Many businesses offer an employee stock purchase plan (ESPP), an incentive that allows employees to buy company stock at a discount from its current fair market value. Here’s what to consider if your employer offers such a plan:
- Should You Participate in Your Company’s ESPP? We believe participating in an ESPP is beneficial because it’s essentially free money if you manage it strategically. For example:
- You can lock in gains if you buy discounted shares and sell them immediately or soon after purchasing. Note that the discount you received and any appreciation gained after you bought the stock will be considered ordinary income and subject to short-term capital gains tax when you sell.
- Should You Hold the Discounted Stock? If you hold the discounted stock for over a year, you could benefit from favorable, long-term capital gains tax treatment when you sell, which is a lower rate than short-term capital gain taxes. Holding could be an option if you believe there is growth potential, but there’s no surefire way to predict the future value of your company stock. Here’s another factor to consider:
- Do you have other company equity compensation, like stock options and RSUs, besides your salary and bonuses? If so, a significant portion of your net worth is already tied to your company’s performance. We often caution against holding the discounted stock for too long, as it can increase your risks if the stock’s value declines, which could ultimately affect your portfolio and long-term income.
An ESPP is a valuable employee benefit. Still, diversification is key to investing. If you work for a tech company like Apple or Google, your net worth is likely deeply connected to your company’s performance through equity compensation and other exposures. Thus, always consider your concentration risks in case of a market downturn or poor company performance.
We’ve spent decades guiding tech employees through these decisions to help maximize their company benefits and grow their wealth. If you’d like to learn more, contact our team, and we can walk you through various scenarios to help inform your decision.
And if you’re ready to optimize your financial plan for taxes, real estate, or other priorities, complete the Personal Financial Snapshot today so we can learn more about how we can assist you.
