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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120820  
Subject: Re: Sell ESPP to fund IRA? Date: 12/5/2013 2:09 PM
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Chris
I assume you mean that you want to generate the cash so you'll have enough of it to contribute to your traditional IRA for 2013? Thus I'd assume you don't have the available cash elsewhere to contribute.

Selling shares of your company's stock that you have as a result of the exercise of ESPP options is one source of stock. Do you have other sources of things to sell? You don't mention it, but the decision to sell should be based on your asset allocation of which your employer stock is one part, but other than the tax issues involved (below), should not be treated any differently than any other shares of stock you hold.

Now, having said that, if you do decide the ESPP generated shares are the shares to sell to provide the cash you need for the IRA contribution, there are a couple of tax considerations unique to these things for which you should be aware.

On the date of exercise, the difference between the fair market value of the stock on that day and the option price....aka the 'bargain element', will be ordinary income to you the year you sell the stock IF you have not held the exercised shares at least 2 years past the date the options were granted to you AND at least one year past the exercise date. If you met or exceeded these two holding periods, the bargain element will be treated as long term capital gains when you sell the shares. However, the discount the employer offered on the stock you purchased at exercise, typically between 5 and 15%....that will be taxed to you as ordinary income in the year of the stock sale regardless of the stock's holding period.

My experience (and only that) with selling ESPP shares and the above tax issues are usually not a big deal for most, as the option issue - exercise date are usually close (typically 6 months apart) which means the bargain element is usually not that big...unless I suppose we're in some kind of stock market bubble. But unless the numbers here are significant relative to your income, it may be better to simply sell and fund the IRA, as the retirement benefit to you of having long term tax deferred growth is likely worth more than a current tax bleep.

BruceM
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