Author Topic: Roth IRA vs Company Sharematch  (Read 4803 times)

Rekon

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Roth IRA vs Company Sharematch
« on: August 25, 2014, 07:32:55 PM »
I'm currently taking advantage of my companies 401k - I invest 6% and my company matches 3%.  This is the max they will match.

I'm contemplating a couple options to further invest:

  • Max out my Roth IRA (vanguard index funds) every year. 
  • Or, buy company shares.  My company does a 2 for 1.  For every 2 shares I buy they give me 1 free.  Couple restrictions (3k max every year and every time I buy shares I cannot sell until the 3rd year of ownership for each share).
« Last Edit: August 25, 2014, 10:41:36 PM by Rekon »

RichMoose

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Re: RO
« Reply #1 on: August 25, 2014, 07:52:09 PM »
Couple questions:

- What is the beta of your company stock? Is it significantly more volatile than the S&P 500? Is it a "blue chip" company?
- At 3k a year, would the value of company stock exceed 10% of your total portfolio?
- Do you have to purchase the shares in a taxable account, or can you use your Roth IRA or 401(k)?

not_a_trex

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Re: RO
« Reply #2 on: August 25, 2014, 07:56:04 PM »
If you're planning on being at the company for a long time (ie 30+) I would probably do the 2 for 1 company share purchase. Then you have almost a quarter of a century worth of purchases where you bought 2 and could sell 3 immediately (since you purchased 3 years before). A 50% gain almost certainly beats the taxes you would have saved by putting money into something like VTSMX in a Roth.

That said, I don't know what your plan is and my crystal ball can't tell me how the company will be doing in the long run. It sounds like it could be a great opportunity, but it's also a risk to further rely on your company for investments outside of just your income.

sirdoug007

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Re: RO
« Reply #3 on: August 25, 2014, 08:00:46 PM »
I'm currently taking advantage of my companies 401k - I invest 6% and my company matches 3%.  This is the max they will match.

I'm contemplating a couple options to further invest:

  • Max out my Roth IRA (vanguard index funds) every year. 
  • Or, buy company shares.  My company does a 2 for 1.  For every 2 shares I buy they give me 1 free.  Couple restrictions (3k max every year and every time I buy shares I cannot sell until the 3rd year of ownership for each share).

I would definitely recommend maxing out the 2 for 1 deal.  And then selling the shares every three years and putting all the money in a US stock market index fund.

A 50% bonus on the stocks is a great deal, but be careful to limit how much that ends up overexposing you to your own companies' stock (see Enron)...

TomTX

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Re: RO
« Reply #4 on: August 25, 2014, 08:41:05 PM »
I'm currently taking advantage of my companies 401k - I invest 6% and my company matches 3%.  This is the max they will match.

I'm contemplating a couple options to further invest:

  • Max out my Roth IRA (vanguard index funds) every year. 
  • Or, buy company shares.  My company does a 2 for 1.  For every 2 shares I buy they give me 1 free.  Couple restrictions (3k max every year and every time I buy shares I cannot sell until the 3rd year of ownership for each share).

Well, if the company shares are quite solid - at that discount, I would seriously consider buying the shares and holding the minimum timeframe - each year. Having $6k invested in the company isn't that much exposure, and it's a $3k profit even if shares stay flat.

After that, I would probably max the 401(k) if expenses are low and they have a good US stock index fund. Otherwise, max a Roth @ Vanguard and put the rest into the 401(k).

Rekon

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Re: RO
« Reply #5 on: August 25, 2014, 10:47:28 PM »
See my comments below in bold.   

Couple questions:

- What is the beta of your company stock? Interesting... the beta is N/A on yahoo finance (http://finance.yahoo.com/q?s=INF.L)

Is it significantly more volatile than the S&P 500? Is it a "blue chip" company?  Not a blue chip company.  They are a global company in the london exchange.
At 3k a year, would the value of company stock exceed 10% of your total portfolio?  Nope
- Do you have to purchase the shares in a taxable account, or can you use your Roth IRA or 401(k)?  Has to be a taxable account. 

Rekon

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Re: RO
« Reply #6 on: August 25, 2014, 10:48:51 PM »
I'm currently taking advantage of my companies 401k - I invest 6% and my company matches 3%.  This is the max they will match.

I'm contemplating a couple options to further invest:

  • Max out my Roth IRA (vanguard index funds) every year. 
  • Or, buy company shares.  My company does a 2 for 1.  For every 2 shares I buy they give me 1 free.  Couple restrictions (3k max every year and every time I buy shares I cannot sell until the 3rd year of ownership for each share).

I would definitely recommend maxing out the 2 for 1 deal.  And then selling the shares every three years and putting all the money in a US stock market index fund.

A 50% bonus on the stocks is a great deal, but be careful to limit how much that ends up overexposing you to your own companies' stock (see Enron)...

I was thinking of selling every 3rd year as well...

Rekon

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Re: Roth IRA vs Company Sharematch
« Reply #7 on: August 25, 2014, 10:57:48 PM »
Also, according to Bloomberg (http://www.bloomberg.com/quote/INF:LN )there is a 3.68% dividend yield. 

Can someone help me do an analysis on which route is better?

I figure at 30% match with a 3 year restriction - I come out to 10% a year assuming the stock stays flat and not factoring in dividends.  However, this is taxed money that I have to pay capital gain tax on as well...  Is there a foreign tax in addition, since it's London stock exchange?

In comparison, with a Roth IRA there are tax benefits and I will probably gain 7% a year on average...

Thoughts?
« Last Edit: August 26, 2014, 11:03:40 AM by Rekon »

RichMoose

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Re: Roth IRA vs Company Sharematch
« Reply #8 on: August 26, 2014, 12:02:10 PM »
Also, according to Bloomberg (http://www.bloomberg.com/quote/INF:LN )there is a 3.68% dividend yield. 

Can someone help me do an analysis on which route is better?

I figure at 30% match with a 3 year restriction - I come out to 10% a year assuming the stock stays flat and not factoring in dividends.  However, this is taxed money that I have to pay capital gain tax on as well...  Is there a foreign tax in addition, since it's London stock exchange?

In comparison, with a Roth IRA there are tax benefits and I will probably gain 7% a year on average...

Thoughts?

I will take a step back here because of the foreign aspect and I'm not familiar with that from a U.S. perspective. Just be aware that you now have exchange rate risks, foreign withholding tax?, foreign income and assets, and probably a bunch of other stuff.

I'm sure there are a few people on the forum familiar with these things and I'm interested to see what they say.

Rekon

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Re: Roth IRA vs Company Sharematch
« Reply #9 on: August 26, 2014, 12:35:04 PM »
Also, according to Bloomberg (http://www.bloomberg.com/quote/INF:LN )there is a 3.68% dividend yield. 

Can someone help me do an analysis on which route is better?

I figure at 30% match with a 3 year restriction - I come out to 10% a year assuming the stock stays flat and not factoring in dividends.  However, this is taxed money that I have to pay capital gain tax on as well...  Is there a foreign tax in addition, since it's London stock exchange?

In comparison, with a Roth IRA there are tax benefits and I will probably gain 7% a year on average...

Thoughts?

I will take a step back here because of the foreign aspect and I'm not familiar with that from a U.S. perspective. Just be aware that you now have exchange rate risks, foreign withholding tax?, foreign income and assets, and probably a bunch of other stuff.

I'm sure there are a few people on the forum familiar with these things and I'm interested to see what they say.

Thanks!! I'm interested as well.  Can someone please share their knowledge about the foreign aspect of this?

seattlecyclone

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Re: Roth IRA vs Company Sharematch
« Reply #10 on: August 26, 2014, 02:22:47 PM »
I've held shares in a few foreign companies before. Withholding depends on which country the stock is traded in. If I recall correctly, there is no withholding for UK stocks owned by US citizens. Most other European countries do withhold from dividend payments. The rate of withholding varies. An interesting wrinkle to this is that the US has tax treaties with many of these countries that sometimes sets the tax rate owed lower than the withholding rate. This means the country might withhold 20% from dividends (because this is the rate their own citizens will pay), while the tax treaty might say US citizens only owe 15%. The foreign tax credit you can claim on your US tax return is limited to the treaty amount. If you want the extra 5% back, you have to file the appropriate paperwork with foreign tax authorities. Totally not worth it for the amount of stock a typical person might own. This is one of many reasons why I now strongly prefer owning index funds over individual stocks; they can easily afford to file the paperwork once for everyone's shares.

adamwoods137

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Re: Roth IRA vs Company Sharematch
« Reply #11 on: August 26, 2014, 02:51:37 PM »
I figure at 30% match with a 3 year restriction - I come out to 10% a year assuming the stock stays flat and not factoring in dividends.  However, this is taxed money that I have to pay capital gain tax on as well...  Is there a foreign tax in addition, since it's London stock exchange?

It looks to me like its a 50% match.  If they give you one share for every two you buy that's a 50% return on your investment.  That works out to about 14% compounded annually.  If you're going to assume that the Roth will return 7% you should make a similar assumption for the company stock, lack of diversification effects the standard deviation of your return not the average expected return.  So the question is does a 21% return make up for the lack of diversification?  We can have a discussion here about what your risk tolerance is but my suspicion is that you'll find this is a much better deal. 

Rekon

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Re: Roth IRA vs Company Sharematch
« Reply #12 on: August 26, 2014, 11:28:57 PM »
I figure at 30% match with a 3 year restriction - I come out to 10% a year assuming the stock stays flat and not factoring in dividends.  However, this is taxed money that I have to pay capital gain tax on as well...  Is there a foreign tax in addition, since it's London stock exchange?

It looks to me like its a 50% match.  If they give you one share for every two you buy that's a 50% return on your investment.  That works out to about 14% compounded annually.  If you're going to assume that the Roth will return 7% you should make a similar assumption for the company stock, lack of diversification effects the standard deviation of your return not the average expected return.  So the question is does a 21% return make up for the lack of diversification?  We can have a discussion here about what your risk tolerance is but my suspicion is that you'll find this is a much better deal.

Thanks - your right!  I miscalculated.

Rekon

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Re: Roth IRA vs Company Sharematch
« Reply #13 on: September 01, 2014, 09:50:43 AM »
So, I'm assuming I should invest in my company's sharematch program instead of a Roth IRA...