Updated for 2022
The Mega Backdoor Roth 401(k) is one of the best employee benefits available to Microsoft employees. We want to help you understand how this benefit can help you invest more towards retirement and reduce some of your future tax liabilities. This video explains how the Microsoft Mega Backdoor Roth Conversion works and highlights what’s new in 2022:
Microsoft 401(k) Contributions and Employer Match
In 2022, you can contribute up to $20,500 if you’re under 50 to your regular Microsoft 401(k). Employees who are 50 years old or older can contribute an additional $6,500 a year for a total of $27,000.
Microsoft will match your contributions, up to $10,250. For individuals under 50, this is a 50% match! We encourage you to make the most of this benefit by maxing out your 401(k) contributions before utilizing any other benefits available to you.
What is the Microsoft Mega Backdoor Roth?
In order to take advantage of the Mega Backdoor Roth benefit, you must be contributing the maximum amount to your 401(k). The Mega Backdoor Roth provision within your 401(k) allows you to make additional after-tax contributions to your 401(k) to make up the difference between your contributions, Microsoft’s matching contributions, and the annual federal 401(k) contribution limit. Your after-tax contributions are then converted to tax-free Roth dollars on a continuous basis.
The Federal contribution limit in 2022 is $61,000 for individuals who are under 50 years old and $67,500 for individuals 50 and older.
How Do You Make After-Tax Contributions to the Microsoft 401(k)?
Microsoft will let you contribute a percentage from each paycheck to your 401(k) over the course of the year up to the Federal limit. You will need to go into Fidelity Net Benefits to set your contributions
A quick note about setting your contributions:
- You can only enter a percentage, you cannot specify a certain dollar amount. To help ensure you make the most of your contribution be sure to round up your percentage to a whole number. For example, if 12.8% is your max contribution based on your salary, round up to 13%.
The dollars you invest into your Mega Backdoor Roth are long-term dollars. If you have other large saving goals, such as saving for a down payment on a home or your children’s college tuition, you will need to allocate these short to mid-term dollars into different saving buckets (like a brokerage account).
If you decide to max out your 401(k) and Mega Backdoor Roth, that is ~$50,750 you are no longer receiving as part of your paycheck. Fortunately, the amount you want to contribute is totally up to you! You can look at your current situation and decide if you want to contribute $1,000, $10,000, or up to the Federal limit.
How Does the Microsoft Mega Backdoor Roth Help Reduce Taxes?
Many of you reading this are saving money above and beyond your regular 401(k) and more than likely you’re saving into a brokerage account (individual account, joint account, etc.). Within these accounts you hold investments which inevitably over time kick off interest income, dividends, and capital gains. All of these events are taxable within brokerage accounts. Over the long-run, this taxation can create a substantial tax drag on performance.
Within a Roth you could hold the exact same investments, but the same interest income, dividends, and capital gains would all be tax-free now and when you retire!
Additionally, when you do retire, having additional money in a Roth account enables you to manage your retirement distributions and give you more control over your taxable income, which could allow you to save even more from a tax perspective.
If You are Microsoft Employee Saving Outside of Your 401(k) for the Long-Term – the Microsoft Mega Backdoor Roth is a Benefit You Should Take Advantage Of.
Needless to say, the long-term benefits of increasing your retirement savings, particularly by utilizing the Microsoft Mega Backdoor Roth Conversion strategy, could make a massive positive impact on what your retirement looks like.
Questions About the Microsoft Mega Backdoor Roth?
If you want to start taking advantage of the Microsoft Mega Backdoor Roth Conversion, or any of the other benefits offered in the Microsoft employee benefits plan, please schedule some time to discuss your questions.