away but that seems to go against the intent of the plan.

[wtjbatman]

I guess I could contribute to get the match and then sell right away but that seems to go against the intent of the plan.

Out of all your concerns, I found this the most funny. Do you think that tax advantaged retirement accounts like 401ks and IRAs were created with the intent that people should game the system to invest pre-tax money and retire early without ever paying taxes (or paying very little) on that money?

A lot of people here take advantage of stock purchase plans. If they didn't want you to sell the stocks after a year, there would be some sort of vesting option. Although I believe most people hold the stock for a year to avoid short term capital gains taxes. And even with the matching contribution being considered taxable income, it's still a very nice return on your money.

[MDM]

Unless your boss keeps track of who owns how much company stock and uses that to evaluate performance (seems unlikely), don't worry about the "intent" of the plan.  Your "guess" is a perfectly valid strategy.

From your post it appears you buy the stock at market price - is that correct?  Many plans offer stock at a discounted price, and you pay tax on the difference between market and discount.  Either way it's "free money" so why not accept it?

Having "some" investment in your company is fine, but having "a high percentage" of your investments in your company is risky: if the company has problems, the stock price could fall at the same time the company fires a bunch of people....

[Khan]

The stock plan is set up how it is, and it is completely up to you to use it to it's fullest. Unless you have better options, that would be getting the full employer match out of it and then selling it.

If you wouldn't go onto the stock market and buy the shares of your company(because it doesn't fit with your investing style), you shouldn't keep them after the shares are distributed to you. There is also the risk-portion of investing in your own companies stock, where you get laid off, and your shares are worth less(or worthless), which is a double whammy of a shit-sandwich.

If they didn't want the employee share program to perform like this, they wouldn't set it up like that. They'd do vesting and other options. For senior executives, they require minimum ownership requirements.

For you? Use them for all they're worth.

[Breck]

I agree with the sentiments expressed already. Just for comparison, I'll share my companies ESPP.

They offer quarterly enrollment periods where you can elect to withhold 10% of your salary for ESPP. At the end of the quarter shares are purchased for you at a 15% discount to market.

So if you sell immediately after each period you basically get a 1.5% raise. Of course you need to pay ordinary income tax on that because it is a disqualifying disposition.

However, if you would like to only pay LTCG tax then you need to wait for the qualifying disposition . That means you'd need to wait 2 years from the grant date and 1 year from the purchase date (whichever is longer).

My strategy so far (~2 years) has been to hold. I work at a pretty large company and am not to worried about large fluctuations. Plus, there a 2.5% dividend so it's doing better than my savings account. The stock has risen significantly with the entire market and now I find myself questioning whether to let it go longer, and keep avoiding the extra tax, or to sell and invest in less risky index funds.

Your plan appears to be different from a tax perspective. In that case, I agree it's probably best from a risk diversification standpoint to sell and invest the money elsewhere.

[chasesfish]

I would say do it, then how much stock to hold is a function of what you think of the stock and what the percentage is relative to your whole portfolio.

My company's industry lags the market in returns right now and a portion of my long term compensation is already tied to the stock, so I only hold a measly amount of company stock personally.  Its nothing against my employer, its just the business and regulatory environment we operate in right now.

[Thedudeabides]

I would recommend participating and selling as soon as you get the match. Unless holding your employers stock fits into your overall AA goals.