Tuesday, November 14, 2006

Do you pass up free money?

Thought I was going to write about a 401k match, NOT! Actually tomorrow is DH's ESPP semi-annual purchase and sale date. I have to go and log in the set price so I know what the stock will price at for the next 6 months, thus I'm contemplating how much we're going to make on our investment today.

What is ESPP? It is employer stock purchase plan. What happens is the company allows employees to purchase company stock at a discounted 15% rate off the set price. The set price typically occurs twice a year, and the employee either gets the stock at the Nov 15th set price or the previous May 15th set price, depending on which is lower. Amazing deal right? Where else can you plunk your money into a savings account for 6 months and earn 15%?

Now there are a few limitations, the first of which is money. DH's company allows us to put in 15% of his salary, which is considerable, but right now we just can't afford it. Did I just write that we can't afford it? Yep, we can't afford to save more. I feel like such a failure to be passing up free money. It really gnaws at me and DH to pass up this free money. I guess if we cut out cable, internet, eating out, and sell the dogs. But I don't think DH will let me fly with that, so 10% savings it is. My stretch goal is to save 15% come February 2007 when DH gets a raise (and prayers a promotion). Then we can stop feeling guilty pangs.

Getting back to the ESPP, sure they give you the 15% but it's not really 15%. It's actually about 10% after taxes? How so? Well say you "churn" the stock on the purchase date. Then you are making 15%, but having held it for only 6 months you will be hit on the earnings portion with short term capital gains. Say you have $3000 but it went up to $3500, you will pay taxes on the $500 of earnings.

The short term gains are unfortunately your normal tax bracket. So by selling today we are in the 25% bracket. Ugh, there we lost $125 immediately to the federal government. Then we lose short term capital gain to state taxes, unfortunately in MA this is 12%, ugh. That means we would lose $60 to MA. This leaves us with...$310, which is about 10% return on our money.

That is still a great deal in my opinion for risk free investing for 6 months guaranteed return! Of course our returns would be greater if we held the stock for 1 year and let it become long term capital gains. In which case the tax rate would be 15% federal and 5.95% MA. But this comes with huge risk that the stock price in 1 year won't fall and become lower than what it is today.

So should we sell or should we wait? Well I'll now lay it out here, we are buying the stock at $28.23 and currently it is $42.69. That means we have made 50% in 6 months. Should we take our profits and run or should we just meander and wait? Why wait? Because typically stocks up at the end of the year. Also we get more stocks on 12/5 so we could save a bit on commission by selling all at one time. This is something I think we'll have to contemplate more.

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