Author Topic: Discounted company stocks or just add money to 401K.  (Read 1488 times)

Eilts88

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Discounted company stocks or just add money to 401K.
« on: January 03, 2018, 01:35:13 PM »
My wife works for Alaska airlines and is offered stock in the company at a 15% discount. She currently does not max out her 401K so my question is this. Is it better to buy stock in the company at a 15% discount or would we be better off just putting that money towards maxing her 401K in a low cost index fund? I don't know if the discount is worth paying the capital gains and having the risk of the stock falling to a level that makes the stock less than the discount. Any information on this would be greatly appreciated.

Thanks,

Dan-


terran

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Re: Discounted company stocks or just add money to 401K.
« Reply #1 on: January 03, 2018, 02:40:16 PM »
The devil is in the details with these kinds of plans. For some plans you can sell right away which makes it a no brainer since it's basically an instant return on your money which you can then use to add more to the 401k.

I'm not super familiar with employee stock purchase plans, but I think some of the key details that will help people answer your question are how long you have to hold the stock and details around when the discount is applied.

Eilts88

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Re: Discounted company stocks or just add money to 401K.
« Reply #2 on: January 03, 2018, 03:47:55 PM »
Thank you. I will find out that information and update.

EliteZags

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Re: Discounted company stocks or just add money to 401K.
« Reply #3 on: January 03, 2018, 04:39:56 PM »
similar question for me, having maxed 401K/Roth/HSA I've also been contributing the max 10% towards Medtronic(largest med device co in the world) stock purchase at 15% discount, deducted from each paycheck then purchased at discount end of each quarter

I think the only selling restriction is here: "(d) Restrictions On Resale Or Transfer Of Shares. Ordinary shares acquired by a
Participant hereunder may not be sold or transferred until after the earlier of: (1) the one-year anniversary
of the date on which the shares were issued; or (2) the death of the Participant. "


so that takes care of short term cap gains already right

have around 30K in there now have not sold any, otherwise would be going into my taxable (mostly)VTSAX



seattlecyclone

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Re: Discounted company stocks or just add money to 401K.
« Reply #4 on: January 03, 2018, 04:49:46 PM »
Why not do both? Contribute the maximum to the ESPP for six months, leaving your 401(k) contributions as they are for now. Once you buy your first bunch of shares, sell them immediately and bump up your 401(k) contributions, using the cash from the stock sale to pay part of your living expenses and make up for the smaller paychecks.

The discount on the ESPP is too good a deal to pass up. It's like getting a free 15% bonus on every dollar you put in there. Put as many dollars as allowed, provided they let you sell immediately.

BuildingmyFIRE

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Re: Discounted company stocks or just add money to 401K.
« Reply #5 on: January 04, 2018, 12:44:07 PM »
One school of thought is that you should not invest too heavily in the company in which you work, because it creates a diversification problem.  One of your major investments is your human capital (i.e., your job).  If you also invest in the stock of the company for which you work, you're putting a lot of eggs in that basket.  If you want to know what kind of problem it sets up, ask the folks who worked for, and invested in, Enron.

If you have a limited amount to invest, and you have to make a decision, add it to your 401K, and make sure that you 401K is stocked (a pun!) with a total stock market index fund + bond fund.  Vanguard has some nice target retirement funds, if you have access to them.

Good luck, and I hope that's helpful!

GnomeErcy

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Re: Discounted company stocks or just add money to 401K.
« Reply #6 on: January 04, 2018, 01:04:44 PM »
If you can sell right away, I'd go ESPP and lock in that gain. It's only a portion of her paycheck that's allowed, and it's essentially guaranteed returns, unless Alaska Airlines goes under. If it does, it's a small portion - whatever's not yet been sold - that you'd be out.

If you can't sell right away, i'd probably go with the 401(k) as the safer bet as BuildingmyFIRE points out.

IMO this question comes down to risk management.

Eilts88

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Re: Discounted company stocks or just add money to 401K.
« Reply #7 on: January 04, 2018, 01:06:14 PM »
I got a little more information about us and my wife's stock situation.

First a little about us. We don't live off of my wife's income because we never wanted to get used to two incomes in case we ever had kids someday. We are pretty new to the whole FI seen and are just trying to figure out what will be best for our situation. As for 2018 both roths are maxed and I will be maxing my 401k by the end of the year. My wife on the other hand has more investment options than I do. I would like to max her 401k, HSA, and company stocks this year I just don't know what order to start(She made around 42K pre tax in 2017). Below are a couple different options I have been thinking about.

1. Put her 401K contributions to 100% and once maxed start splitting the income between company stocks and an IRA.

2. Put her 401k contributions to 90% and 10% towards company stocks. I believe the max she can contribute to  company stocks is 10%. Once the 401k is maxed then try to max the HSA.

3. The third option would be to distribute 100% of her income evenly between the three  until her HSA is maxed then move that percentage to her 401K.

Any help would be greatly appreciated.

Below are some more details about the company stocks. 

There is no vesting period in order to sell the stocks. The discount is applied immediately but, they only buy stock twice a year. In February and July. They basically put money aside into an account for you for six months and at the end they buy you one large lump of stock at a 15% discount.

Thank you everyone for your time.

Dan-


terran

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Re: Discounted company stocks or just add money to 401K.
« Reply #8 on: January 04, 2018, 02:19:09 PM »
In that case, I would max the stock purchase and sell immediately.

If you don't rely on your wife's income then you shouldn't have a problem maxing everything:
$42k income
-$6900 family HSA
-$2685 FICA (7.65% of income after HSA deduction)
- $4200 ESOP
-18.5k 401k
$9715 leftover

You'll need to pay taxes too, but you could also adjust your withholding to cover that if you have a higher income and/or fewer deductions.

If I've got the math wrong or missed something and you aren't able to max everything out from her income I would skip the HSA deductions and instead contribute to that directly. You'll miss out on the FICA deduction, but then you would have more available from her pay to max out other things that can only be payroll deducted and at her level of income contributing more towards her social security might not be a bad thing anyway (lower income makes any additional amount you contribute to social security worth more when you start collecting). You can contribute directly to an HSA any time up to your tax filing deadline.

ooeei

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Re: Discounted company stocks or just add money to 401K.
« Reply #9 on: January 04, 2018, 02:57:12 PM »
In that case, I would max the stock purchase and sell immediately.

If you don't rely on your wife's income then you shouldn't have a problem maxing everything:
$42k income
-$6900 family HSA
-$2685 FICA (7.65% of income after HSA deduction)
- $4200 ESOP
-18.5k 401k
$9715 leftover

You'll need to pay taxes too, but you could also adjust your withholding to cover that if you have a higher income and/or fewer deductions.

If I've got the math wrong or missed something and you aren't able to max everything out from her income I would skip the HSA deductions and instead contribute to that directly. You'll miss out on the FICA deduction, but then you would have more available from her pay to max out other things that can only be payroll deducted and at her level of income contributing more towards her social security might not be a bad thing anyway (lower income makes any additional amount you contribute to social security worth more when you start collecting). You can contribute directly to an HSA any time up to your tax filing deadline.

Agree on the max everything plan, that's basically what I do right now with a similar stock plan.

OP it looks like you can max it all, so do it. Keep in mind you'll get that employee stock windfall twice a year, so you can hold off a bit on your IRA contributions and wait for the stock sale if it makes things easier.

Eilts88

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Re: Discounted company stocks or just add money to 401K.
« Reply #10 on: January 04, 2018, 03:32:14 PM »
In that case, I would max the stock purchase and sell immediately.

If you don't rely on your wife's income then you shouldn't have a problem maxing everything:
$42k income
-$6900 family HSA
-$2685 FICA (7.65% of income after HSA deduction)
- $4200 ESOP
-18.5k 401k
$9715 leftover

You'll need to pay taxes too, but you could also adjust your withholding to cover that if you have a higher income and/or fewer deductions.

If I've got the math wrong or missed something and you aren't able to max everything out from her income I would skip the HSA deductions and instead contribute to that directly. You'll miss out on the FICA deduction, but then you would have more available from her pay to max out other things that can only be payroll deducted and at her level of income contributing more towards her social security might not be a bad thing anyway (lower income makes any additional amount you contribute to social security worth more when you start collecting). You can contribute directly to an HSA any time up to your tax filing deadline.

This is great. Thank you for taking the time to write all of this out. It's much appreciated.

Eilts88

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Re: Discounted company stocks or just add money to 401K.
« Reply #11 on: January 04, 2018, 03:35:38 PM »
In that case, I would max the stock purchase and sell immediately.

If you don't rely on your wife's income then you shouldn't have a problem maxing everything:
$42k income
-$6900 family HSA
-$2685 FICA (7.65% of income after HSA deduction)
- $4200 ESOP
-18.5k 401k
$9715 leftover

You'll need to pay taxes too, but you could also adjust your withholding to cover that if you have a higher income and/or fewer deductions.

If I've got the math wrong or missed something and you aren't able to max everything out from her income I would skip the HSA deductions and instead contribute to that directly. You'll miss out on the FICA deduction, but then you would have more available from her pay to max out other things that can only be payroll deducted and at her level of income contributing more towards her social security might not be a bad thing anyway (lower income makes any additional amount you contribute to social security worth more when you start collecting). You can contribute directly to an HSA any time up to your tax filing deadline.

Agree on the max everything plan, that's basically what I do right now with a similar stock plan.

OP it looks like you can max it all, so do it. Keep in mind you'll get that employee stock windfall twice a year, so you can hold off a bit on your IRA contributions and wait for the stock sale if it makes things easier.

Good call. I will definitely look into holding off in the future. Unfortunately I already maxed our Roth's this year.