ESPP Exit: What’s Your Financial Advice for Us?

I can’t help but realize that writing this blog each week almost always involves me giving some advice about some money issue. Sometimes it has been very specific on things like saving money at the grocery store or preparing yourself for retirement and at other times it’s been more spiritual like when I refer to things that can motivate you and good money habits to develop that help protect your financial well-being.

My wife and I need to make a decision about what to do with her old ESPP (Employee Stock Purchase Plan) shares. What's your financial advice for us?

Sometimes when I look back on what I’ve written, I realize I definitely have had a tendency to pontificate and yes, even ramble. I’m being kind to myself more than a little here. I really think writing a 2,000+ word post can lose even the most diehard readers. Who has the time for that much stuff to read on a regular basis?

So today I am going to write a shorter, more personal, and concise post. And guess what? I going to write it with less than 1,000 words and actually ask for your help and advice about it.

This post is about a financial decision my wife and I have to make right now. I don’t always have every answer to every question (gee, that is kind of hard to admit!) so why not see what you have to say? Today I am asking this question: “What is your advice on this ESPP exit?”

When an unexpected financial decision appears, what do you do?

A couple of weeks ago, my wife received a letter from Philips Electronics (PHG), a former employer, regarding changes in her ESPP (Employee Stock Purchase Plan) which she still owns after years of not being employed there. Her stock has been accumulating with dividends and reinvesting every year.

It has grown very well over the years despite no additional new cash infusions. It just sat and grew into a tidy sum until now she has over 300 shares with a value of nearly $12,000. The ESPP plan will be revised effective April 1, 2019 (coincidence?) and ex-employees must exit now from the plan by that date!

Of course there may be tax implications to this so that is another reason we are doing some heavy thinking. A choice has to be made, and soon.

What are our choices?

Option #1 – Remain a shareholder and transfer all of the whole shares to a personal brokerage account. Any fractional shares must be sold off before any transfer no later than April 1st.

Option #2 – Sell all of the shares through the administrator no later than April 1st.

We could do absolutely nothing and the administrator will sell all the shares (whole and fractional) off and forward a check to my wife (with higher fees that way and a mandatory withholding deduction to cover any potential tax consequences).

Upon receipt of the money, we would then be free to re-invest any or all of the money into a retirement type account like a Roth IRA or an IRA CD account for example. Re-investing may create a tax deduction that eliminates some or all the tax consequences on our 2019 taxes.

What will it cost us to do all of this?

Of course, none of this is free. In fact, option #1 actually requires paying some of our own money up front to have any of this processed (by credit card). After the transaction is completed, any monies she will receive will take about 10-14 business days to actually get in hand.

But, whether we choose option #1 or #2, there is a cost. They do differ slightly.

In option #1, transferring the shares to a broker will cost a flat $50.00 fee plus $0.03 per fractional share sales.

In options #2, fees are $0.03 for the sale of each share plus a $24.95 fee added.

If we do nothing, the cost is $0.07 per share when the company sells the stock, plus a fee of $39.95. They will then deduct the mandatory withholding.

Oh and by the way, asking the company for any advice or help with the options will cause all the share fees to double and add another transaction fee of $39.95.

There is also a $5.35 “handling” fee (WTF is that?) charged as well as a “small” SEC charge for issuing any transaction and it will be deducted from the proceeds. Sounds like fun, doesn’t it?

Just an additional point to know

The money we are talking about here is not a life changing number and we haven’t ever even thought about using it for anything in the 12 years we have been married. In fact, my wife was very content to just leave it where it was and let it keep growing every year. That includes even the down years of market drops during the recession of 2008.

Since she is not that close to FRA (full retirement age) age, it makes the most sense to re-invest the money somewhere rather than just use it as a windfall gift that fell from the sky. We aren’t going to spend it right now as we always planned that money as a part of her retirement funds.

So what do you think?

We will decide what to do in just a few weeks so here’s where you come in. Which choice do you recommend and why?

We have over 300 shares of a very reliable well known company who currently is growing and whose stock pays dividends regularly. The company stock has grown about 167% since 2008 and has grown 25% in the past two years alone so it’s kept pace and even exceeded the overall market trends. Please make your pick here and we’ll let you know what the verdict and decision outcome is before the April 1st deadline! You can leave any comments you have in the comment section below and thanks!

Option # 1? Option #2 (and then what)? Or, do nothing and get a smaller check in the mail?

There ya go. All in less than 1,000 words!

5 Comments

  1. Louise

    I’m a bit confused about how a Roth IRA would help on your 2019 taxes. That isn’t tax-exempt when the money is first put in, is it? Or are your contribution limits different when the money is being moved within retirement accounts?

    If the money is going to stay untouched for quite some time, although the fees are annoying now, I wouldn’t consider them a huge criteria in deciding between the two options as they don’t seem to be too different, though I’m not quite sure how many fractional shares, as opposed to just shares, she has. I had to look up what that term means.

    Some criteria for investing are risk-comfort, time available for growth, fees, ease of managing the money. I think I tend toward option #1 as well.

    1. It is confusing, yes. The tax treatment on the sale of any shares in an ESPP account depends on the timing of the sale of the shares. If shares are sold more than two years form the first day of the offering and more than one year from the purchase date, then the sale is considered a qualifying disposition and any gains are taxable in two ways.

      First, when you sell the stock, any discount that you received when you bought the stock is generally considered additional compensation and there are taxes due on that as ordinary income when sold.

      Second, she has gains on all new shares purchased with the dividends that have been reinvested. Those shares are considered unqualified and long-term capital gains and thus taxable. Her tax liability is on the discount she got and the capital gains. I believe that investing in any Roth IRA would qualify for some income taxes due on the unqualified money when it’s moved into a new account.

      Regarding fractional shares, they are actually what they sound like: a piece of a single share. In our case it represents about 2/3 of a single share so I may have blown that waaaay out of proportion when telling the story! Sorry for that.

      Thanks for your input Louise…much appreciated!

      1. Louise

        I appreciate these small puzzles so I can learn some more terms and procedures, so I will be ready to make good decisions in the unlikely event the situations ever come my way! At the very least, I can practice asking questions more intelligently about financial decisions.

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