Author Topic: Investing order - where does ESPP go?  (Read 1131 times)

thedigitalone

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Investing order - where does ESPP go?
« on: March 14, 2017, 03:25:25 PM »
We've recently paid off our last debt other than the mortgage and are working our way down the investment order list that was posted here.

We have most of the basics in place, however my DW's company has an ESPP program that she's withholding 10% of her paycheck into as they offer it at a 15% discount with a look-back.  As I understand things now we should be selling this off as soon as possible and moving those funds into our taxable account?

0. Establish an emergency fund to your satisfaction         Done
1. Contribute to your 401k up to any company match        Done x2 (2 employers)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.      Done
3. Max HSA     N/A
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level     Phased out, too much income (~$275k)      
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)     Maxing x2 401k
5a. ESPP?  Sell and convert into backdoor Roth?
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.     Done, $490k remaining on a 15 year mortgage @ 3% with 14 years left.
8. Invest in a taxable account with any extra. We're putting about $2,500/mo into VTSAX right now

Other info: Mid 40's 2x kids (15, 12) with partial college funds, $475k liquid, $350k home equity, HCOL area.

Just typing all this out shows me that I need to go figure out a backdoor Roth solution... any easy solutions out there?

MDM

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Re: Investing order - where does ESPP go?
« Reply #1 on: March 14, 2017, 03:35:56 PM »
Probably combined with #2.  A 15% return isn't as good as most 401k matches, but it's better than most other investments and better than most non-credit-card loans.

See Backdoor Roth IRA - Bogleheads and links therein for the ~definitive guide on the backdoor Roth.
« Last Edit: March 14, 2017, 10:43:05 PM by MDM »

MDM

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Re: Investing order - where does ESPP go?
« Reply #2 on: March 14, 2017, 10:48:51 PM »
After thinking about this more, it is less clear.

Here's what seems correct:
The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts.
 - For someone paying 15% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2.
 - For someone paying 25% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

VoteCthulu

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Re: Investing order - where does ESPP go?
« Reply #3 on: March 15, 2017, 01:33:47 PM »
In your tax situation, I would max out the espp, but not sell until it qualified as long term capital gains (probably 12-18 months after each purchase happens). The risk of holding into a downturn should be more than offset by the tax savings and equal chance of the shares appreciating.