Transcript:
I had a client come to me recently and they're investing in the employee stock purchase plan (ESPP) at their work and they were asking me, “Should I continue to do this, “I mean I'm already contributing to a 401K." "Do I really need to be having more of my money, “and, by the way, isn't this just creating “more risk for me because I'm concentrating" in one stock or one position?
Here's what I said to them. So, I think it's important to understand what an employee stock purchase plan is. Typically, the way it works is your employer pulls money out of your paycheck and puts it into a sub account. And then at the end of the quarter or the time period, whatever the offering period is, they purchase shares of stock with that money. And usually what they do in some of the better plans I've seen, is they will look at the low price on the quarter and then they'll also give you an additional discount on it. So, it's very hard, I can't think of where you would ever get a deal like that. So that money that you're getting is essentially free money, as I call it.
So what's the down side of doing an employee stock purchase plan? Well there's two things to consider. First of all, now I think of it as free money, the IRS does not. They’re goanna consider any discount that you get or any that you wouldn't otherwise get as compensation or income. And the amount that you're taxed on that depends on how long you hold the stock before you sell. So, you certainly should work with your tax advisor or certified financial planner to figure out what your potential liability might be on that. The second thing is diversification. Especially if you're already receiving stock compensation from the company, so you’re getting shares already and here you are buying more shares. It’s pretty easy to get a concentration in a particular security that you may not want to have more exposure to. So, you want to continually consider maybe selling shares and look at the tax impact. So, you want to consider the taxes and then also diversifications to when you're goanna seller trim back positions in your overall portfolio.
But that said, I still think it’s better to be paying taxes on money that you have now, versus not having that money at all. As they say, "You never go broke paying taxes. “This is not a recommendation for anybody's specific situation. Talk with your tax advisor or your certified financial planner about your specific situation before taking any action.
Take care. Bye-bye.
