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Should I Contribute to My 401(K) or ESPP?

ESPP or 401(K)

It can be tough to determine which investment to choose, especially when you have many options as an employee. Your 401(K) and Employee Stock Purchase Plan (ESPP) are great tools for building wealth and retirement savings. Many 401(K) plans offer an employer match, and most ESPPs allow employees to purchase the company stock at a discount. Both of these benefits offer instant value to the employees. In this article, we’ll explain what these employee-sponsored plans are and how they work so that you can decide which one is right for you.

What is a 401(K)?

A 401(k) is a retirement plan that allows you to save for retirement with pre-tax dollars. In other words, when you contribute money to your 401K account, it is paid out of your paycheck before taxes are taken out. This could reduce the amount of money you need to pay in taxes now and lower the amount due when filing your income taxes. 

How Does 401(K) Matching Work?

Many employers offer matching funds for 401(k) contributions up to a certain amount or percentage of your salary. For example, let’s say you earn $65,000 per year and contribute 3% of your salary or $1,950 into your 401K account. If your employer matches 50% or $0.50 of each dollar you contribute, up to 3% of your salary, your employer would add an additional $975 to your 401(k) account, boosting your total contribution for the year to $2,925.

What is an ESPP?

An employee stock purchase plan (ESPP) is an employer-provided benefit that allows you to purchase shares of your company’s stock at a discounted price. You pay for the shares of your company’s stock or contribute to your ESPP through automatic payroll deductions.

While ESPPs are only available to employees of publicly traded companies, not all public companies give you the opportunity to participate in an ESPP.

How Does an ESPP Work?

Like 401(k), ESPP contributions are automatically deducted from your paycheck. The difference is your ESPP contributions are withheld from your after-tax income, unlike regular 401(k) contributions. 

The key benefit of an ESPP is that you can purchase shares of your company’s stock at a predetermined discount, often up to 15%. While you can usually sell these shares immediately for full market value, you don’t have to pay taxes on your investment earnings until you sell your shares.

Also see: Everything You Need to Know Before Selling Your ESPP Shares

Should I Invest in My Employee Stock Purchase Plan?

Yes, if you can afford to do so, you should definitely take advantage of your ESPP. It can help you build wealth and fast-track your personal financial goals, and it can also be a great way to give yourself a raise without having to talk to your boss.

Remember that your paycheck will be reduced by the amount of your contribution when you participate in an ESPP.

That’s why we’re happy to introduce Benny

Benny gives you cash to participate in an ESPP without affecting your take-home pay, so you can make the most of your ESPP while keeping more money in your pocket.

How Much Can I Earn With My ESPP?

The amount of money you can earn in an ESPP depends on a few factors:

  • The discount your employer offers (often up to 15%)
  • The percentage or amount you contribute to your ESPP

Below is an example of what you could earn with your ESPP in a year if your employer offers a 15% ESPP discount.

ESPP Discount Contribution Amount Annual Income Your Yearly ESPP Gain Reduction in
Monthly Take-Home Pay
Without Benny With Benny
15% 15% $75,000 $1,985.29 $937.50 Zero
15% 10% $75,000 $1,323.53 $625.00 Zero
15% 5% $75,000 $661.76 $312.50 Zero

Does participating in an ESPP affect my ability to contribute to a 401(k)?

No, you can participate in both plans at once! Your 401(k) and ESPP are the best tools that help you build wealth and save for retirement. If you can afford to do so, you should participate in both.

With a 401k, your contributions are deducted from your paycheck before taxes are taken out, so it’s all tax-deferred. Plus, many employers offer 401(k) matching contributions, meaning they deposit money in your 401(k) to match the contributions you make up to a certain amount. This can be a huge advantage depending on how much you make and your contributions since your money will grow faster.

If you’ve considered investing in your future, employee stock purchase plans are an underutilized and valuable wealth-building tool.  

Participating in your ESPP has never been easier! Benny gives you cash to participate in your ESPP to make your monthly contributions. That way, you don’t have to pay out of pocket or dip into your savings—and you can easily take advantage of this benefit!