What you need to know about your employee stock purchase plan

  • Your employer may let you buy company stock at a discounted price through an employee stock purchase plan, or ESPP.
  • If you choose to participate, these investments can boost your bottom line and offer tax advantages, depending on when you opt to sell your holdings.

The company you work for may let you purchase company stock at a discounted price.

The formal name for this is an "employee stock purchase plan," or ESPP.

And if used correctly, these stock purchases can boost your bottom line, according to Sophia Bera, founder of Gen Y Planning.

Here's how it works.

Your company lets you buy its stock at a discount, which can range from 10 percent to 15 percent, for example.

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If you choose to participate, the deductions are taken out of your paycheck, just like your 401(k) contributions.

The stocks are then bought in bulk at one point in time, alongside other employees' contributions.

That purchase typically happens every six months.

You then have the ability to sell those shares immediately and lock in the gains from the discounted price you paid, Bera said, or you can hold on to your shares for later.

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"If you'd like to hang on to your employer stock for preferred tax treatment, the best thing you can do is to wait until at least one year after the purchase period and two years after the initial offer date," Bera said.

At that time, the gains will be taxed as long-term capital gains, which is typically taxed at a lower rate than your ordinary income, Bera said.

Keep in mind that there is usually a limit to how much you can invest in an employee stock purchase plan, such as no more than $25,000 per year or 15 percent of your salary.

"If you can afford the payroll deductions, the ESPP is a great way to invest in your company stock at a discounted rate," Bera said. "However, you want to make sure to balance this with your other financial priorities."