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An employee stock purchase plan (or ESPP) can be a very valuable benefit. In general, if your employer offers an ESPP, we think you should participate at the level you can comfortably afford and then sell the shares as soon as you can.
We'd recommend maximizing your ESPP sometimes even before maximizing your 401(k). The percentage will vary, but you'll want to maximize your ESPP contributions however you can. Note: If you have the ability to max out an HSA or Roth IRA, those should be priorities as well.
While it would be nice if everyone could max their 401(k) and contribute to an ESPP, not everyone has the cash flow available to do this. Generally speaking, you should be contributing up to the employer match in a 401(k) before even considering setting aside additional money in an ESPP.
Maximum contributions: Tax rules cap the amount of company stock an employee can accrue in an ESPP at $25,000 of the fair market value of the stock per year. Most plans allow employees to elect a payroll deduction between 1% and 15%.
Qualifying disposition: You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the ?bargain element?) is considered compensation income (taxed at regular rates) on your Form 1040.
How much should I put in an employee stock purchase plan? You can contribute 1% to 15% of your salary, up to the $25,000 IRS limit per calendar year. The more disposable income you have, the more you can afford to put in an employee stock purchase plan. Employees contribute through payroll deductions.
An ESPP discount is nice, but it ultimately comes down to whether or not you believe the stock price will appreciate. A 5% discount on shares that depreciate 10% is still a loss.
ESPPs can also be subject to a vesting schedule, or length of time before the stock is available to the employees, typically one or two years of service. Depending on when the employee sells the shares, the disposition will be classified as either qualified or not qualified.