A Quick Guide to Maximizing Your Microsoft 401k
As an employee of Microsoft, you have access to many financial resources through your benefits package. One of the most significant perks offered is the Microsoft 401(k) plan. If you know how to leverage this plan, it can have a significant positive impact on your retirement strategy. Here’s a breakdown of the basics:
Microsoft’s 401(k) works like any other 401(k) plan–it allows you to use part of your income for long-term investments and retirement.
For the year 2022, If you are 50 years or younger, you can put up to $20,500 in your 401(k). After the age of 50, you are eligible for a “catch-up” contribution of $6,500, for a total of $27,000.
Microsoft will match 50% of every dollar you contribute, up to the IRS deferral maximum.
Your 401(k) contributions and Microsoft’s matching contributions are considered fully vested right away.
That should help you get started, but there’s much more to learn about this topic. Read on for advice on getting the most out of your Microsoft 401(k).
Maximize Matched Funds
One significant financial perk of working at Microsoft, is the matching funds they provide to employees investing in their 401(k). They offer a 50% match for every pre-tax or Roth dollar saved. This is essentially free money which is why you should take advantage of it to the maximum amount. Note that Microsoft's match will always be a pre-tax contribution, regardless of whether you make pre-tax or Roth contributions as an employee.
For example, let’s assume you put $20,000 into your retirement account. Microsoft will match the contribution at 50%, leaving you with an extra $10,000, and a total of $30,000.
Consider the Roth 401(k)
For the tax year 2022, you can contribute up to the elective deferral of $20,500 either pre-tax or Roth. Contributing to Roth doesn’t cut down on your tax liability, but it may still be worth considering because Roth contributions offer tax-free withdrawals.
Roth contributions also allow earnings to accumulate without associated taxes while sidestepping the income limits associated with Roth IRAs. That’s crucial to consider, especially since many Microsoft employees are getting phased out of Roth IRA contributions and the benefits associated with them.
Choosing whether to include Roth contributions comes down to tax planning. Consider including your financial planner or CPA in the process so they can advise accordingly.
After-Tax to Roth Strategy - aka “Mega Back Door Roth”
In some cases, employees investing in a 401(k) plan can make contributions above the standard contribution limit, thanks to after-tax contributions. Not all 401(k) plans offer this feature, also known as the “Mega Back Door” Roth IRA, so it’s a good idea to understand how it works so you can leverage the benefits.
Let’s start by looking back at the ins and outs of contribution limits:
For the 2022 tax year, there’s a $61,000 limit on total 401(k) contributions. That includes contributions from employers and employees.
The IRS has capped employee 401(k) contributions from people 50 and younger at $20,500.
If you contributed as much as possible to your 401(k), Microsoft would provide a 50% match–that is, $10,250.
With the additional After-Tax contribution option, Microsoft employees are eligible to contribute an additional $30,250.
Best of all, you won’t need to worry about taxes on earnings from your after-tax contributions after you retire. You can elect for Fidelity to automatically convert after-tax contributions to the Roth 401(k), immediately after contribution. That means you may be able to enjoy a sizable tax-free nest egg at the end of your career.
Consider All Investment Options
There’s more to the Microsoft 401(k) than putting money away for retirement. This plan has 25+ investment options available, including bond funds, equity funds, target-date funds, and many others.
You’ll need to do some research and collaborate with trustworthy financial advisors to pick the most suitable investment options for you. Still, keep these pieces of advice in mind:
Know your time horizon. That is crucial in any form of investing, not just planning your Microsoft 401(k). Generally, longer time horizons allow for more aggressive investment strategies.
Know the (company-specific) risks. It can be surprisingly easy to earn shares in Microsoft as an employee of the company. Still, you don’t want to put all your eggs in one basket. Focusing too much on stocks means your investments and your retirement are tied to Microsoft’s success. Avoid the issue by diversifying your investments.
Know the risks of diversifying, too. No matter how exciting the headlines about one fund or another are, they shouldn’t be the deciding factor in your investment decisions. Do your research, and make choices based on where you are and where you want to be.
Don’t ignore the cost of investing. Options with low expense ratios are ideal. Luckily, Microsoft offers quite a few investments that fit that description.
Get Expert Guidance
If you want to take the first step towards planning for retirement, maximizing your Microsoft 401(k) is a great place to start. With the right guidance, Microsoft employees can take control of their financial future.
Of course, this is just a broad overview of Microsoft 401(k) management. Managing a retirement account means making countless choices over years or decades, which can be overwhelming without help. Instead, consider working with Consilio Wealth Advisors, which focuses on helping tech industry employees build wealth and financially prepare for retirement.
We leave the jargon behind and really listen to your goals so we can help you plan the financial future you’ve always wanted.
Disclosures:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Consilio Wealth Advisors (CWA) is not affiliated with Microsoft. While CWA communicates with its clients regarding their Microsoft employee benefits, and maintains records on Microsoft’s Benefits, there is no guarantee that the information provided is accurate or up-to-date. Microsoft employees should rely on their employer for the most up-to-date information on their benefits, and for answers to any questions regarding their specific situation. There is no guarantee as to the current accuracy of, nor liability for, decisions based on such information and it should not be relied on as such. This information is designed to be educational only, and does not constitute financial advice.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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