I work at a company that offers a 50% match on 401k contributions, on the first $3500 per year (So $1750 total match possibility). They also have an employee stock purchase plan (ESPP), which basically guarantees a minimum 15% return. (Stock is purchased 85% of the lower price of Jan 1/Jun 30, and Jul 1/Dec 31).

401k contributions are taken out pre tax, and ESPP contributions are taken out post tax.

I have been currently contributing at 5% in the ESPP, and 12% in the 401k plan. I was trying to figure out if that is the best way to do that, or if it would be better to do the minimum necessary to achieve the employer match, and put the rest of that into the ESPP, with the intention of taking the "extra" over what I am currently putting into ESPP, and then investing that into a mutual fund (Such as VFINX, which is currently running a little over 7% 10 year return).

I just can't do the math correctly to see if the 15% return on the ESPP and subsequent reinvestment into a fund outweighs the pretax contribution savings of just putting it into the 401k. (Which under my current distribution is also making slightly over 7%).

Which would be the better option, keep contributing as is, or change to the ESPP with enough still going to the 401k to get the full employer match?

  • 1
    The return for the ESPP is more like 17.65%. It's the gain on the .85 that gets you to 100. But note that that gain is not guaranteed; you can't count on getting the market price that the value was based on, because you can't sell the stock on the day that the price was determined; by the time you can sell the stock the price could well be lower. Nevertheless, an ESPP is a good bonus -- that pad protects you from fairly target market swings. Oct 19, 2016 at 17:40
  • ESPP is a good bonus, but you do not want anything like a majority of your investments there. Hypothetical situation: your company is sued and goes bankrupt and is liquidated. Now you're out of a job and whatever portion of your retirement was based in their stock is worth less than toilet paper. The risk may not be likely, but you have to consider it. Fund 401k then IRA. If you have disposable income left after maxing out those two, put some in ESPP some in brokerage. Consult a financial advisor on how to split up pre- and post-tax retirement investments. Diversification is key.
    – Xalorous
    Oct 19, 2016 at 19:39
  • @Xalorous - Not to be pedantic, but where do I say that I plan to keep any money at all in the ESPP? Currently the 5% I treat like an extra paycheck 2x a year, and the rest would be cashed out and reinvested as soon as possible (Presuming it doesn't crash more than 15% of value in the 2-3 day transition). I keep almost no money in ESPP shares long term.
    – JohnP
    Oct 19, 2016 at 19:42
  • I edited mine before I saw your response. I would set up the retirement savings aspect, with balance between pre- and post-tax accounts and then funnel as much disposable income through the ESPP as they'll allow or as much as you feel like gambling with. In other words, don't confuse it with your retirement savings, keep that separate.
    – Xalorous
    Oct 19, 2016 at 19:47
  • @Xalorous - I don't think I am explaning it well, or not understanding your answer. Current ESPP is 5%, 401k is 12%. I am thinking of dropping 401k to 5% (Minimum to get match), putting the extra 7% in ESPP and then cashing it out to reinvest in a separate account (Such as the VFINX or similar). My question is whether this is advantageous, considering the 401k is pre tax payroll deduction, the ESPP is post tax, but you have ~ 15% return that would be part of the reinvestment.
    – JohnP
    Oct 19, 2016 at 19:53

1 Answer 1


This answer assumes that your purpose for using the ESPP is to generate a relatively safe 15% return on that portion of your income.

Frequently before there were Roth 401K options the advice was:

  • step one get the maximum match;
  • step 2 fund the Roth IRA to the maximum amount, and then
  • step 3 revisit the pre-tax 401K.

This advice was especially good for the younger workers because they wanted to have a Roth account but didn't want to miss the 401K match.

As Roth 401K accounts were introduced that advice changed somewhat because it was possible to get the benefit of the Roth and still get the maximum match.

for your situation what I would propose is:

  1. contribute to the 401K enough to get the maximum match.

    • decide if this 401K contribution will be Roth or pre-tax.
    • You may need to spread the contributions over all the paychecks to get the maximum match, please read your plan documents discussing how the match works
  2. Contribute as much as you want or are allowed into the ESPP.

    • As quickly as possible sell the shares to minimize the chances of a loss.
  3. Take the proceeds and contribute to an IRA or Roth IRA.

    • you will have to look at your family and tax situation to determine which type of IRA makes the most sense for you.
  4. If you reach the IRA max you have to decide if you will scale back the ESPP to contribute more to the 401K.

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