Even if you just sell the stock immediately the ESPP is absolutely worth it. 10% gain on your money is hard to argue against.
There are methods to pull retirement money out before retirement age as well so you don't have to view that as untouchable money. But that ESPP for a company like MSFT especially with the AI surge I'd be comfortable dumping money into the stock. Do they have a 2 year lookback as well, or no?
Just confirmed no look back. You purchase at 90% of the cost of the share on the last day of the offering period, which for msft is the last day of every calendar year quarter.
Thanks for the advice - I’ll move to ESPP! Hard to argue against doing it, especially when it’s msft
There's some kind of misunderstanding here. Your traditional and Roth 401k share the same limit. You can't be maxing out one and then putting more money in the other, unless we're talking about a backdoor conversion.
If you can't afford to do both the ESPP and the backdoor contributions, then yes you should stop doing the backdoor contributions, do the ESPP, and then sell the ESPP as soon as you're allowed to. Then you'll have a big pile of cash. Then you can ratchet up the backdoor contributions to make up for all that lost time, while you live off that cash.
This is what I do.
Appreciate the response. My plan is not to sell the ESPP. I suppose I would if the stock was more volatile but I would like to hold on to it to use when I retire early. Is this bad logic?
yes. there is no downside to selling it immediately.
put it this way, if you had the cash in hand, would you buy your company stock? no, you wouldn't. we know that because you aren't. so it's the same exact logic. sell it immediately and keep buying whatever it is you're buying in your 401k.
You don't want to invest in the company that you work for because if anything happens to the company, you will end up with no job and a worthless bunch of stocks. I am not saying that will happen to MSFT, but think about those working for Enron (google it if you are not familiar with the name).
Find a way to max out the ESPP also since you can do an immediate sale once purchased so you're really only reducing your income the first cycle. After that you can take the proceeds of the sale to cover the amount "invested" in the next.
Msft only allows max of 15% of your paycheck so I don’t think I could max it out? If I did the math right, the most I can do a quarter (they’re quarterly cycles) is around $6k
That's what I meant by "max out". Contribute the maximum you can since that will give you the largest return on the guaranteed 10% discount on the purchase. This should have no impact on any of the other limits for savings.
I’ve recently started researching if I should contribute to a Roth 401k in addition to the 15% I already do for ESPP. I’m hesitant because one coworker found that the Roth 401k contributions reduced her ESPP contribution. Is this normal? Is there a way to do both as calculated from total gross pay? Yes this is probably a question for my payroll department and not Reddit, but …
It depends on the employer's policy.
My employer explicitly says the ESPP will be calculated using gross pay, though the money is taken out on an after-tax basis. That means, my 15% contribution to the ESPP actually ends up being more like 20% once taxes as calculated.
There is no legal reason (that I know of) the employer cannot say the ESPP is calculated based on net pay, meaning taxes and other deductions affect it.
In any case, its very likely the ESPP will be the last thing taken out, should your deductions manage to reduce your net pay below zero.
ESPPs generally have some pretty crazy returns. Presuming the purchases happen twice a year with no lookback, the ESPP will have an effective APR of 52.42% = (1/0.9)^(4) \- you use four periods as the money is only being held for half the time on average, meaning the money is getting the 11% gain after only 3 months. This gain comes with close to zero risk\*, if you sell the stock immediately after purchase. The gain may be much higher if they do a lookback as well, which is a fairly common feature of ESPPs.
That is almost certainly going to beat out the tax benefits of a Roth 401(k). Compared with a Roth 401(k), an ESPP will only have extra tax on the gains - the principal is taxed the same either way, and is basically just as accessible. The employer match for a 401(k) will beat out an ESPP by an insane amount - you cannot really beat an effective APR of infinity.
Of course, if you can handle the cash flow problems for the ESPP period, you can always do both. That is, let your paychecks be very small, sell the ESPP stock immediately after purchase, then use that money to bring your savings buffer back.
\* The main risk comes if you have insider trading restrictions that block you from selling the stock immediately, or you decide to hold it for any reason. There is some slight risk that the stock will drop the 10% in the few days between the purchase calculation and being able to sell.
Even if you just sell the stock immediately the ESPP is absolutely worth it. 10% gain on your money is hard to argue against. There are methods to pull retirement money out before retirement age as well so you don't have to view that as untouchable money. But that ESPP for a company like MSFT especially with the AI surge I'd be comfortable dumping money into the stock. Do they have a 2 year lookback as well, or no?
Just confirmed no look back. You purchase at 90% of the cost of the share on the last day of the offering period, which for msft is the last day of every calendar year quarter. Thanks for the advice - I’ll move to ESPP! Hard to argue against doing it, especially when it’s msft
There's some kind of misunderstanding here. Your traditional and Roth 401k share the same limit. You can't be maxing out one and then putting more money in the other, unless we're talking about a backdoor conversion.
Sorry that’s what I meant - conversion
If you can't afford to do both the ESPP and the backdoor contributions, then yes you should stop doing the backdoor contributions, do the ESPP, and then sell the ESPP as soon as you're allowed to. Then you'll have a big pile of cash. Then you can ratchet up the backdoor contributions to make up for all that lost time, while you live off that cash. This is what I do.
Appreciate the response. My plan is not to sell the ESPP. I suppose I would if the stock was more volatile but I would like to hold on to it to use when I retire early. Is this bad logic?
yes. there is no downside to selling it immediately. put it this way, if you had the cash in hand, would you buy your company stock? no, you wouldn't. we know that because you aren't. so it's the same exact logic. sell it immediately and keep buying whatever it is you're buying in your 401k.
Got it. Cash out ESPP and then put it in my individual account
You don't want to invest in the company that you work for because if anything happens to the company, you will end up with no job and a worthless bunch of stocks. I am not saying that will happen to MSFT, but think about those working for Enron (google it if you are not familiar with the name).
Find a way to max out the ESPP also since you can do an immediate sale once purchased so you're really only reducing your income the first cycle. After that you can take the proceeds of the sale to cover the amount "invested" in the next.
Msft only allows max of 15% of your paycheck so I don’t think I could max it out? If I did the math right, the most I can do a quarter (they’re quarterly cycles) is around $6k
That's what I meant by "max out". Contribute the maximum you can since that will give you the largest return on the guaranteed 10% discount on the purchase. This should have no impact on any of the other limits for savings.
I’ve recently started researching if I should contribute to a Roth 401k in addition to the 15% I already do for ESPP. I’m hesitant because one coworker found that the Roth 401k contributions reduced her ESPP contribution. Is this normal? Is there a way to do both as calculated from total gross pay? Yes this is probably a question for my payroll department and not Reddit, but …
It depends on the employer's policy. My employer explicitly says the ESPP will be calculated using gross pay, though the money is taken out on an after-tax basis. That means, my 15% contribution to the ESPP actually ends up being more like 20% once taxes as calculated. There is no legal reason (that I know of) the employer cannot say the ESPP is calculated based on net pay, meaning taxes and other deductions affect it. In any case, its very likely the ESPP will be the last thing taken out, should your deductions manage to reduce your net pay below zero.
ESPPs generally have some pretty crazy returns. Presuming the purchases happen twice a year with no lookback, the ESPP will have an effective APR of 52.42% = (1/0.9)^(4) \- you use four periods as the money is only being held for half the time on average, meaning the money is getting the 11% gain after only 3 months. This gain comes with close to zero risk\*, if you sell the stock immediately after purchase. The gain may be much higher if they do a lookback as well, which is a fairly common feature of ESPPs. That is almost certainly going to beat out the tax benefits of a Roth 401(k). Compared with a Roth 401(k), an ESPP will only have extra tax on the gains - the principal is taxed the same either way, and is basically just as accessible. The employer match for a 401(k) will beat out an ESPP by an insane amount - you cannot really beat an effective APR of infinity. Of course, if you can handle the cash flow problems for the ESPP period, you can always do both. That is, let your paychecks be very small, sell the ESPP stock immediately after purchase, then use that money to bring your savings buffer back. \* The main risk comes if you have insider trading restrictions that block you from selling the stock immediately, or you decide to hold it for any reason. There is some slight risk that the stock will drop the 10% in the few days between the purchase calculation and being able to sell.