Above match 401k Contribution or company stock purchase plan?

[hogfanboy]

I’m wondering if it is better for my wife to reduce her 401k contribution (above the match) and buy company stock purchase plan at 85% of fair market value.

Background:
My Spouse’s company was recently bought out and the new company offers a stock purchase plan.  Currently she is working part time and I’m FIRE.  She currently has 80% of salary withheld (which gets her to $24k for the year into 401k, (company does not match on the extra $6k catch up).

Our state doesn’t tax retirement income (like 401k and IRA disbursements a savings of 3.75%). That’s why she maxes out her 401k. (Her's goes “into” 401K state income tax free and to live we withdrawal from my 401k state income tax free).

So now I’m thinking if we should shift all “above match” 401k contributions to stock purchase at a 15% discount, keep them for a year to qualify for long term capital gains(if any).  But we will have to pay 3.75% state income tax on the salary to purchase stock (pulse federal tax but we will pay that any way on my 401k withdrawal).  Our income  will be such that the long term capital gains will be taxed at 0%.  The employee match is 3% if she puts in 4%. (75%)

I hope I got all the details needed,   

if so, what are some views  on how to use her salary above the 401k match.

[seattlecyclone]

Are there any rules on how long she has to keep the stock after she buys it at a discount? If not, I suggest maxing out the stock purchase program and selling the stock immediately after purchase. Once you have gone through one cycle of stock purchases, you can use the cash you got from selling the first batch of stock to pay your bills, at which point you can increase payroll contributions to the 401(k) so that you're maxing it out again in addition to contributing to the stock plan.

[hogfanboy]

Thanks for the advice
I checked and there is no holding period.
Looks like purchases are done twice a year.

so If we sell immediately after receiving.  how is the profit because of the 15% discount considered for tax purposes? (income or capital gains- if capital gains I think I would want to wait a year).

Lets see if I can do some more math

Case #1   max out  the 401k contribution

Yearly
Gross salary $30k
FICA (7.65%)  = $2295
401k contribution   = $24K
Taxable = $3705
Fed Tax  15% = $556
State Tax 3.75% =  $139
Take Home = $3010
Withdrawal $24K from "my" 401K taxed at 15% federal = $3600
Thus are yearly available from this option is $3010 + $24000 - $3600 = $23410
My Savings is based on the State Income tax of 3.75%  I don't pay on the 401k withdrawal =$900



Case #2 Max out Stock Purchase (and only 401k match)
Gross yearly salary $30k
FICA (7.65%)  = $2295
401k Contribution (4%)  $1200
Taxable = $26505
Fed Tax 15%  = $3976
State Tax 3.75% =  $994
Stock purchase  = $21535 
Take Home = $0
Sale Stock purchase ($21535/.85) =  $25335
Gain from Sale = $3800
Fed Tax on Gain 15% = $570
State tax on Gain 3.75% = $142
Assume  $0  cost to sell the stock(for now because I don't know what that is at this point)
Profit from  Stock purchase is $3800 - $570 -  $142 = $ 3088
After Tax Take home from the Sale $25335 - $570 - $142 = $24623
Withdrawal $1.2K from "my" 401K taxed at 15% federal = $ 180
Thus are yearly available from this option is $24623 + $1200 - 180 = $26003


OK I'm not  sure even I follow all that.
But  I think  Stock option wins $26003 vs $23410  diff = $2593
But is there more risk with the stock purchase option if you plan to immediately sell?

The Stock option could have a little more advantage if
1) Adjust the federal withholdings to make sure you get to the max for $25k vs the current $21,535
2) If you hold it for a year is the gain considered long term thus there would be zero tax on gain.

[seattlecyclone]

so If we sell immediately after receiving.  how is the profit because of the 15% discount considered for tax purposes? (income or capital gains- if capital gains I think I would want to wait a year).

It's complicated. See this post for a summary of how it works. Some of the discount is taxed as wage income, some is taxed as capital gains. The amount of wages can go down a bit if you hold the stock for two years after the date the price is based off of. I personally think that the risk of having money invested in your employer is generally too great to make up for a small decrease in taxes owed, but that's a decision you'll have to make for yourself.

Are you sure you would be able to put $21k out of a $30k salary into the stock purchase program? My wife has an ESPP and they limit it to 10% of your salary.

[hogfanboy]

Thanks  I must of skipped the percentages when I read it the first time
Max is 15% which is only $4500, that's is close to the take home in option 1

I can tell my wife doesn't like  bringing home a near zero pay check every 2 weeks.
But I gave her the option and and she understand the savings on the state income tax
so she decided to do the "max" out 401k thing.

the $4500 max keeps the risk of company stock a little more reasonable. 
I think we will do the immediate sale. meaning about $675 pre tax profit

Thanks again


Eligible teammates can purchase XXX
stock twice per year, at the end of a six month
offering period. During the offering
period, you contribute from 1% to 15% of
your pay to the plan (in 1% increments).
You cannot purchase more than $25,000
worth of stock per year,