Should I Participate in Costco’s Employee Stock Purchase Plan or Open a Roth IRA?

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Costco is money expert Clark Howard’s favorite store.

As such, we’ve written plenty about whether a Costco membership is worth it, the Costco Anywhere Visa® Card by Citi and even buying unexpected items such as engagement rings from the store.

But Wall Street has loved Costco for decades as well. That’s particularly true in the last 15 years.

Costco employees get access to an employee stock purchase plan (ESPP). Should you take advantage if you work at Costco?

Should I Participate in Costco’s Employee Stock Purchase Plan?

I work at Costco and have the opportunity to participate in Costco’s ESPP. Should I do it?

That’s what a listener recently asked Clark.

Asked Tom in Michigan: “I am a Navy veteran, semi-retired, and working part-time at Costco. I do not have any debt and have about $18,000 in a high-yield checking account. I am enrolled in Costco’s Roth 401(k).

“However, Costco also offers a stock purchase plan whereby an employee can contribute up to $10,000 per paycheck, which is taxable. Since one investment is taxable and the other is not, should I contribute to both or consider opening another Roth IRA at a brokerage firm?”

An ESPP offers employees the option to purchase company stock directly and at a discounted price. It’s a benefit that comes directly out of your paycheck if you elect to participate. There are holding period requirements. You can’t simply max out your discounted stock purchases and immediately sell your shares at full price for a profit.

However, if you get a significant discount and the stock also performs well, you’re juicing your returns.

Costco’s stock price hit $38.98 on March 6, 2009, at the end of the Great Recession. As of this writing, the stock is worth $577.12 per share. In nearly 15 years, the stock has returned nearly 100% profits per year.

Why Clark Doesn’t Recommend Leaning Into Employee Stock Purchase Plans

The problem with ESPPs is that you’re putting a lot of eggs in one basket as an employee.

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Just like you want to diversify your investments across the entire stock market rather than making huge bets on individual stocks, you want to avoid tying up so much of your financial life with your employer.

You’re getting a paycheck from your company. And you’re potentially holding stock in the company as well. You may even be making an outsized bet on your company’s stock depending on how much stock you purchase through your ESPP.

What happens if the company runs into trouble? You could lose your job (and income) — and your investment in your company’s stock could plummet at the same time.

“I don’t like for people to have their assets, their savings or investments, tied up in their employer,” Clark says.

“Now I have no problem with you having a small position in your employer’s stock. In this case Costco. And Costco [stock] if you look back historically has done phenomenally. But there’s nothing about the first 40 years of Costco’s existence that says that the next 40 are going to be good.

“People tend to have a sense that they’ve got superior knowledge about a stock in a company they work for.

“Having a small position in Costco stock is fine because you’re diversified in other ways. No debt. You’re doing the Roth 401(k) and all that. If I was going to do more than just a small amount in Costco stock, I would do a Roth IRA in addition to what you’re already doing in the Roth 401(k) with the company.”

Final Thoughts

Getting access to an ESPP, especially at a great company like Costco, can sound like a too-good-to-be-true deal.

But it also gives you outsized risk should the company not perform well.

It’s better to limit your employee stock purchase plan participation to a small amount and focus on contributing to your company 401(k). And potentially funding a Roth IRA as well.

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