Author Topic: Roth or ESPP  (Read 1997 times)

VaCPA

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Roth or ESPP
« on: March 03, 2018, 06:48:05 AM »
Currently my wife and I both max out our 401ks. She has a great plan, I have a mediocre one(~.5 ER). Regardless of my plan I think we need to max out the 401ks, as we live in HCOL area and need to knock down our taxable income. We hit AMT for the first time last year.

My question is what to do with extra money. It's not a lot right now, but should slowly increase over time. My best two options seem to be my Roth or my wife's ESPP(employee stock plan).

Roth - I have one opened through Vanguard, with a small balance that pretty much just holds rolled over Roth 401ks from when I was younger. I haven't been putting much into as most money goes to the 401k but have wanted to start backdooring

ESPP - wife works for a massive international consulting company, so the stock is able as steady as a stock can be. The real draw is she gets a 15% discount. One strategy I think we could employe down the road is once our house is paid off and we retire we can use the stock for the first year or two instead of drawing from IRAs. If the cap gains is our only income and we're careful we can potentially keep ourselves in the 0% cap gains tax bracket and pay no tax on it. Obviously this is dependent on tax laws in the future.

I think the ESPP is the play but tell me if I'm missing something.

not_a_trex

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Re: Roth or ESPP
« Reply #1 on: March 03, 2018, 09:13:26 AM »
Currently my wife and I both max out our 401ks. She has a great plan, I have a mediocre one(~.5 ER). Regardless of my plan I think we need to max out the 401ks, as we live in HCOL area and need to knock down our taxable income. We hit AMT for the first time last year.

Can you give a rundown on what tax advantaged accounts you are currently contributing to? When you say you and your wife are contributing to a 401K do you mean a traditional 401K or a Roth 401K? Are you maxing IRAs (traditional or Roth)?

My question is what to do with extra money. It's not a lot right now, but should slowly increase over time. My best two options seem to be my Roth or my wife's ESPP(employee stock plan).

Roth 401K or Roth IRA? You can't contribute 18.5K to your traditional 401K and another 18.5K to your Roth 401K so do you mean your IRA?

Roth - I have one opened through Vanguard, with a small balance that pretty much just holds rolled over Roth 401ks from when I was younger. I haven't been putting much into as most money goes to the 401k but have wanted to start backdooring

What do you mean by backdooring? It sounds like the money would already be in a Roth 401K so there is nothing to backdoor. Do you have the ability to make after-tax contributions (not to be confused with Roth contributions) in your 401K plan?

ESPP - wife works for a massive international consulting company, so the stock is able as steady as a stock can be. The real draw is she gets a 15% discount. One strategy I think we could employe down the road is once our house is paid off and we retire we can use the stock for the first year or two instead of drawing from IRAs. If the cap gains is our only income and we're careful we can potentially keep ourselves in the 0% cap gains tax bracket and pay no tax on it. Obviously this is dependent on tax laws in the future.

Be aware that you will still pay income tax on the 15% basis discount, even if you hold the stock long enough for it to have qualified dispositions.

frugalnacho

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Re: Roth or ESPP
« Reply #2 on: March 03, 2018, 09:57:59 AM »
Currently my wife and I both max out our 401ks. She has a great plan, I have a mediocre one(~.5 ER). Regardless of my plan I think we need to max out the 401ks, as we live in HCOL area and need to knock down our taxable income. We hit AMT for the first time last year.

My question is what to do with extra money. It's not a lot right now, but should slowly increase over time. My best two options seem to be my Roth or my wife's ESPP(employee stock plan).

Roth - I have one opened through Vanguard, with a small balance that pretty much just holds rolled over Roth 401ks from when I was younger. I haven't been putting much into as most money goes to the 401k but have wanted to start backdooring

ESPP - wife works for a massive international consulting company, so the stock is able as steady as a stock can be. The real draw is she gets a 15% discount. One strategy I think we could employe down the road is once our house is paid off and we retire we can use the stock for the first year or two instead of drawing from IRAs. If the cap gains is our only income and we're careful we can potentially keep ourselves in the 0% cap gains tax bracket and pay no tax on it. Obviously this is dependent on tax laws in the future.

I think the ESPP is the play but tell me if I'm missing something.

You usually don't have to tie up the money indefinitely in an ESPP.  I say take full advantage of the ESPP, sell it asap (and just deal with whatever minor taxes this causes), and then pump as much as you can into roth.  You really only have to tie up your extra money for one round of the ESPP.  Once you can sell it you can use the proceeds from that to fund more purchases.

MDM

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Re: Roth or ESPP
« Reply #3 on: March 03, 2018, 10:21:17 AM »
See the investment order thread for several posts discussing ESPPs.

In short, as already mentioned here, try to make the ESPP something you do in addition to your other investing, not instead of other choices.

VaCPA

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Re: Roth or ESPP
« Reply #4 on: March 03, 2018, 10:32:58 AM »
You usually don't have to tie up the money indefinitely in an ESPP.  I say take full advantage of the ESPP, sell it asap (and just deal with whatever minor taxes this causes), and then pump as much as you can into roth.  You really only have to tie up your extra money for one round of the ESPP.  Once you can sell it you can use the proceeds from that to fund more purchases.

I've read people touting this strategy too. Buy ESPP at the discount and immediately sell. I'd have to check the rules on her plan but I don't think there is a mandatory hold period. Then we're paying ordinary tax rates on the gain though which could also potentially push us further into AMT, although admittedly I still don't know how the new tax plan will affect that.

VaCPA

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Re: Roth or ESPP
« Reply #5 on: March 03, 2018, 10:40:29 AM »
Can you give a rundown on what tax advantaged accounts you are currently contributing to? When you say you and your wife are contributing to a 401K do you mean a traditional 401K or a Roth 401K? Are you maxing IRAs (traditional or Roth)?

My original post was probably a little unclear. So the Roth IRA is in Vanguard, and is rolled over balances from Roth 401k plans with previous employers. We're not currently contributing to a Roth 401k, and I'm not able to contribute to the Roth IRA because of income limitations. So what I meant was I wanted to start backdooring more money in at some point. I think I could backdoor up to $5k per year with the current rules.

Currently we're both maxing out traditional 401k plans with our employers.

I am aware we pay income tax on her ESPP discount. They show it on her W-2 every year so it gets picked up at year end when we file our taxes.

MDM

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Re: Roth or ESPP
« Reply #6 on: March 03, 2018, 11:09:23 AM »
I am aware we pay income tax on her ESPP discount. They show it on her W-2 every year so it gets picked up at year end when we file our taxes.
Also note Your 1099-B form for an ESPP sale will probably be wrong.

not_a_trex

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Re: Roth or ESPP
« Reply #7 on: March 03, 2018, 11:19:05 AM »
Ah, I understand now. When you said Roth or ESPP you meant a Roth IRA.

I agree with MDM and ESPP is something you do in addition to the other tax things. If you're cutting it so close that you can't do both at the same time, I would buy the ESPP and sell as soon as it's vested. You lock in the 15% discount and can then do a traditional-to-Roth IRA backdoor with the sold stock (assuming you meet the minimum income requirements).

VaCPA

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Re: Roth or ESPP
« Reply #8 on: March 03, 2018, 11:57:21 AM »
I am aware we pay income tax on her ESPP discount. They show it on her W-2 every year so it gets picked up at year end when we file our taxes.
Also note Your 1099-B form for an ESPP sale will probably be wrong.

Yeah we sold a bunch a couple years ago for a home downpayment and I had to manually calculate the basis/gain myself for taxes.

Thanks for the link in your previous post. I briefly skimmed through and looks like some good reading in there.

VaCPA

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Re: Roth or ESPP
« Reply #9 on: March 16, 2020, 05:42:33 PM »
I ended up putting money into the ESPP. We upped her contribution to the ESPP to the max her company allows(10%). The stock(ACN) did great over the past few years. We've sold lots a few times. As fate would have it we needed to cash some of it out early this year. Sold at $208 but I only sold the portion that had been held more than a year to get LTCG tax, which was about half of our current holding. Ended being around the stocks all-time high and obviously since then it's gotten absolutely drilled. Down to like $150. On the plus side she buys her next lot in May so she can start accumulating again at a cheap price I guess.

I've been lazy about the backdoor Roth but I'm going to go ahead and put the $5500 in for this year soon probably. No idea when the bottom will be but I tend to think prices over the next month or two will be cheaper than end of the year.