[thechat] Employee Share Purchase - opinions..?
ethanol at mathlab.sunysb.edu
Tue Dec 10 22:12:00 CST 2002
Getting a 15% discount with money you're paying 40% tax on yields about 1.19
cash unit you need to earn for each 1 cash unit of equity (neglecting broker
fees and other expenses). Buying the stock pre-tax with 15% matching yields
about 0.87 cash unit earned for 1 cash unit of equity. Not a bad deal.
So what considerations are you getting for paying the premium on the
after-tax purchase? And what do you sacrifice for the pre-tax purchase?
There is the tax implication. First, is there a possible downside to taking
money out pre-tax? Here in the States some government pay-outs (most
notably social security) are based on taxable income. Depending on income
and age, there are situations where paying less taxes now can cost you more
in benefits later. Second, does the income tax you can avoid now come back
to haunt you later? Unless you've been paying off a lot of lobbyist, the
government probably hasn't burning the midnight oil figuring out ways to
save you money. Is there an extra tax on the back end when you sell, to
make up for the tax you didn't pay now? Depending on your current tax
bracket and liquidity horizon, it may make sense to take the bite and pay
the income tax upfront.
And there is the issue of tying up your money with a single stock for three
years. You're taking on some added risk there. First there's an issue with
investing in a single company versus a fund covering an industry or broader
market, but you can easily balance that risk with other parts of your
portfolio. Another area of risk is the time element. That's a hard one to
get around. Yes, it's IBM, but a lot can happen in three years. For every
live-fast-die-young Enron there's a supposedly-old-faithful Polaroid or
Arthur D Little. The third element of risk is the old eggs-basket issue.
Your employer goes tits up, you lose your job, and just when you need that
nest egg the most it is gone.
So, I think the incentive to buy pre-tax is pretty strong and probably a
good offer to take up. However, due to the restrictions on selling, I say
use it as a small addition to your portfolio. Like the money you piss away
now on lottery tickets and strippers--that's good disposable income to put
into that type of plan. And I would look into that 3-year restriction.
Just cause the company says so, doesn't make it legal. In my book, any
compensation the company gives you is yours to with as you please. If you
can't take your money off the table and walk away, it isn't really your
IMHO, YMMV, HTH, etc.
(Disclaimer: I know so much about the stock market I got Ariba at $70, sold
at $140, and pissed the earnings away on CMGI. Lottery tickets and
strippers would of done me more good.)
On Tue, 10 Dec 2002, Luther, Ron wrote:
> Hi Martin,
> It depends. How close are you to retirement? ;-)
heh. Not close enough. (there are nice UK tax rules about employee share
ownership where you don't get taxed if you sell on retirement compared to
leaving the company as a normal leaver)
> I think 'Option 2' gives you a hair more equity, (since you are playing
> with the deferred tax money),
/me is paying 40% income tax...
> but that's probably only of interest in a
> long term play for value growth. i.e. Leaving it alone versus viewing
> it as an 'annual bonus' to be cashed in as soon as possible.
Yep - I'm viewing it as a contribution to my pension.
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