Ava
Senior Member
Joined: Jan 30, 2011 12:23:55 GMT -5
Posts: 4,176
|
ESOP
Jun 27, 2022 14:09:20 GMT -5
Post by Ava on Jun 27, 2022 14:09:20 GMT -5
My employer was recently purchased by a bigger company. As part of our benefits, we can now purchase company stock. We can use up to 10% of our after-tax salary, and the company sells us the stock at a 10% discount. Former company had an ESOP but they just gave us stock, we didn't buy and couldn't sell it as long as we remained with employer.
No idea if this is worth it. I don't think I can buy more than 1% this year anyway. It's hard enough to max out contributions now that I qualify for the catch-up. So I'm focusing there.
Any information about ESOPs welcome. Is this a good deal? If I buy stock, should I keep it or sell it as soon as allowed.
|
|
MN-Investor
Well-Known Member
Joined: Dec 20, 2010 22:22:44 GMT -5
Posts: 1,937
|
ESOP
Jun 27, 2022 14:22:18 GMT -5
Ava likes this
Post by MN-Investor on Jun 27, 2022 14:22:18 GMT -5
The general opinion, usually, is to buy the stock but sell it as soon as possible. At a 10% discount, you're getting free money. Don't pass it up. But don't hang on to the stock because you don't want to be too heavily invested in your own company's stock. My husband and I have participated in these in the past and it's worked out well. Because we didn't worry about being over-invested in company stock, we tended to hang on to the stock. I have a spreadsheet of the stock acquired in my husband's last employee stock purchase plan. From Sept 1998 - Dec 1999 he invested $8,736. Dividends were paid on the stock over time, so that was taxable income. However, the dividends were also reinvested. By the time my sweetie sold those shares in early 2016, he had $14,850 invested in that company stock. Net sale after commission was $41,582. We used the money to buy a car to celebrate his 2016 retirement.
|
|
|
ESOP
Jun 27, 2022 14:24:23 GMT -5
Ava likes this
Post by The Walk of the Penguin Mich on Jun 27, 2022 14:24:23 GMT -5
TD made out VERY well. He had company stock, the company was sold. The company sale was lucrative for his stock, but he was forced to sell as it could only be held by employees and the company had closed their local office. As a result, his stock was sold and he received a check for about 4x what he paid for it. About 6 months before this happened, he sold off about 1/2 his holdings because he wanted to keep his stock with this company around 10% of his investments. He made a decent amount of money, but not as much as the second time around.
If you get a 10% discount, this is almost like receiving 10% income on an investment, if you buy and sell immediately (if you can). I’d be looking at the history of this company.
This was when I got introduced to IRMAA.
|
|
Deleted
Joined: Apr 30, 2024 1:25:52 GMT -5
Posts: 0
|
ESOP
Jun 27, 2022 14:44:34 GMT -5
Ava likes this
Post by Deleted on Jun 27, 2022 14:44:34 GMT -5
If you get a 10% discount, this is almost like receiving 10% income on an investment, if you buy and sell immediately (if you can). I’d be looking at the history of this company. This was when I got introduced to IRMAA. Yes- so much depends on the company. I worked for a GE sub and I believe you had to hold the stock for a certain period. I didn't bother buying any. The other potential downside, as mich and MN-Investor mentioned, is having too much of your assets in your employer stock. Before the dot-com burst, many employees were "millionaires" based on the value of the company stock. They lost their jobs and their retirement finds at the same time. Consider the tax consequences as well. I wish now I'd put less in the 401(k). When I start withdrawals it's ALL going to be ordinary income and, thanks to over-saving and a high SS benefit, it will be taxed. If you sell your company stock after a year it's long-term gains with far more favorable treatment. And, if you sell before you're on Medicare, you won't make the acquaintance of IRMAA. Also, IIRC, even after you can sell, there are time periods near the end of each quarter when you can't because there's enough inside info on quarter-end results that some employees could act on it, so they don't let anyone sell. My employer always reminded us of these times.
|
|
|
ESOP
Jun 27, 2022 15:00:32 GMT -5
Post by The Walk of the Penguin Mich on Jun 27, 2022 15:00:32 GMT -5
If you get a 10% discount, this is almost like receiving 10% income on an investment, if you buy and sell immediately (if you can). I’d be looking at the history of this company. This was when I got introduced to IRMAA. Yes- so much depends on the company. I worked for a GE sub and I believe you had to hold the stock for a certain period. I didn't bother buying any. The other potential downside, as mich and MN-Investor mentioned, is having too much of your assets in your employer stock. Before the dot-com burst, many employees were "millionaires" based on the value of the company stock. They lost their jobs and their retirement finds at the same time. Consider the tax consequences as well. I wish now I'd put less in the 401(k). When I start withdrawals it's ALL going to be ordinary income and, thanks to over-saving and a high SS benefit, it will be taxed. If you sell your company stock after a year it's long-term gains with far more favorable treatment. And, if you sell before you're on Medicare, you won't make the acquaintance of IRMAA.Also, IIRC, even after you can sell, there are time periods near the end of each quarter when you can't because there's enough inside info on quarter-end results that some employees could act on it, so they don't let anyone sell. My employer always reminded us of these times. Unless you are forced to sell, like TD was. He could hold stock as a non employee in his old company. He could not in the new company who bought it. That sale resulted in a $55k unexpected tax bill that emptied both of our savings accounts, and resulted in about a $6000 IRMAA surcharge for me. It would have been far less painful if we could have split it over 2 years.
|
|
Ava
Senior Member
Joined: Jan 30, 2011 12:23:55 GMT -5
Posts: 4,176
|
ESOP
Jun 27, 2022 15:05:11 GMT -5
Post by Ava on Jun 27, 2022 15:05:11 GMT -5
Yes, I was worried about being too heavily invested in one company. I hadn't considered that, at a 10% discount, it's free money to me. Tax consequences are a concern. I think I'm not in a strong enough position to take advantage of this offer. We have one month to let the company know if we want to buy stock. With all the changes in health insurance, dental insurance, vision, HSA, etc. it's been stressful. I'll pass this year. Plus, I don't like to make rush decisions and this feels rushed to me. I mean, the company does it every year, but it's my first year with them and we just got acquired.
|
|
MN-Investor
Well-Known Member
Joined: Dec 20, 2010 22:22:44 GMT -5
Posts: 1,937
|
ESOP
Jun 27, 2022 15:26:50 GMT -5
Post by MN-Investor on Jun 27, 2022 15:26:50 GMT -5
Important note for people who own company stock within their 401(k) - Take a look at Net Unrealized Appreciation rules. Basically, for example, say you paid $10,000 for stock in your own company and that stock is in your 401(k). But now you're retiring and that stock is worth $50,000. If you move that stock to an IRA, you'll pay ordinary income taxes on the $50,000 when you take it out of the IRA. However, if you use NUA rules, you can move that company stock to a brokerage account and pay ordinary income taxes on your $10,000. The remaining $40,000 will be eligible for capital gains treatment. I simplified things, but that's the basics of it. I used those rules for the company stock in my 401(k) - the stock I mentioned above with a $2 basis. One article which talks about it -
(Come to think about it, I should have mentioned my NUA over in the smartest financial moves. It's saved me a lot! I only knew about it because I was a tax accountant.)
|
|
bean29
Junior Associate
Joined: Dec 19, 2010 22:26:57 GMT -5
Posts: 9,929
|
Post by bean29 on Jun 27, 2022 15:48:19 GMT -5
Important note for people who own company stock within their 401(k) - Take a look at Net Unrealized Appreciation rules. Basically, for example, say you paid $10,000 for stock in your own company and that stock is in your 401(k). But now you're retiring and that stock is worth $50,000. If you move that stock to an IRA, you'll pay ordinary income taxes on the $50,000 when you take it out of the IRA. However, if you use NUA rules, you can move that company stock to a brokerage account and pay ordinary income taxes on your $10,000. The remaining $40,000 will be eligible for capital gains treatment. I simplified things, but that's the basics of it. I used those rules for the company stock in my 401(k) - the stock I mentioned above with a $2 basis. One article which talks about it -
(Come to think about it, I should have mentioned my NUA over in the smartest financial moves. It's saved me a lot! I only knew about it because I was a tax accountant.)
Can you benefit if you have a loss? I have some I have to move per plan rules soon. I should contact them and see what I can do.
|
|
Deleted
Joined: Apr 30, 2024 1:25:52 GMT -5
Posts: 0
|
ESOP
Jun 27, 2022 16:13:27 GMT -5
Post by Deleted on Jun 27, 2022 16:13:27 GMT -5
(Come to think about it, I should have mentioned my NUA over in the smartest financial moves. It's saved me a lot! I only knew about it because I was a tax accountant.)
Wow. Now I see why people hire a tax accountant. A previous employer had a program called a "phantom stock plan". It had far better provisions than a typical ESOP. At the beginning of a 2-year period you committed to buy company stock over the next 2 years at 90% of the price at that date (except you didn't actually own any stock). After 2 years you liquidated at the current price i.e. the price 2 years down the road). If the stock had lost value you got back what you put in plus a money-market return, so basically you couldn't lose. You also got contributions plus the money-market return if you left during that period for any reason, voluntary or involuntary. Many of us bought in at a year that was the worst of the financial crisis- stock had hit a low of $12 because the CEO had gotten us big into derivatives on subprime mortgages even though we were an insurance company. Two years later the stock had quadrupled. One coworker paid off her mortgage in Westchester County. I wish I'd put in more but I think I made $50K. It was unfortunate that the gain was taxed as ordinary income, though. We had a LOT of resignations after that 2-year period ended.
|
|
|
Post by The Walk of the Penguin Mich on Jun 27, 2022 16:29:02 GMT -5
Yes, I was worried about being too heavily invested in one company. I hadn't considered that, at a 10% discount, it's free money to me. Tax consequences are a concern. I think I'm not in a strong enough position to take advantage of this offer. We have one month to let the company know if we want to buy stock. With all the changes in health insurance, dental insurance, vision, HSA, etc. it's been stressful. I'll pass this year. Plus, I don't like to make rush decisions and this feels rushed to me. I mean, the company does it every year, but it's my first year with them and we just got acquired. It is easy enough to limit your exposure like this. TD was only comfortable with 10% of his portfolio being in his company’s stock. When it was 20%, he sold half and invested in something else. You’d have tax consequences with any investment. The difference is that you are paying 15% tax on the proceeds rather than your marginal rate if you have it in your 401k. Watching him invest makes me realize how important it is to have various pots to pull from…..not just retirement funds. If you hold off, this is a lost opportunity to make 10% on your money. You can limit your exposure to a small amount…..or just dip your toe in…..but I would be looking at how to work this to my advantage rather than putting it on the back burner. JMHO
|
|
Tiny
Senior Associate
Joined: Dec 29, 2010 21:22:34 GMT -5
Posts: 13,368
|
ESOP
Jun 27, 2022 17:07:14 GMT -5
Post by Tiny on Jun 27, 2022 17:07:14 GMT -5
it's free money to me. Tax consequences are a concern. I don't know how it works - but can you test the waters with $500.00 or some other small amount? Going thru the process with a small amount may help make next years decision easier. I tend to start small with new stuff - so I can get familiar with all the steps and processes. It seems a shame to leave some money on the table... even if it is a small amount.
|
|
Deleted
Joined: Apr 30, 2024 1:25:52 GMT -5
Posts: 0
|
ESOP
Jun 27, 2022 17:09:45 GMT -5
Post by Deleted on Jun 27, 2022 17:09:45 GMT -5
If you hold off, this is a lost opportunity to make 10% on your money. You can limit your exposure to a small amount…..or just dip your toe in…..but I would be looking at how to work this to my advantage rather than putting it on the back burner. JMHO But doesn't that depend on the plan rules? If she has to wait 6 months before she can sell and the stock drops 50%, she's lost money, right? In any case, I'd keep an eye on what the investment analysts are saying about the stock.
|
|
MN-Investor
Well-Known Member
Joined: Dec 20, 2010 22:22:44 GMT -5
Posts: 1,937
|
ESOP
Jun 27, 2022 17:17:17 GMT -5
Post by MN-Investor on Jun 27, 2022 17:17:17 GMT -5
Can you benefit if you have a loss? I have some I have to move per plan rules soon. I should contact them and see what I can do. No. Say you put $10,000 in and it's now worth $4,000. Under NUA rules, you move the stock to a taxable brokerage account and have $10,000 ordinary income. The stock would have a $10,000 basis, so you would experience a $6,000 capital loss when you sold that stock. Capital losses may be limited. If you just roll the stock over into an IRA, then take a distribution, you would get the $4,000 that it's worth and that would be taxed at ordinary income rates. So... Under NUA - $10,000 ordinary income and $6,000 capital loss. Moved to an IRA then distributed - $4,000 ordinary income.
|
|
MN-Investor
Well-Known Member
Joined: Dec 20, 2010 22:22:44 GMT -5
Posts: 1,937
|
ESOP
Jun 27, 2022 17:31:43 GMT -5
Post by MN-Investor on Jun 27, 2022 17:31:43 GMT -5
(Come to think about it, I should have mentioned my NUA over in the smartest financial moves. It's saved me a lot! I only knew about it because I was a tax accountant.)
Wow. Now I see why people hire a tax accountant. The funny thing about the NUA rules is that I remember reading about them back when internet and technology stocks were going wild. Since I worked for a manufacturing company, I figured that those rules were great for technology stocks, but would never apply to me. After I stopped working in 1999, I just left everything in my 401(k). When I turned 59-1/2 in 2012 - penalties apply before then - I looked at the value of my company stock and remembered what I had read years before. Thank goodness!
|
|
justme
Senior Associate
Joined: Feb 10, 2012 13:12:47 GMT -5
Posts: 14,618
|
Post by justme on Jun 27, 2022 18:07:24 GMT -5
So I regret not doing mine ESPP until almost 6 years in
The biggest downside for me is I'm still charged per sale even though any other time I buy or sell stock with fidelity it's free.
Another wrinkle is it takes a few days to settle. So my last buy, by the time I could sell it I would have lost money. Been waiting for it to go back up for 2 months. But it's been less than 2 years and before the drop off I had about 3000 of my own money and 1000 in on paper returns.
It does make taxes a bit more complicated. No more free version and if you don't save the paperwork they send you it'll be more difficult.
|
|
giramomma
Distinguished Associate
Joined: Feb 3, 2011 11:25:27 GMT -5
Posts: 21,323
|
ESOP
Jun 28, 2022 6:59:46 GMT -5
Post by giramomma on Jun 28, 2022 6:59:46 GMT -5
Ava, are you still planning to move back to your home country by the time your are 60ish? I thought you said you could even maybe stop working earlier like 57ish, and move back home on the jobs thread.
Would you even qualify for medicare if you are living in another country? I think you alluded to your home country having medical care that was fine. Is that a public program or would you have to buy private insurance? If you move to your home country permanently, at say, 57, are you still subject to US taxation laws say, at 67? Will you have to pay taxes in both countries until you pass?
I seriously don't know how this all works. In your position, I agree, I would defer this year. And then I'd take some time to figure out all the tax laws, what you qualify for, and then make financial decisions based on the end goal of moving home permanently before you hit 60.
|
|
bean29
Junior Associate
Joined: Dec 19, 2010 22:26:57 GMT -5
Posts: 9,929
|
ESOP
Jun 30, 2022 13:50:10 GMT -5
Post by bean29 on Jun 30, 2022 13:50:10 GMT -5
I called today to check on my (former) company 401K plan. The plan does allow distributions of a specific investment, but it would not allow me to roll the stock over and not liquidate said stock. If I take a distribution now, I would have a 10% penalty. In about 1 more year, the penalty will not apply, but I do not expect to start taking distributions for about 10 years yet. I need to decide on a different investment for those funds. I have until August to make a decision. If I don't choose a fund, they will invest it in a Target date fund for me. I have several other investments in that 401K- the company stock only represents about 2% of what I have there.
|
|
MN-Investor
Well-Known Member
Joined: Dec 20, 2010 22:22:44 GMT -5
Posts: 1,937
|
ESOP
Jun 30, 2022 14:26:49 GMT -5
Post by MN-Investor on Jun 30, 2022 14:26:49 GMT -5
I called today to check on my (former) company 401K plan. The plan does allow distributions of a specific investment, but it would not allow me to roll the stock over and not liquidate said stock. If I take a distribution now, I would have a 10% penalty. In about 1 more year, the penalty will not apply, but I do not expect to start taking distributions for about 10 years yet. I need to decide on a different investment for those funds. I have until August to make a decision. If I don't choose a fund, they will invest it in a Target date fund for me. I have several other investments in that 401K- the company stock only represents about 2% of what I have there. If you're looking at a NUA situation, do that at the same time as you roll your 401(k) into an IRA. I had my 401(k) at Fidelity and I rolled the non-company stock into a Fidelity IRA and the company stock into their taxable brokerage account. I explained to Fidelity what I wanted to do and they made sure it was done correctly and the year end tax statements reflected the NUA. Work with the financial company you roll the 401(k) into. Since IRAs allow more investment options than a company's 401(k), it usually makes sense to eventually move your funds into an IRA.
|
|
Ava
Senior Member
Joined: Jan 30, 2011 12:23:55 GMT -5
Posts: 4,176
|
ESOP
Jul 2, 2022 10:06:38 GMT -5
Post by Ava on Jul 2, 2022 10:06:38 GMT -5
I took a quick look at the information the company provided regarding the ESOP. The shares are purchased with after-tax dollars, and then gains are taxed depending on when you sell. If you sell before a 12 months period, you have a short term gain, and if you wait over 12 months you have a long term gain, with a more favorable tax situation.
I'm going to pass for now. It's been overwhelming with all the changes in such a short time. I'm still trying to set up my 401k properly. I haven't even looked at the HSA account yet. Trying to find providers that take my vision and dental insurance now. Fortunately, my doctor takes my new health insurance.
As for investments, since this is the first year I qualify for catch up contributions, I'm slowly upping my contributions monthly to max out again. I rather concentrate on that right now. The ESOP allows to invest up to 10% of your income after tax, and that would take a big chunk out for me. I could contribute 2%, but it's such a small amount that I'll leave it for now.
Anyway, I can enroll every six months, so it's not like I'm missing a huge opportunity, considering how little I can invest and that I'll be opting out for just a six months period. In six months, I can decide again if I want to enroll. I want to do it, just feel I need a little more time to process everything.
|
|
alabamagal
Junior Associate
Joined: Dec 23, 2010 11:30:29 GMT -5
Posts: 8,118
|
Post by alabamagal on Jul 5, 2022 5:18:13 GMT -5
Hi Ava, I think it is fine to pass up this opportunity. A 10% discount on stock purchase is not a huge benefit, and just has to be weighed against potential losses due to stock price going down. Seems like most people who make out well are with small startup companies who are growing. You have to have a company doing well to get big benefits.
I have been “burned” with lost opportunity due to stock prices going down, both with large multinational companies. Most recent case was ESOP with a 50% discount (up to $1500 per year). I participated for 3 years, then when I was laid off, stock price and exchange rate were both low, and I had to sell within 3 months, I got out about the same amount I put in, si basically no benefit. Prior to that I worked for a big pharma company and we used to get stock options as bonuses, and stock prices were going up. Then stock crashed (in 2000) and a few years later I was laid off. With stock at its highest, I had over $100k of potential gains, when stock went down I had $0, and options were lost when I was laid off. Stock price was so bad that stock is only now reaching 2000 year high, so if I had stayed there the options would have been worthless anyway. In both examples, I didn’t really lose my investment, but examples of how stock prices have risk to your investment.
|
|
Ava
Senior Member
Joined: Jan 30, 2011 12:23:55 GMT -5
Posts: 4,176
|
ESOP
Jul 6, 2022 16:17:14 GMT -5
Post by Ava on Jul 6, 2022 16:17:14 GMT -5
alabamagalI was going to pass for now on the ESOP purchase, and start on it next year. But now I'm wondering if it's worth it. For me, 10% of my after-tax paycheck is huge, plus I'm maxing out retirement. I've always been very careful with money, and I continue to prioritize retirement saving & investment. But at this point in life, I want to enjoy part of my money now, instead of having another bucket to fill besides 401k and IRA. It's hard enough as it is. This is a huge, well established company, not a start up. Your comment is making me rethink the idea of participating in the ESOP next year.
|
|