ESPP - 13 years of investing

[ChicagoGal]

I was reading with interest another post about an employee stock purcahse plan, and it spurred me to reach out with a question I’ve had for a while about my own ESPP, but have been putting off dealing with.

Program: We can invest 1-15% of income. Contributions are deducted from payroll biweekly, with purchases made on the last day of each quarter at 15% below market value at close on that day. Dividends are automatically reinvested.

My portfolio: I have been enrolled since they started the program in 2002. Over that period, I have invested between 3-5% of my salary each year, plus dividends, and have never sold any shares. Our stock has consistently performed well, although the last 5-6 years, not quite as well as the overall market. My current balance is just over 1,500 shares, with a portfolio value of just under $100K. Of the 1,500 shares, ~1,000 are 423b qualified shares, 150 are 423b subject to disqualification (less than 2 years since offering) and 350 are dividend shares. This portfolio represents about 12% of my current total investable assets (including 401k, brokerage, IRA, savings, etc.).

The holding company would charge $20 per transaction plus $.07/share for selling. I’m currently in the 28% marginal income tax bracket.

So here are the questions/options that I’m thinking through.

What to do with current portfolio:

• Do nothing and wait until I retire (3-5 years) so that I’m in a lower tax bracket.
• Sell everything now and move money to Vanguard brokerage account (mostly VTSAX).
• Sell only qualified shares and dividends now and move to Vanguard.

What to do with future elections:

• Stick to the current scenario (5%) or increase to max of 15% contribution to get the total discount (even if that means selling more quickly as that would be part of my spending allocation)?
• Sell right away to get 15% discount (even if nonqualified?) or hold? I hate the $20 transaction fee, but it might still make sense overall.

Appreciate any input. Thanks.

[Animorph]

Always contribute the maximum, though you may be limited by dollar maximums. You can sell what you don't want immediately. Where else do you get a safe 30% return? Even if it is fully taxable.

I'd be comfortable enough at 12% of investable assets, though only if you are comfortable with your company's future. And I'm less sensitive to risk than most.

Holding for two years or not is kind of the same consideration, are you willing to hold company stock?

I've done it both ways, held on for two years and sold right away. Depending on stock price moves during the grant period it sometimes made sense to hold if you were comfortable and sometimes it made sense to sell. That was for my ESPP when the purchase price was the lower of the start or end price, and the esoteric ESPP tax rules forced you to use one or the other to calculate regular income. I'm not sure if that is the same now, with your price dependent only on the end price. Check it out.

If you do decide to sell some, just ensure that you pay 15% capital gains rate and don't get caught in the extra ACA 3.8%, AMT, Roth contribution limits, or other gotchas you might not want to hit. In retirement you might have a shot at the 0% CG tax rate, which might work out if you don't have anything else planned. Until then, selling whatever you can at the 15% rate is good. Obviously you want to minimize the number of transactions, but $20 is not too bad. If it makes you feel better, only sell if your gains are $20 more than your normal target.

[JoeWras]

I put as much in it as possible. Can't get that kind of return anywhere else.

I used to hold on for two years. After a few multi-year down cycles in Mega's stock, I got tired of locking up too much in Mega -- after all, my j*b is there too.

So I gradually converted to "sell immediately," even though it is ordinary income. I've been very happy with that choice, even though Mega's stock has finally been on a slight upturn. No sweat, really, as my reinvestment into the broader market has been better. Yes, the tax hit is worse, but the risk is less.

[rodi]

I was in the max out then churn when it became available for sale.

Not the most tax advantaged way but I didn't want to put when more of my financial eggs in the mega corp basket. I also found that it was a great way to set aside money for the periodic big bills like property taxes.

[rayinpenn]

Without knowing how much else you have I am going to take a long shot and talk about what comes to mind -concentration risk. Have you ever heard of Enron? How about Bear sterns? Barrings Bank? A good friend worked at BS when it died - his boss had kids college ready and a big position in BS ... Bam For him and hundreds of others the nest egg was GONE. Period.

Does this position represent more than 1/8 of your total holdings? I'm guilty of holding too much company stock also.
I kid myself by rationalizing it by thinking you've done well Ray but it's a fools game. This companies I mentioned had smarter people than me and (forgive me) likely you. Unless you're in a mature Industry Id be inclined to:

1) sell some each year and reduce your position
2) continue to buy and sell as soon as you are able.

Good Luck..
RayinPenn


Sent from my iPad using Early Retirement Forum

[rayvt]

I agree with rodi. Put in the max and sell it as soon as you can. Don't think of it as an investment, think of it as a way to get a paycheck bonus by deferring some of your salary by one quarter.

17.6% bonus on up to 15% of your salary. You get $100 worth of stock for $85, which is 17.65% gain.

For each $1000 of salary you get:
$850 in cash (immediately), plus
$150 * 1.0 / (1.00 - .15) = $176.47 in stock (deferred by one quarter).
Total: $1026.47

You can probably avoid the transaction fee, too. Mine would allow me to transfer the shares to my regular broker with no fee. Then you've just got whatever commission your regular broker charges -- $5 to $10 or so.

[RobLJ]

We've lived in Houston for 25 years and my wife worked for Dynegy when Enron went down, with a lot of employees who put all their retirement into Enron stock. Which did extremely well, until the crash, when they were all wiped out. My wife had her 401k sharing in Dynegy stock, but I put her contributions as far away from energy as possible--which turned out to be a prudential strategy, since Dynegy bought Enron's pipeline and then was dragged down.

Just as a risk equalization, I would suggest that you sell your tax qualified assets in your employer, no matter how optimistic you are, unless they are less than 10% of your portfolio. If that's the case, then you're in a different risk scenario. I told my wife if I could sell short options I would, about a year before the blow up, but luckily the Dynegy stock was less than 10%, so it was a black eye but it wasn't disastrous.

Just my 10 c. But I've seen it and when a employer stock goes from 40 bucks to a dollar, it isn't pretty. Enron went bankrupt and a lot of their employees had everything in Enron stock. Millionaire to pauper in about 4 months.

Our son works for Microsoft for 3 years and I've advised him to sell half of his stock, but gradually. He's pretty sharp, so has divested of about 30% of his stock and options. So I understand the problem.

[RobLJ]

I see it's 12% of total worth, so I'd be inclined to gradually sell down to 5-6 percent. I missed the total worth piece.
But I have seen more than a few Enron millionaires left with nothing. Don't let too much ride on your company.

[ChicagoGal]

Thank you all for your thoughts.

I'm going to plan on increasing to the maximum investment at the next opt-in period and plan to sell right away. Although I will definitely look into being able to transfer in kind to my brokerage, if a reduction in transaction fees would be material.

As for the older stock, I'm really not worried about concentration risk from a chance of failure standpoint. I'm only a little concerned in that I think I could be getting slightly better returns elsewhere. I was thinking about holding it for the next few years until I retire, so I could finagle the tax situation down to zero. But I guess it depends on how the overall market does vs. this company's stock. And me without my crystal ball...

I guess I'll model a few scenarios and see where I feel most comfortable. Right now I'm leaning toward selling at least some if not most/all.

Again, thanks for all the input!

[big-papa]

I've always sold immediately. The effective returns of a 15% discount are hard to consistently beat. To me, at least, letting it ride is akin to using company stock in my 401K. Not going to do it.

[ArkTinkerer]

One other item to consider if you are counting pennies is to eventually move the account from your employer to a low cost brokerage. Someone else might comment on any concerns from a tax point of view based on your account types.

I am maxing out on our ESPP in anticipation of FIRE this year. Will close the account by moving it to a low cost brokerage and then use at least one of my free transactions to sell either all the stock that is now considered long term or possibly all of the stock depending on market conditions.

I'm overweighted in company stock right now but a big part of that is due to it being way up the last year or two. Good problem to have but I do need to trim it back some. Will probably use those gains to get me thru the first few years of FIRE.

[Which Roger]

OP says that the company stock is about 12% of the total portfolio value, which is significant but probably not a deal-breaker if the stock tanks. That being said, I concur with the other posters who have raised the Enron-like scenarios. My MegaTechCorp stock lost over 99% of its value during the dot-com bust, and is still down 90-ish percent from the peak. I had participated in the ESPP, spending roughly 20k for stock that was worth about 3k when I finally sold it a few years ago. Fortunately it was a very small part of my portfolio, and let me offset capital gains for a few years, but buyer/holder beware.