Question: Should I contribute $25K/year to my employer's ESPP, a 401(k) mega back door, or split between both?
Background: My employer offers a fairly typical ESPP: Up to $25K/year can be used to purchase company stock every six months, at 85% of the stock's fair market value at either the beginning or end of the "offering period". Cash is set aside using after-tax payroll deductions and is held in an account which earns no interest until used to purchase the stock. The company's stock price is nearly the same as it was five years ago, although it's yo-yo'd up and down quite a bit. It is certainly not in the "FAANG" category, and I have no desire to hold it long term. I have participated in the ESPP since being eligible, and I typically sell purchase lots once they've reached long-term cap gain age. Proceeds from these sales are reinvested into Boglehead-friendly index funds.
The 401k offers an after-tax feature with automatic in-plan rollovers into a Roth 401k, so taxable income from conversions should be at or near-zero. In-plan rollovers to a Roth IRA are not allowed, but the Roth 401k plan offers Boglehead-friendly investment choices (SWPPX/SWISX/VBTLX) so I don't think it should matter. I am presently contributing the max allowable to my pre-tax 401k ($23K+7.5K catch-up) but nothing to either Roth 401k or after-tax 401k. Based on IRS rules, I should be able to contribute up to $41K to the after-tax/mega back door ($69K - $23K - $5K (employer match)).
I am in my early 50s, and I am in the 32% federal tax bracket, plus 9.3% for California. I have a Roth IRA, but it's only a small fraction of the size of my taxable and 401k assets. I'm thinking it might be a good idea to dump money into Roth-protected space while I still can, but this would come at the expense of the ESPP discounted stock purchases. I would like to keep the $25K limit in place. What should I be considering?
Background: My employer offers a fairly typical ESPP: Up to $25K/year can be used to purchase company stock every six months, at 85% of the stock's fair market value at either the beginning or end of the "offering period". Cash is set aside using after-tax payroll deductions and is held in an account which earns no interest until used to purchase the stock. The company's stock price is nearly the same as it was five years ago, although it's yo-yo'd up and down quite a bit. It is certainly not in the "FAANG" category, and I have no desire to hold it long term. I have participated in the ESPP since being eligible, and I typically sell purchase lots once they've reached long-term cap gain age. Proceeds from these sales are reinvested into Boglehead-friendly index funds.
The 401k offers an after-tax feature with automatic in-plan rollovers into a Roth 401k, so taxable income from conversions should be at or near-zero. In-plan rollovers to a Roth IRA are not allowed, but the Roth 401k plan offers Boglehead-friendly investment choices (SWPPX/SWISX/VBTLX) so I don't think it should matter. I am presently contributing the max allowable to my pre-tax 401k ($23K+7.5K catch-up) but nothing to either Roth 401k or after-tax 401k. Based on IRS rules, I should be able to contribute up to $41K to the after-tax/mega back door ($69K - $23K - $5K (employer match)).
I am in my early 50s, and I am in the 32% federal tax bracket, plus 9.3% for California. I have a Roth IRA, but it's only a small fraction of the size of my taxable and 401k assets. I'm thinking it might be a good idea to dump money into Roth-protected space while I still can, but this would come at the expense of the ESPP discounted stock purchases. I would like to keep the $25K limit in place. What should I be considering?
Statistics: Posted by investor997 — Mon Jul 01, 2024 4:23 pm — Replies 4 — Views 459