Top 3 steps to maximize your Microsoft 401(k)!

1. Take advantage of your match

2. Determine pre-tax or Roth

3. Maximize after-tax contributions (mega backdoor Roth).

Transcript:

In today's video, we're going to be providing you with a quick guide to maximizing your Microsoft 401k. My name is Nathan Donohue, I'm a partner and advisor with Consilio Wealth Advisors, where we specialize in providing financial planning and wealth management to technology professionals at Amazon, Microsoft, Meta, and Google.

So today to get into the Microsoft 401k plan, we'll be walking through a number of different benefits to make sure you maximize. The first of which we always talk to our clients about is maximizing the employer matching on your contributions. Microsoft has a very generous and robust matching program for their 401k plan. They will match 50% of your contributions all the way up to the IRS limit.

So what that means is that for the year 2023, if you contribute up to the IRS limit of $22,500, they will match 50 cents for every dollar you contribute. You put in $22,500, they will contribute $11,250.

The next component to consider with your Microsoft 401k is to consider your contribution options. With the Microsoft 401k plan, you have the ability to contribute both pre -tax as well as Roth.

With your pre-tax contributions, those contributions will be made before you pay income taxes on that compensation. So you'll get a little help to reduce your taxable income for that year. Your contributions will grow based upon how they're invested between the time you make the deposit and when you start taking withdrawals in retirement. And then whenever you turn that spigot on in retirement, you'll start paying ordinary income taxes at that time. The Roth is the taxes are reversed. So with the Roth 401k, I'll say, I will pay my taxes today.

And then once I make my contributions into the Roth 401k, I don't pay any taxes as the account accumulates. And then at retirement, whenever I turn that spigot on, everything comes out tax-free, both my contributions as well as all the earnings that I've accumulated over the years. Now, many people ask, is it better to do pre-tax? Is it better to do Roth? The answer is it depends. It can depend largely on your cashflow as well as your tax situation today, as well as your tax situation in retirement.

If you are in a very high-income tax bracket today, it might be more beneficial to use the pre-tax plan so that you can get very generous tax benefits today. If you're not in one of the highest tax brackets and you have ample cashflow to pay the taxes today, it might be beneficial to use the Roth 401k option. We always encourage you to work with your financial advisor and or your tax advisor to help make the determination on which option or combination is best for you.

The next benefit that is tremendously valuable for Microsoft's 401k plan is the after tax to Roth strategy, or what sometimes is dubbed the mega backdoor Roth. So we're familiar with the pre-tax and Roth contribution options. So between those two contribution options for 2023, you can contribute up to $22,500.

Now, in addition to that, you have your employer match, which again is 50 % of that. So that's an additional $11,250, and then there's this third contribution option, which is called the after-tax 401k. And what some folks aren't familiar with is that the IRS also has a contribution limit on the total amount that you can contribute from both your pre-tax and Roth deferrals, plus your employer matching, plus any after-tax contributions you might be making as well.

And for 2023, that absolute total cap is $66,000. So what does this mean? This means that if we maximize our pre -tax and or Roth deferrals at $22,500, Microsoft matches 50 cents on the dollar. So an additional $11,250. There is an additional $32,250 of additional capacity before we hit the stop or the absolute limit that the IRS has of $66,000 for 2023.

This is the after -tax component. So what Microsoft employees can do in addition to maximizing the pre-tax and or Roth deferrals, they can contribute up to $32,250 into this after-tax 401k. Just like the name insinuates, these are after-tax contributions. There are no tax benefits received for making those contributions today. You don't get any deductions today. Once I make my contributions into the after -tax 401k, they will grow on a tax deferred basis until retirement.

Now, one of the unique benefits to this plan as well is that the Microsoft 401k plan gives you the option to automatically convert those after-tax contributions into the Roth 401k. So I'll make my after tax contributions and then it'll allow me to automatically convert those into the Roth.

The benefit here is that at retirement, now that additional $32,250 that I can contribute to the after -tax 401k, now when I start to turn that spigot on to retirement, all of those dollars come out tax-free as well. If you do not elect to have the plan automatically convert your after-tax contributions into the Roth 401k, you still get the tax-deferred growth. However, at retirement, you're going to have to pay taxes on any gains or any dividends or any growth that you've accumulated over the years, that will then be taxable.

So it's extremely important to make sure that the bottom of the contributions page on the Net Benefit site, there's a little drop down menu that asks you, would you like the plan to automatically convert your after-tax contributions to Roth? If you're going to be funding the after-tax, tax 401k, you absolutely want to make that election. I hope you found this video valuable.

Again, this has been your quick guide to maximizing your Microsoft 401k plan. My name is Nathan Donohue with Consilio Wealth Advisors. If you enjoyed this video, please like, subscribe. We'll see you next time.