As an employee of Microsoft, you have access to many incredible financial resources through your benefits package, from Microsoft RSUs to deferred compensation plans. 

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. 

What do you need to know about Microsoft’s 401(k) plan, and what are some tips to get the best possible benefit from it? Let’s dive in. 

How does the Microsoft 401(k) Plan Work?

First, let's take a look at 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. Microsoft also offers a generous employee match of 50% up to the IRS’s yearly contribution limit.

Here’s a breakdown of what you can expect in 2024:

• For the 2024 tax year, if you are 50 years or younger, you can put up to $23,000 in your 401(k).

• After the age of 50, you are eligible for a “catch-up” contribution of $7,500, for a total of $30,500.

• Microsoft will match 50% of every dollar you contribute, up to the IRS deferral maximum. This would add up to $11,500 for those contributing the maximum of $23,000.

• 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).

1. Maximize Microsoft’s 401(k) Match

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, so it’s worth taking 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 say you put $20,000 into your retirement account. Microsoft will match the contribution at 50% and add an extra $10,000 to your Microsoft 401(k). This means you’ll have a total of $30,000 added for the year. 

That said, contributing $20,000 for the year isn’t enough to maximize the matched funds Microsoft will allow. Rather, contributing $23,000 for the year (the IRS’s employee limit for 2024) means Microsoft matches at 50% to contribute $11,500 to your account.

This adds up to $34,500 toward your account for the year!

Unfortunately, Microsoft does not match catch-up contributions for those who are age 50 or older. Still, catch-up contributions can be an incredible benefit when it comes to staying on track with your retirement age milestones. 

2. Consider the Roth 401(k)

For the tax year 2024, you can contribute up to the elective deferral of $23,000 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.

3. Leverage the 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 2024 tax year, there’s a $69,000 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 $23,000.

• If you contributed as much as possible to your 401(k), Microsoft would provide a 50% match of $11,550.

• With the additional After-Tax contribution option, Microsoft employees are eligible to contribute an additional $34,500.

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.

4. 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.

5. Revisit Your Contributions Often

The IRS updates 401(k) contribution limits regularly to account for inflation. While the individual limit for 2024 is $23,000, that may change in the years to come.

Here’s a quick history of how the IRS’s individual contribution limit has changed over the last few years:

• 2021 contribution limit: $19,500

• 2022 contribution limit: $20,500

• 2023 contribution limit: $22,500

• 2024 contribution limit: $23,000

As you can see, the amount to max out your contributions changes on a fairly regular basis – often by $1,000 or more! While not every year will see an updated limit, it’s worth keeping an eye on if you want to max your Microsoft 401(k).

The IRS tends to announce these changes at the beginning of the year on January 1st. Mark your calendar or work with a financial advisor who will stay abreast of these changes on your behalf. 

6. 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. 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.

And after maxing out your 401(k), what should you do next?

With the right guidance, Microsoft employees can take control of their financial future. That’s why we encourage you to work with us at Consilio Wealth Advisors. We focus on helping tech industry employees like you 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. For even more tips and strategies to maximize the benefits and compensation you receive from Microsoft, including RSUs, your ESPP, deferred compensation plans, and more, access our free library of Microsoft resources.

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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For additional information, please visit our website at www.ConsilioWealth.com.