If your company offers an employee stock purchase plan (ESPP), participating feels like an easy decision. Buying company stock at a discount sounds like a smart way to build wealth and invest in a company you believe in.
However, the decision to participate in an ESPP should be less about a publicly traded stock and more about your broader financial situation and how this decision impacts both short- and long-term goals.
How Do You Decide Whether to Participate in ESPP?
For many executives, participating in an Employee Stock Purchase Plan (ESPP) can be a valuable opportunity. However, the right decision depends on several factors, including your cash flow, how much of your wealth is already tied to your employer, and the tax implications of selling or holding shares.
An ESPP can be beneficial, particularly when the plan offers a discount on company stock. But like most financial decisions, it should be evaluated in the context of your overall goals rather than viewed in isolation.
The Foundation of Every Financial Decision: Cash Flow
Cash flow is determined by what money is coming in, what money is going out, and what money is left over.
If money is stretched thin, adding another paycheck deduction might make things more stressful than helpful. Maybe you’ve recently had a large expense like a medical bill, wedding, or home project, and your liquid cash is temporarily limited. In this case, it’s probably not the best time to participate in your employer’s ESPP.
However, an ESPP lets you participate only when it suits you, so you can sit out an enrollment period and sign up again later. Don’t think of it as missing out. You are actually keeping your financial plan in balance.
Conversely, when cash flow is strong, you have more room to consider opportunities like this. Healthy cash flow gives you options. You can choose to participate if it aligns with your broader goals, knowing you have the resources to adapt if priorities shift.
The goal isn’t to jump at every opportunity, but rather to recognize which opportunities fit well into your current situation.
Understanding the Three Investment “Buckets” in Financial Planning
Once you understand your cash flow, the next question is whether you’re saving in the right places, or “buckets.”
I like to break buckets down into three categories: taxable investment accounts, tax-deferred accounts, and tax-deferred/tax-free accounts. Combined, they are the foundation of a healthy financial plan.
Taxable investment accounts are accounts that are readily available and liquid. They are essential to provide flexibility in the years before retirement where access to capital may be needed. Each year you may have to pay taxes on dividends and interest that the portfolio generates, as well as potential capital gains if anything was sold for a gain in the account.
Tax-deferred accounts, like 401(k)s or traditional IRAs, allow your investments to grow without paying taxes each year. You’ll pay taxes when you withdraw the money in retirement.
On the other hand, tax-free accounts, such as Roth IRAs or Health Savings Accounts (HSAs), work differently, you pay taxes up front, and then qualified withdrawals are tax-free down the road.
By taking a holistic approach to these three buckets, you have a more informed mindset when deciding whether or not to participate in your ESPP plan. This type of investment account would fall into the first bucket: a taxable investment account.
The goal should be to have a healthy mix of account balances in each of these buckets, ensuring that you are planning for the long-term, but maintaining flexibility for shorter-term goals and objectives.
Take the time to review where your current investments are located and which buckets they fall into. There is no magic number for determining what the right mix is, and it is highly dependent on your personal situation and what you are attempting to achieve.
The ESPP Decision: Evaluating the Opportunity in Context
Your financial plan has moving parts: savings goals, debt repayment, family needs, unexpected expenses, future plans. The ESPP is one piece of a larger puzzle, and you now know that participating shouldn’t come at the cost of other priorities.
It’s also important to consider how much of your wealth is already tied to your employer. After all, your income comes from the same place. If you receive restricted stock units (RSUs) or hold company shares, continuing to buy more can lead to too much exposure to one company. Determining the right amount of exposure is something that should be discussed with someone outside of the organization who knows your goals.
For some, the best approach might be to participate and sell shares quickly, capturing the discount and using proceeds to diversify or fund other goals. Others may decide to hold longer, particularly if the company is financially strong and the tax implications align with their plan.
Additionally, there are tax nuances associated with each of these approaches, which are beyond the scope of this blog. For a more detailed review of how taxes on ESPP’s work, visit our detailed overview here.
Not only do you want to be mindful of your concentration risk in company stock, but you also want to be aware of other opportunities you may be missing out on. One example would be if your employer allows you to take advantage of the “mega back door” Roth strategy. This strategy is a highly effective way for individuals to get more dollars into the tax deferred or tax-free bucket.
Going back to your cash flow, if you can save more, does it make the most sense to participate in your ESPP or take advantage of the mega-back door? The answer to this question is not a straightforward one and requires an in-depth analysis of the totality of your assets and what you are trying to achieve.
Future You: The Long View
Participating in an ESPP connects today’s paycheck with tomorrow’s possibilities. Each contribution is a decision for both your current and future self, aligned with the future you future you envision today. Saving isn’t just about accumulating money. It’s about creating freedom to make choices, handle life’s curveballs, and support the people and causes that matter to you.
When working with a TCI Advisor, we help you evaluate whether participating adds value, how much to contribute, and when to sell or hold. Additionally, we look at how these decisions support what’s meaningful to you over time, both personally and financially.
To help you determine if participating in your ESPP makes sense for you, schedule a time with a TCI advisor, who will take a detailed and holistic approach to help you make this decision.
Disclosures
TCI Wealth Advisors, Inc. is an SEC registered investment advisor. This material is provided for informational purposes only and should not be construed as investment advice or a recommendation. TCI is neither a law firm, nor a certified public accounting firm and this material should not be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice.
