If your ESPP allows, you can choose between paycheck deductions and lump sum investing. I have used both of these methods and learned the hard way that I much prefer the lump sum method.
The advantages of paycheck deductions:
- A passive method of investing
- Easier to part with money if you never had it in your checking account
- Creates the most diversified cost basis
The disadvantage (and the reason I avoid paycheck deductions) is that throughout the year you will accumulate 12 to 26 different purchases, each with their own tax lot (cost basis, or purchase price). Whether you sell those shares at a gain or a loss, you have to then pay taxes or report the loss on each lot! It is cumbersome and time consuming if you are doing your own taxes.
This is why I say to start with paycheck deductions After shares have accumulated, move on to writing larger checks. You will thank me when you only have to enter 4 to 7 transactions into your accounting software.
Of course, there are disadvantages to this method – you have less diversity in your cost basis. My advice is to take a balanced approach; write medium-size checks that are larger than 1 paycheck deduction, and smaller than the yearly maximum. If you are planning on selling call options on your shares, then write checks worth about 50 shares at a time.
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One thought on “Paycheck Deductions”
Thank you for pointing out this potential headache. I use Advanced Micro Solutions (1099-etc.com). Their payroll software calculates and reports these deductions for me.