The information about the Microsoft Deferred Compensation Plan has been updated for 2022.

The Microsoft Deferred Compensation Plan (DCP) is available to employees who are Level 67 or higher. The plan allows you to defer a percentage of your salary and cash bonus. This can lower your taxable income and help reduce your tax bill.

You can save and invest dollars on a pre-tax basis, similar to your 401(k). Contributions can be invested into a selection of investment options.

You can enroll in the Microsoft DCP two times a year:

  • May 1 – 31: Elect to defer up to 100% of next September’s cash bonus
  • November 1 – 30: Elect to defer up to 75% of next year’s salary

Deferred Compensation is complex to implement. It requires extensive planning to incorporate into your financial strategy.  Our team has years of experience working with tech professionals like you.

How Does Deferred Comp Reduce Your Tax Bill?

You receive your Microsoft compensation in 3 ways; salary, bonuses, and stock awards (RSUs). DCP allows you to control how much taxable income you receive from your salary and bonuses. You have no control on when you receive income from your RSUs or when you are taxed.

You elect when your deferrals are paid out. We prefer to structure your distributions to be paid during retirement, when you are typically in a lower marginal tax bracket.

At a high level, here are 3 things you want to consider before you enroll in DCP:

  • Maximize your current Microsoft Benefits
  • Create a cashflow plan to supplement the income you defer.
  • Decide when you want to receive your distributions.

1. How do I Maximize My Microsoft Benefits?

Make sure you are fully funding all your other pre-tax accounts (Microsoft 401(k), HSA) before deferring any income to DCP. In addition, consider funding the Microsoft Mega Backdoor Roth provision within your 401(k). Once your tax-advantaged accounts are fully funded, your decision on how much to defer into DCP will become clearer.

2. Create a Cashflow Plan

You may need a cashflow plan to help you understand how to best supplement the income you defer with DCP.

RSUs vest multiple times per year and typically vary in amount each vest. As your Restricted Stock Units (RSUs) begin to vest, they are treated as income and are taxed, regardless of if you sell or hold on to the shares.

We recommend that you sell your RSUs when they vest. Use the proceeds to supplement your cashflow needs throughout the year. There are a couple of benefits associated with this strategy. First, selling your RSUs may enable to you to defer more income from your salary and bonus – which can help reduce your tax bill. Second, it helps you maintain a more diversified portfolio.

3. Decide When to Receive Your Distributions

You decide when you want to receive your distribution at the same time you make your deferral.  You can receive a lump-sum distribution or annual installments over 3 to 15 years.

The decision on when to receive your distribution is one of most complex steps within DCP. You need to think about what your income will look like in retirement to avoid receiving your distributions at the same time.

Retirees have the potential to continue receiving income in the first several years of retirement. If you meet the criteria, you could fall under Microsoft’s 55/15 rule. You may earn income from part-time work or consulting. Longer term, you’ll want to look at the timing of your Social Security elections and think through your IRA and 401k distributions.

If you don’t factor in future sources of income, you run the risk of eroding all the thoughtful tax-planning that has been done prior to your retirement.



“Make the Most of Your Microsoft Deferred Compensation Benefit”

Key Differences Between Microsoft Deferred Comp and Your 401(k)

Like your 401(k), the Microsoft DCP helps defer taxable income and reduce current tax liabilities. It’s important to note that there are some key differences you should be aware of:

CONTRIBUTION DECISION You can contribute at any time. You can only enroll in May and November.
CHANGE YOUR DECISION You can change your 401(k) contributions at any time. Your deferrals are irrevocable once the enrollment period ends
CONSUMER PROTECTION The funds you invest in your 401(k) are governed by ERISA. The funds in your DCP are an unsecured liability of the company.
PAYOUT FUNDS You are able to receive the funds any time (some penalties may apply) You must set DCP distributions at the time you make your elections. Changes are restricted to the 5-year re-deferral rule

In 2022 you can contribute:

$20,500 if under 50
$27,000 if 50 or older

You can defer up to 75% of your salary and up to 100% of next September’s cash bonus.

Should You Enroll in the Microsoft Deferred Compensation Plan?

If eligible, Deferred Compensation is a powerful benefit that can help reduce your tax bill.  It is also one of the more complex benefits to implement. It requires extensive planning to incorporate into your financial strategy.

Our team has years of experience working with tech professionals like you. We can help make sure you take full advantage of Deferred Compensation and your other Microsoft benefits.

Schedule a 30-minute call to discuss:

  • Strategies for reducing your taxable income
  • Maintaining cashflow to cover monthly expenses
  • Developing a comprehensive payout strategy