The Microsoft 401(k)
The Microsoft 401(k) plan provides an excellent opportunity for employees to save for retirement. The following is a summary of the features of the Microsoft 401(k) and strategies for how a MSFT employee might best utilize the plan to save for retirement.
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About the Microsoft 401(k) Plan
The Microsoft 401(k) is a defined contribution plan to which employees can contribute a portion of their income. Microsoft matches a portion of its employees contributions. 401(k) plans are structured to encourage employees to save money for future retirement income needs.
Employee contribution: a Microsoft employee participating in the plan may make an elective deferral into their 401(k) account in the amount of $22,500 in 2023. If the employee is over the age of 50, they are eligible to make catch-up contributions in the amount of $7,500 in 2023. The federal contribution limit changes from year to year; to obtain the current contribution limits, visit the IRS website at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Microsoft matching contribution: Microsoft offers a match of 50% of the employee's 401(k) contribution amount, up to the federal limit, excluding the over-age 50 catch-up contributions. This is equivalent to $11,250 in 2023.
Vesting: contributions to the 401(k) vest in full immediately, meaning the employee has a non-forfeitable right to those assets.
Traditional vs. Roth Contributions: Microsoft employees have the option to direct their contributions to a Traditional pre-tax 401(k) and a Roth post-tax 401(k) account.
Traditional Pre-Tax: contributions are made before taxes, meaning an employee's taxable income is reduced in the year of the contributions by the amount of the contribution. When distributions are made from a Traditional 401(k) in the future, they will be taxed as ordinary income.
Roth Post-Tax: contributions are made after taxes; there is no reduction in taxable income in the year of the contribution. However, when distributions are made in the future, they are not taxed.
Microsoft Mega Backdoor Roth Contribution: Microsoft allows employees to make after-tax contributions up to the total federal defined contribution limit of $66,000 in 2023 and convert the after-tax contributions to a Roth 401(k) immediately. So, in addition to the $22,500 employee contribution and the $11,250 Microsoft match, an employee can contribute an additional $32,250 into their 401(k) with after-tax dollars and then convert it into a Roth 401(k) immediately. For those over age 50, the defined contribution limit is $73,500.
Microsoft 401(k) Plan Considerations and Strategies
Take advantage of Microsoft's matching contribution. Many call the match "free money," which it is in a way. But you've also worked hard for the benefit, so consider contributing as much as you can to your 401(k) to obtain the full match benefit.
The Mega Backdoor Roth Contribution is a very nice benefit that not every employer offers. Consider how it fits into your financial goal plan and if it makes sense to put your retirement dollars in an account that will grow tax-free.
Diversify. Consider how your 401(k) plan fits into your overall asset allocation, including investments outside of your 401(k) account. If you have an allocation to one specific holding, like Microsoft, a good rule of thumb is to keep the concentration in that company to no more than 10% of your overall allocation. An added diversification consideration is the fact that if you work for Microsoft, your salary and benefits are dependent on Microsoft as well. It could be a double whammy if the company struggles, the stock goes down, and then layoffs come.
An employer-sponsored retirement plan, like Microsoft's 401(k) plan, can play an important role in achieving financial goals like retirement. There are several important considerations, including how much to contribute, what type of pre- or post-tax contributions to make, how to invest the contributions, and how and when to start taking distributions. These decisions are very important, and the ramifications are long-lasting. Consider talking with a financial planner to determine the best answer to each of these questions and how to navigate company benefits. The answer is not the same for every person's situation.
My name is Tim Melia, and I am a CERTIFIED FINANCIAL PLANNER™ Professional. I would be happy to answer any questions you may have or discuss how this topic impacts your life and financial goals. Feel free to email me at tim.melia@emboldenfp.com. If you would like to learn more about working with Embolden Financial Planning LLC, please schedule a free, virtual introductory meeting.
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References
“Retirement Topics - 401(K) and Profit-Sharing Plan Contribution Limits | Internal Revenue Service.” Retirement Topics - 401(K) and Profit-Sharing Plan Contribution Limits | Internal Revenue Service, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.
“What Is a 401(K) and How Does It Work?” Investopedia, 19 Mar. 2023, www.investopedia.com/terms/1/401kplan.asp.
