You Down with ESPP?

First world problem alert: we have an investment decision to make, and one with tax consequences, too. (Remember back when we used to have to choose between paying rent on time or paying our credit card bills before the late fee kicked in? Those were the days.

It's like Kevin Spacey said back in American Beauty. All I did was party and get laid. )

So, my employer generously allows us worker bees to participate in an employee stock purchase plan. Basically, it allows employees to pay into a program, and to buy the company stock at a discount.

Here are the details:

• Employees can put up to 10% of their income each paycheck into the plan, for a six month period.
• That money sits in a cash position for those six months, then buys the company stock on a specific day.
• Here's the fun part. The purchase price is X% less than the lower of the two dates: the first day of the six month purchase period, or the last day of the six month purchase period
• So, that means if the stock went up over those six months, we get to buy it for X% less than whatever that price was six months ago. That means we'd get more than an X% discount (the price delta from today's date to the purchase price six months ago...minus X percent)...which is great.
• If the stock goes down over those six months, then employees just get X% off.
• Any time after the purchase, we have the option to sell the stock, or keep it. 

So, all in all, it's a cool program.

The problem is that I don't like holding any single stock, let alone that of the company that also is responsible for providing me a paycheck. It seems risky to concentrate your wealth and income source in the same company. Besides, I'm a straight up Boglehead and index all the way...until now.

The rub is that if we sell right now, all the gains get treated as short term capital gains: i.e. - taxed like regular income...which sucks. (I can hear those Syrian children getting ready to bludgeon me for complaining again.) If we hold on to the money for another 18 months, the gains get (mostly) treated as long term capital gains, taxed at a nice low 15% rate.

And if we hold on to the stock all the way until early retirement, we might be able to sell it while we're in the ultra-desirable 15% marginal tax bracket, meaning we'd pay 0% tax on the gains. (I call this the GoCurryCracker Special...TM). Of course, early retirement is still at least six years out. And if we keep on putting 10% of every paycheck into this stock, and we keep getting discounts on each purchase, we could have way, way too much of it in our portfolio by the time early retirement comes around.

So, what's a boy to do? I figure we have four pretty good options.

1. Sell the stock immediately after each purchase (i.e. - every six months), pay the higher short term capital gains, and put the funds into our asset allocation (A.A.): Bernstein's Simpleton's Portfolio
2. Wait the requisite 18 months, sell the oldest batch of stock at the lower long-term capital gains rate, put funds into A.A., and repeat each six months.
3. Pick a percentage of our total portfolio we are comfortable being in this single stock (e.g. - 5% of all our investments) and sell whenever we go over that amount, regardless of tax consequences.
4. Hold on to stock until our income drops (early retirement or job loss), try to pay 0% on all gains...and ignore the ever growing slice of our portfolio the stock represents.

The rub is that I can see the merits of each approach. Staying within our asset allocation seems prudent, so maybe selling immediately is wise...if a little risk averse. Waiting will save us on taxes, and perhaps would make us more money. But the longer we wait to sell, the more of our investments will reside in that single stock.

As we usually try to do when we have a tough decision, we turn to our brain trust: our readers. Of course, you are wasting part of your Monday reading this sorry blog...so how smart can you be? Regardless, I'd still love to hear what you'd do in this situation.

I realize you don't have all the information (how much we make/what tax bracket we're in, what the company stock is, what the discount is, etc.) As we value and try to preserve our anonymity, I can't share a lot of the details of our financial lives any more. Sorry 'bout it.

Instead, I'd like to hear what you would do with this sort of Employee Stock Purchase Plan. If you were in our shoes, what would you do? Apply your own situation, investing style, income, and tax strategy, and please pick one of the options below. I'm excited to see the results...and not just because I finally figured out how to insert a poll into a blog post.

Just to be safe, I should probably remind myself and everyone else that I am not offering investment or tax advice, or advice of any kind. Before making investment decisions, you should seek the advice of a professional, along with that of your shaman and your mother.

I, on the other hand, am willing to foolishly take the advice of internet strangers. Opinions are welcome, as is candy.


*Photo is from puuikibeach, used under the Creative Commons License at Flickr.