Unlocking ESPP vs. Mega Backdoor Roth Options with AI Legalese Decoder
- May 26, 2024
- Posted by: legaleseblogger
- Category: Related News
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#Investment Analysis: ESPP vs MBR
I’ll have additional funds to invest this year, and I’m trying to understand which option will have the best yield in a 10+ year timetable.
##ESPP Option:
I can get a guaranteed 15% return through the employee stock purchase program by selling the moment the stocks vest – and likely more because the company also “price matches” the lowest stock price in the given contribution period in addition to the 15% discount. I would then reinvest through a regular brokerage account.
**AI Legalese Decoder can help:** The AI Legalese Decoder can analyze the legal jargon in the ESPP agreement, making it easier for you to understand the terms and conditions of the program. This can help you make a more informed decision regarding your investment in the ESPP.
##MBR Option:
The company just started offering the option to contribute up to $10k (post tax) to our 401k, which for those who aren’t aware, can then be converted/moved into a Roth to grow/compound tax-free.
**AI Legalese Decoder can help:** The AI Legalese Decoder can assist in interpreting the complex tax laws and regulations surrounding 401k contributions and Roth conversions. This can help you evaluate the tax advantages of the MBR option more effectively.
So what do we think? Is the tax-advantaged growth potential of the MBR more beneficial in the long run than getting the 15+% return upfront and investing through a taxable brokerage account? The decision between ESPP and MBR requires careful consideration of the potential returns, tax implications, and long-term growth prospects.
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****** just grabbed a
Can you do espp for the first 3 quarters, then do a 10k mega back door roth in the final quarter?
To give yourself options and have better control of tax rate you need 3 buckets of money for retirement: before-tax, tax-free and taxable.
Invest in a bucket that is currently behind compared to others. If they are more or less equal I would argue that tax-free bucket provides the most value and best insurance against potentially high tax rates in the future.
OP, you might want to ask the same question in /r/financialindependence. That sub is quite familiar with analyzing strategic choices like this that are not often available to most people.
Do both. Max out your ESPP always, I always told my team that. It’s leaving free money on the table, and not only that, you will surprisingly trim spending even though you get that money back. I’m assuming that your espp is every 6 months? Max out as much as you can until you can use the previous ESPP to float any expenses you would “eat into” by opting the ESPP route. Basically, you’re building a “6 month fund” that you use to pay your expenses while you eat for the next 6 month tranche to vest. The ESPP is just a great program that will trick you into being frugal, and then give you a big paycheck every 6 months.
By doing this, you will end up with 15% more than your normal paycheck, which then means you can add to the megabackdoor Roth. You can keep stepping up the contributions as your “float” grows.
As anecdotal evidence, my company has two ESPP programs. The normal one like you describe, max 15% of your income. Then we have a *second* ESPP that has a max of 25% of your income. Our second ESPP is a buy one get one, or basically a 50% discount, the only catch is they cannot be sold for one year.
I max out both of those (40% of my income) and that is the money my family lives on. All of the rest of my income is diverted to 401k, HSA and megabackdoor. So my paycheck is 0. Instead, I sell ESPP shares quarterly to live on.
Instant returns from ESPP is better if you can only do one, but is there a reason you can’t do both? If it’s a matter of limited funds you’re willing to defer from your paycheck, the priority should be:
1. 401k up to employer match (typically 50-100% instant returns plus tax advantages)
2. ESPP up to max (15%+ instant returns)
3. 401k up to annual limit (no additional instant returns, but tax benefits vs investing in a taxable brokerage)
I would go ESPP for your situation. Long term capital gains tax is a nice mix of accounts and fund types with the Roth and traditional pots of money you have going.
I imagine you will eventually pursue the mega backdoor contributions anyway.