What To Know About Employee Stock Purchase Plans (ESPP)
/Hi everyone,
We created a brief video explaining Employee Stock Purchase Plans (ESPP). We discuss how an ESPP works, the benefits of such a plan and the tax consequences that participants should understand. If you have an ESPP through your employer, take a look:
Similar to other videos we’ve created, this ESPP one is always available on our site, under: FAQ > ESPP
Speed up your mortgage payments? Last week I mentioned that it might be wiser to pay down your mortgage before saving for college. How so? Let’s explore…
Under the new tax laws the standard tax deduction increased from $12,000 to $24,000 for married couples ($6,000 to $12,000 for individuals). As a result, many taxpayers who previously itemized their deductions will now take the standard deduction.
If you historically itemized and your primary deductions are mortgage interest and property taxes, there is no tax benefit of paying those expenses moving forward if the sum of those things fall short of the standard deduction.
To illustrate this, consider the below example where a married couple owns a home valued at $500,000 and a mortgage of $250,000. If we assume a 1.0% property tax and a 4.5% interest rate on the mortgage, using rough math we can conclude that the sum of those two expenses are roughly $16,000 for a given year. Here is how the tax deductions compare under the previous tax laws (2017) versus the new tax laws (2018 and on):
Notice how this married couple would have itemized their deductions under the previous tax laws and now claim the standard deduction under the new laws. Since they now take the standard deduction their mortgage interest is no longer deducted, which means there is no tax advantage to carrying the mortgage.
What does this have to do with saving for college? Well, frankly it isn’t just saving for college. This applies to other savings that occur outside of tax-deferred retirement accounts as well. The question that needs to be asked is: Can I reasonably earn more by investing (after taxes) than I pay on my mortgage?
Obviously, the higher your mortgage rate the more you need to earn to justify the investment. But there is another factor, which is the risk component. In order to earn what you need, you have to assume some degree of investment risk. Assuming your mortgage is a 30-year fixed rate, there is no risk of that rate going up, which gives the edge to paying down the mortgage (in my opinion).
The trade-off of doing this is that you are obviously not allocating that money toward other savings goals. This means you would need to fund those with future income when the time comes. Ideally though, your mortgage would roll off sooner, which would free up that money to allocate toward other things like retirement, college, etc.
These new tax laws will sunset at the end of 2025. So this approach could be short-lived if things revert back to the way they were. For now though, consider reevaluating how you prioritize spending and savings.
In The Market...
The S&P 500 fell -0.7% last week. Let's look under the hood:
(price data via stockcharts.com)
It looked liked the market was poised to post another nice week of gains, only to have those wiped out (and then some) on Friday. The S&P index fell nearly -2.0% on Friday to end the week right at 2,800. This is no coincidence, as 2,800 was previously a key level that the index had failed to rise above. Now we will see if 2,800 provides support from which stock prices can rebound.
The bond market rallied nicely following the Federal Reserve’s announcement that there would likely be no additional interest rate increases in 2019. This contradicted previous indications that there would be one or two more rate hikes this year. That news boosted demand for longer-term bonds. The 10-year Treasury yield fell to 2.4%, which is the lowest since Dec. 2017.
The notable addition we made last week was adding a High-Yield bond fund (SHYG) to more moderate accounts. High yields have rallied nicely in recent weeks and appear to be continuing that ascent.
In Our Portfolios...
What's New With Us?
I was over in Spokane on Friday meeting with a couple clients but am back in the office all week.
As an additional reminder, let us know if you would like to establish or refresh your financial plan. We recently implemented a new financial planning software through Right Capital. Our previous Microsoft Excel-based financial planning model worked well, but we finally reached a point where it made more sense to purchase a more user-friendly software to create and maintain financial plans.
Have a great week!
Brian E Betz, CFP®
Principal