I hope you already knew what ESPP and ESOPs are. And if not, ESPP means Employee Stock Purchase Plan. ESPP is a means by which employees of a corporation cam purchase the corporation’s capital stock, often at a discount.
Employees contribute to the plan through payroll deductions which eventually builds the employees’ capital investments. Working for a company that offers employee an employee stock purchase plan can be a valuable perk that can help you reach your financial goals.
ESPP may be advantageous for both employers and employees. The employers would attract and recruit top talents, get better employees performance, create an ownership culture in their companies, bring broad-based and cross-border benefits, raise capital for financing, lower expenses other than equity compensation and corporate tax deductions.
In finance, an option is a contract which conveys to its owner, the holder, the right but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the options.
ESOPs (Employee Stock Option Plans) are a label that refers to the compensation contract between an employer and an employee that carries some characteristics of financial options. Stock options are forward incentive plan that measure future cash flows. Here are the advantages of ESOP and that of ESPPs.
1. Flexibility as holders has the option of withdrawing funds slowly over time.
2. Confidentiality, continuity and control maintenance.
3. Tax advantages.
4. Wealth creation when shares appreciate.
How to use your ESPP or ESOP to improve your financial life
1. Supplement your cash flow
2. Save for near-term goals
3. Pay down debts
4. Reinvest into a Roth IRA
5. Understand the company’s perk and fools returns.
ESOP is a qualified defined contribution (retirement plan), so employees don’t buy shares with their own money while an ESPP on the other hand, is a plan that allows employees to use their own money to buy a company’s share at a discounted price. The two plans can be qualified or non-qualified by the IRS. An ESOP benefits the employee after retirement while an ESPP brings immediate rewards. In an ESOP, The money would be tax-deferred until the employee retires while an employee may only purchase the company’s stock with an after-tax dollar in an ESPP.
Thanks for going through this value-dispensing article. Now that you’ve understood how to make good use of your Employees Benefit Plans, check our latest posts for more topics that would promote your financial life and also drive you to financial freedom.
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