Microsoft’s 401(k): What’s New for 2023?

The Microsoft 401(k) is a retirement savings plan that allows you to invest a portion of your salary into long-term investments to save towards retirement.

Your 401(k) contributions increased in 2023:

• Under 50: $22,500
• 50 or older: $30,000 ($22,500 + $7,500 catch-up contribution)

These contributions can be made on a traditional pre-tax or Roth basis.

Microsoft Employer Match

Microsoft will match 50% of your 401(k) contributions, up to the federal limit.

In 2023 you can receive a match up to $11,250 from Microsoft, if you contribute the max of $22,500. If you are 50 or older, the maximum match remains at $11,250, as catch-up contributions are not eligible for the 50% match.

Your contribution and the Microsoft match are 100% vested from day one with the company.

401(k) Tax Benefits: Pre-Tax 401(k) and Roth 401(k)

The difference between a traditional and Roth 401(k) comes down to when you pay taxes.

Traditional Pre-Tax 401(k)
You make your contributions before taxes. Contributions do not count as income, reducing your taxable income for that year. Distributions in the future are taxed as ordinary income. “Pay the taxes later”

Roth 401(k)
With a Roth 401(k) you make your contributions after taxes. When you withdraw savings for retirement, you are not taxed. “Pay the taxes now”

Generally, people find themselves in a lower tax bracket when they retire, making pre-tax contributions to a 401k more attractive during working years.

Microsoft Mega Backdoor Roth Conversion

The Mega Backdoor Roth is a provision within your Microsoft 401(k).

It allows you to contribute after-tax dollars to your 401(k), up to the IRS federal limit and convert those dollars to Roth. We think this is one of the best benefits available to Microsoft employees.

In 2023, the IRS federal limits for 401(k) contributions are:

• Under 50: $66,000
• 50 or older: $73,500

Mega Backdoor Roth Example

This example demonstrates how much a Microsoft employee, who is under 50, can contribute to their 401(k) utilizing the Mega Backdoor Roth provision. Our example employee maxes out their 401(k) and earns the full Microsoft match:

• 401(k) contribution: $22,500
• Microsoft match: $11,250 

The pre-tax contribution and Microsoft match equal $33,750. This means there is a difference of $32,250 between what is being contributed and the federal limit of $66,000. Using the Mega Backdoor Roth, our example employee can contribute up to $32,250 in after-tax dollars and immediately convert those dollars to Roth.

Benefits of a Roth

The Mega Backdoor Roth is a way for high-income earners to utilize the benefits of a Roth. Within a Roth your money grows tax-free. These same dollars, and the growth, are tax-free when accessed in retirement. Having a bucket of retirement assets that can be distributed tax-free, provides for greater control of the income you realize and your resulting tax bill throughout retirement.