Employee Stock Purchase Plan

[ChicagoGal]

I have about $100,000 in an employee stock purchase plan, built up over almost 12 years. I’ve never sold any of it, just let it be, reinvesting dividends, appreciating and compounding.

As I understand it, the difference between Fair Market Value and Share Price (15% discount) is taxed as income at marginal tax rate, while the appreciation in price is taxed at capital gains rate (15%). If that’s correct, I calculate there is about $6.5K in total taxes owed on this stock if I were to sell it all today.

FYI, I also have about $30K in company stock in my 401k, although I’m not putting new dollars toward it. If I leave everything as is, my projection is that total company stock would be about 15% of my portfolio at retirement.

I have 100% confidence in the viability and longevity of the company. The stock price has done well, somewhat outperforming the S&P in the 1, 10 and 15-year comparisons, although lagging slightly in the 3 and 5-year. It did outperform its sector (financial industry) in the 3- and 5-year periods, though. So I’m not concerned about concentration risk from a “belly up” perspective, but of course, any given sector can perform better/worse at any given time.

I’m targeting to retire in 5 years (at age 57, single, no kids). I currently put 4% of my post tax pay into the ESPP in addition to 12% pretax into my 401k (with company match up to 5%). I’m currently in the 28% tax bracket, and total spending will likely be in the 25% bracket, although depending on what I do with pension (lump sum v. annuity), draw from after tax accounts, backdoor Roth conversions, etc., I might be able to get down into the 15% bracket for income purposes. Still working that piece out.


Questions to ponder:

• Should I sell some/all of the stock in the ESPP now and reinvest in Vanguard brokerage account to VTSAX? I’d take the tax hit, but I’d also lessen concentration risk and have more in after tax funds to withdraw between 57 and 59 ½.
• Should I hold what I have, sell new contributions to realize the 15% discount and invest those sales into my brokerage account? That would be short-term gains, though, right? Taxable at 28%?
• Should I change my contribution (more? less?) to the ESPP for some reason?
• Should I continue to do what I’ve been doing, and start selling when I hit retirement age so that I’m in a lower tax bracket (probably only slightly lower, but maybe much lower to 15%)?
• Should I move the dollars I have in the 401k to something different? (I don’t love the funds in our 401k – they perform decently, but expenses seem higher than I'd like.)
• Should I do something that hasn’t occurred to me yet?

Feedback welcome. Thanks.

 

[fh2000]

Questions to ponder:

• Should I sell some/all of the stock in the ESPP now and reinvest in Vanguard brokerage account to VTSAX? I’d take the tax hit, but I’d also lessen concentration risk and have more in after tax funds to withdraw between 57 and 59 ½.
• Should I hold what I have, sell new contributions to realize the 15% discount and invest those sales into my brokerage account? That would be short-term gains, though, right? Taxable at 28%?
• Should I change my contribution (more? less?) to the ESPP for some reason?
• Should I continue to do what I’ve been doing, and start selling when I hit retirement age so that I’m in a lower tax bracket (probably only slightly lower, but maybe much lower to 15%)?
• Should I move the dollars I have in the 401k to something different? (I don’t love the funds in our 401k – they perform decently, but expenses seem higher than I'd like.)
• Should I do something that hasn’t occurred to me yet?

Feedback welcome. Thanks.

I also have ESPP shares. It really depends on how risking holding the shares. The value could go down. I am holding my shares and plan to dispose them after I retire in a year, since I am at high tax rate right now. But, I am risking losing not just the gain, but my principal.

To calculate how much is income, how much is capital gain, I suggest to visit this site: Fairmark Forum. It depends on if your share price is higher or lower than FMV for each purchase. I sold some last year and went thru quite elaborate calculation. Since some were purchased more than 2 years ago, Megacorp does not track on W-2 anymore, and I had to manually insert into TurboTax as income. So, you should look into these cases.