Tax planning and compliance for investors
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By Kaye A. Thomas
Updated June 20, 2010
A good way to acquire stock in your company.
Employee stock purchase plans can be a good deal for those who participate. Like incentive stock options, they can make it possible for you to buy stock at a bargain price without reporting income until you sell the stock. In some ways they're even better than ISOs:
Incentive stock options can be better in other ways, though:
A qualified ESPP can offer stock options that are similar to incentive stock options, but few companies set them up that way. Instead, they offer an opportunity to buy stock at a favorable price through payroll deduction. In a sense you're exercising an option if you choose to participate, but it isn't quite the same as holding a stock option. The specifics of these plans vary from one company to the next. Keeping in mind that your company's plan could be different, here are some typical terms:
You can benefit from an ESPP in several ways. It's a way of saving and investing with money that automatically comes out of your paycheck, which is an excellent way to build wealth. If the company provides a discount, your savings get a boost. On average you would expect to wait close to two years to see a stock investment grow from $85 to $100, so that discount is a big head start. If your company's plan offers a lookback, so you can buy based on the price on the offering date even if the stock is trading at a higher price on the purchase date, you can really turbocharge your savings.
Apart from the financial benefits, there's something special about having a stake in your company's fortunes. It's one thing to watch an investment grow in value, and quite another to participate in the rewards of a success you helped create. Holding stock in the company where you work can provide a kind of satisfaction you can't get from other investments.
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