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Passive investing generates income that requires little or no effort to earn, maintain and grow that income. Passive investing examples include dividends from dividend stocks, 401(k), Roth IRA, interest from high yield savings account and dividends from REITs. Learn more about what are passive investments, different types of passive investments and how to get started.

The Ultimate Guide To Employee Stock Purchase Plan (ESPP)

01.27.2019 by admin // Leave a Comment

Why You Should Enroll in an employee stock purchase plan

Why do you care about Employee Stock Purchase Plans (ESPP)? If you enroll in the employee stock purchase plan offered by your company you can make more money! ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.5% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

If you’re considering enrolling in ESPP here are the terms you should know, the benefits of ESPP and approximately how much extra income you may be able to make.

Employee Stock Purchase Plan Terms To Know

  • ESPP Enrollment Period: defined set of dates where you can sign up to participate and select the % election amount. If you miss this enrollment period you will have to wait for the next enrollment period (either 6 months or 1 year later depending on the terms)
  • ESPP Purchase Period: Timeframe in which company shares are purchased on your behalf through payroll deductions. There may be two purchase periods a year, one beginning Jan 1st  and ending on June 30th, with the second starting July 1st and ending Dec 31st. You do not have access to the money you’ve contributed during this time.
  • ESPP Purchase Price: Usually, the purchase price is the price of the stock on the last day of the offering period, with the discounted rate applied. In the example above, it would be the ending stock price on June 30th and December 31st.
  • ESPP Holding Period: You can sell your ESPP shares at any time, even the same day you get the shares. However, in order for the sale to be taxed as a capital gain it must be considered a qualifying disposition.
  • ESPP Qualifying Disposition: A qualifying disposition refers to a sale, transfer or exchange of stock that qualifies for favorable tax treatment. ESPP falls within this definition. To be a qualifying disposition, the employee must sell their position at least one year after exercising the stock or two years after the beginning of the ESPP offering period. As long as you hold your ESPP shares for this time period you are taxed at a capital gains rate. If you sell prior to this period, it is considered a disqualifying disposition. A disqualifying disposition is taxed at the income tax rate.

Employee Stock Purchase Plan IRS Limits

The IRS imposes a limit of a maximum market value of $25,000 per year. However, companies can decide to impose lower limits. That means if your company grants you shares at a 15% discount, the max you can contribute is $21,250. The purchase discount also tops out at 15%, but your company could choose to offer less than that as well. Every plan can vary so be sure to look into the details around what plan your company offers.

Employee Stock Purchase Plan Tax Rules

The stock discount price (up to 15%) is considered additional compensation and taxed as ordinary income. If you sell that day, it is disqualifying and will be taxed as a short term gain / ordinary income. If you hold shares for at least 2 years from the first day of the offering period and at least one year from the purchase date, the additional income is considered a “qualifying dispositioned” and will be taxed as a long-term capital gain (15% tax rate for most taxpayers).

Additional Income Earned with Employee Stock Purchase Plan

The tables below offer a guide to how much additional income you can make after taxes if you sell that day per year. If you decide to hold onto the stock for the time period outlined below, your taxes will be 15% (for most taxpayers) for the discounted amount + any gains you made while holding the stock. Remember, it is always possible for the stock to lose value.

Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for single tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket
Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for married filing jointly tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

It’s hardest to maximize the program when you make less money, but that’s when this is actually the most valuable! When your tax rate is only 22%, you could make almost $2,500 after taxes. If you’re in the highest tax bracket you make only $2,000 after taxes. The first purchase period is always the toughest. You’re used to getting that money in your paychecks every pay period. After the first purchase period is done, if you sell all your shares immediately you have everything you’ve invested from the past 6 months plus the additional income you made as soon as the sale settles!

If you work for a public company, check out your internal benefits page and see if this is one of the benefits your company offers!

See Also: Company 401(k) Match and Why You Should Max Out Your 401(k)

Categories // Invest Tags // Corporate Benefits, Extra Income, Passive investing

Legalized Equity Crowdfunding: What to Know

01.20.2019 by admin // Leave a Comment

Regulation crowdfunding

So you want to invest in private companies but you aren’t an accredited investor quite yet? Title III of the JOBS Act, passed in 2012, created an opportunity for the average investor to invest in private companies. Regulation crowdfunding allows startups to raise up to $1,070,000 per year from both individual investors and accredited investors through registered funding portals.

There are still some limitations such as how much a person can invest in a 12 month period. These investment limits are inflation-adjusted.

  • If your annual income OR your net worth is less than $107,000, you can only invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth
  • If both your annual income AND net worth are equal to or more than $107,000 then you can invest up to 10% of your annual income or net worth, whichever is less, but not to exceed $107,000

If your annual income is $150,000 and your net worth is $200,000, the JOBS Act crowdfunding rules will let you invest up to $15,000 over a 12-month period. It is $15,000 and not $20,000 because your annual income is less than your net worth.

Generally there is a feeling that the limitations and regulations most companies still restrict investments from non-accredited investors, and the JOBS Act hasn’t had the impact intended. Mainly, companies don’t want to pay the associated costs and file all of the mandated disclosures when they can raise capital under Regulation D which is both easier and cheaper. However, there are some bright spots. Crowdfund Capital Investors wrote a report and found that while the market is still young, it is growing at a rapid pace and found a high success rate for offerings.

You can find all of the registered funding portals on the FINRA website here. FINRA also provides an overview of Crowdfunding and what Investors should know here.

Has anyone invested in private companies through these funding portals? What was your experience?

Categories // Start Here Tags // Passive investing

Accredited Investor – What It Is And Why It Matters If You Want to Invest In Startups

01.06.2019 by admin // Leave a Comment

What is an accredited investor, accredited investor definition

In order to invest in startups you must be an accredited investor. The SEC creates limitations on who and who can’t invest in private companies. The logic behind it is that most of these investments are risky and illiquid so the SEC put rules in place to limit who can invest in these types of investments. With these guardrails, the hope is that these investors have enough money so should they lose their entire investment, or not have access to this investment for years they will still be in good financial shape. So, how do you know if you are an accredited investor and how can you become an accredited investor?

What Is An Accredited Investor?

An accredited investor is defined as someone who has income that exceeded $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach that same amount of income in the current year. A person is also considered an accredited investor if their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.

The full definition is on the SEC website.

Why Is It Important To Be An Accredited Investor

Accredited investors have many more opportunities to invest than non-accredited investors. They are able to invest in private companies which opens up the door for a lot more investment opportunities. There are opportunities for non-accredited investors to invest in. However, these investments are limited to the stock market and legalized crowdfunding opportunities.

How To Become An Accredited Investor

Understand where you are income wise and net worth wise. Will it be faster to make $200K (or $300K for married couples) for 3 years in a row, or have $1 million net worth? Estimate how long it will take you to reach that salary and add 2 years. Use this calculator to identify how long it will take you to have $1M. Identify which way is fastest, and then identify ways to hit that target faster.

See Also: Make More Money Through Your Career and Side Hustles

Qualify to Become an Accredited Investor Through Income

Income doesn’t equal your salary. Income includes money you make from everything including your investments and side hustles. If you or your spouse don’t have line of sight to hitting the yearly income threshold look for opportunities to create additional income streams.

Qualify to Become an Accredited Investor By Reaching $1M Net Worth

The more money you make, the easier it is to reach $1M net worth. Increasing your income should always be your first focus. To reach the $1M threshold though, you need to keep the money you make – and have that money make you even more money. Automate your savings and increase your savings rate as your income increases. Then, invest that money. Be smart with your spending so you can put additional money towards investing as well. Thanks to compounding interest, the first $100K is always the hardest but it’ll get progressively easier as you go. Your primary residence doesn’t count towards the $1M net worth so you need to consider if it’s worth paying your mortgage off early for this circumstance.

Research Potential Startup Investments

You don’t want to wait until you’ve met the accredited investor requirements to start thinking about investing in startups. Research the different types of investments that are only available to accredited investors before you qualify. If you’re interested in investing in a startup, what industries are you interested in? Many of these investment opportunities develop through word of mouth. It takes time to network with the right people, identify what types of companies you’d like to invest in and then identify companies that meet the target profile that are also raising money.

Accredited investor, what is an accredited investor, accredited investor definition

Categories // Start Here Tags // Angel Investor, Invest in startups, Passive investing, Personal Finance Terms to Know

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