024R | The Friday Roundup | How to Hack Your ESPP

In today's Friday Roundup we discuss Episode 24 with Joel and Alexis from FI180 as well as some expert voicemails from Chad Carson about real estate plus Ken talking about ESPP options.

In Today’s Podcast we cover:

  • Friday Roundup after Episode 24 with Joel and Alexis from FI 180
  • Camp Mustache tickets for January 2018 are available for sale, so come and join us!
  • The letter Joel wrote to his younger self and the emotional value of it
  • The sacrifice for living an opulent lifestyle is too great in our opinion as you have finite resources and have to make the best choices
  • Joel and Alexis had a true choice and inflection point where they chose Financial Independence
  • They looked at FI as a game and had fun trying to gain a quicker path to FI. It made them happier and brought them closer together
  • The 72 hour no buying rule that Liz from Frugalwoods informed us about
  • Brad’s new favorite card game: Monopoly Deal
  • Feedback from the audience: Austin’s email about his path to FI with a career that didn’t require a Bachelor’s Degree. He is now earning 6-figures at 25 years of age
  • Itunes review from Derek who is teaching his 5th grade students how to look at money, index fund investing and much more.
  • Geri’s question about reinvesting dividends when you invest in mutual funds. You generally want to reinvest the dividends
  • Question from John about investing in VTSAX in a “taxable” investment and what bucket to put it in? Our advice is to open a standard brokerage account and invest in VTSAX
  • Index fund investing is the most tax efficient investing since there is low turnover and thus lower capital gains that would be taxed in the current year
  • Email from Matt describing how he’s thinking more deeply by listening to our show and reading FI blogs
  • ChooseFI mentions on other blogs
  • FI hack from Ken on ESPPs and Jonathan’s response since he can benefit from it at his job and purchase his company stock at a 10% discount
  • Follow up from our in-house expert on real estate: Chad Carson who gives us a background on how to evaluate the financials behind a rental real estate purchase
  • Travel rewards question about how to review flight and alliance award options. Our  thought is to look at traveling differently and build in flexibility and find saver award availability
  • Travel rewards question about combining Chase Ultimate Rewards points
  • Hot Seat intro music update
  • Itunes reviews and The Simple Path to Wealth book giveaway

Links from the show:

Your Financial Resilience Toolkit

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12 thoughts on “024R | The Friday Roundup | How to Hack Your ESPP”

  1. I just want to clarify – awardhacker.com only shows you what is possible based on the award charts. It doesn’t tell you about availability of a flight at that saver level on any given date.

  2. Hi guys – I looked up the ESPP tax treatment after you discussed it. I don’t have an ESPP available and there may be multiple varieties, but this is what I found that I think ought to be clarified:

    – Using the example in the show, the 10% discount received on the purchase is treated as taxable income/compensation. Therefore, the $2500 total discount is $2500 you have to pay tax on without actually receiving the funds if you didn’t sell the stock. That’s $625 in Federal tax you have to be able to cover (assuming 25% tax bracket).
    – The basis used to calc your gain/loss on the sale of the stock is the price you paid plus the amount of the discount, since you paid tax on the discount you received. Presumably, how long you hold the stock will determine if it’s short or long term gain and the corresponding tax treatment – hold it for over a year and then move it to Vanguard for the more favorable long-term rate treatment, assuming you can handle the risk associated w/ holding an individual stock that long.

    Paying tax on the discount isn’t a reason not to proceed with this, as 75% of free money is way better than no free money, and the same logic applies to having a short-term gain vs. long-term if you can’t hold it for that long. But it does require to be thoroughly thought through so one completely understands what one is getting into.

    Keep up the good work.

  3. Another great episode – well done Brad and Jonathan! I realize I’m about 2 months late in my comment here, but I’m slowly cherry-picking episodes to listen to on my bus commute to/from work after discovering the podcast a few weeks ago.

    I wanted to add some color to the ESPP part of the episode. In my experience, this is an *amazing* benefit when offered by your employer. Both my wife and I have been fortunate to work for companies that offer top-notch ESPP plans that seemed almost too good to be true.. Here are the details below:

    1. Contribution limit of 15% of after-tax payroll contributions.
    2. 12 and 24-month offering periods (the period for which you may lock into a ‘low’ price).
    3. 6-month purchase periods (the period during which your money is deducted and set aside to purchase stock at the end of the period)
    4. 15% discount. The purchase price is 85% of the lesser of the market value of the company’s common stock on (i) the first day of an offering period or (ii) the last day of the applicable purchase period.
    5. No vesting or minimum holding period. THIS is the key. Since our plans allow us to sell right away, it eliminates 99% of the risk and results in a minimum 15% gain (often significantly higher) over the course 6 months.

    As Olaf mentioned above, the tax treatment is a little odd here and you want to be careful when it comes time to file your taxes – make sure to submit the correct cost basis (NOT your 15% discount purchase price); otherwise you run the risk of paying taxes twice on the discounted portion of the transaction.

    I happen to work for a company with a pretty volatile stock, so I would be _much_ more hesitant to participate if my vesting period was ~3 months or longer. With any sort of a required holding period attached to the ESPP, it becomes a judgment call as to whether your should participate or not – and really depends on your (personal) risk tolerance.

    Looking forward to future episodes!

  4. Hi gang,

    Slowly catching up on episodes hence the late comment.

    There was a part towards the end of this episode where it was mentioned “if there is an easier/better way of explaining taxable accounts then please let us know”.

    I must admit as an Australian, I’ve been slightly confused several times whenever you (or guests) mention “taxable” accounts and this episode made it much clearer and tried to address this terminology problem head on.

    Here in Australia our tax system is far more simple. We have one retirement account only called “superannuation” or “super” for short, which is a fund that invests retirement savings on behalf of the people. There are many different super funds out there and we choose which one we want our money to go to. It is mandatory for employers to pay 9.5% of (pre-tax) salary into our nominated super fund, so additional money is being added (and invested) automatically for the working class people.

    Superannuation deposits (both mandatory contributions by employer and/or voluntary contributions by people looking to boost their retirement funds) are taxed at just 15% up to $25,000 annually (mandatory & voluntary contributions combined), so it is a tax efficient investment vehicle and what we call a “pre-tax investment”

    So it’s easy and simple for us to understand that only superannuation (here in Australia) is dealing with gross salary (aka “pre-tax” dollars) while everything else is using what we call “after-tax dollars” or “post-tax dollars” (aka your net salary after your individual taxation has been taken out).

    I think in your podcast (and I guess it’s common American tax terminology), the constant referring to “taxable” accounts is throwing people off and causing confusion because you are meaning it to be a “after tax account” i.e you have already been taxed, but the word “taxable” is using present/future tense and implying that money in this type of account can still be taxed.

    So for the sake of clarity, consistency and friendliness to foreign listeners, :), in the FI community – I propose a slight change in terminology when discussing various accounts and tax implications and assumptions of these accounts:

    Retirement accounts = pre-tax accounts = pre-tax buckets (this is where you reduce your annual taxable income and thus total tax paid by depositing pre-tax dollars into a retirement account.

    Instead of calling it a “taxable” account, everything else should be considered to be a “standard post-tax account” = post-tax buckets (bank account, savings account, brokerage accounts etc). This is where “after-tax” dollars or “post-tax” dollars end up after your earnings/income has been taxed at your individual tax rate. No further taxation occurs upon purchasing investments from these post-tax buckets (Capital gains tax occurs upon sale not purchase of investments).

    I think being consistent with pre and post accounts / pre and post buckets terminologies, it is easier for listeners of an audio podcast to visually understand the flow of money and where the taxation is occurring.

    Just my two cents… a post-tax opinion!

    – Chris

  5. Was the ChooseFI Hot Seat intro music “really” changed in the last episode (i.e., Episode 24)? I don’t hear any difference. Maybe you went back and re-edited all previous episodes with this “new” intro music. Am I right?

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