Microsoft Deferred Compensation
What is Deferred Compensation and how does it work at Microsoft?
Deferred Compensation is an opportunity to save and invest dollars on a pre-tax basis, similar to your 401k, available to employees who are Level 67 and above. Contributions to your DCP reduce taxable income and are invested in mutual funds that are aligned with your goals.
At a high level, you have three types of compensation as a Microsoft employee:
You have no control over when your stocks vest – and when that happens, taxes are due. This can mean a huge increase to your annual tax bill. What you can control is the percentage of salary and cash bonus that is taxed each year, by deferring this compensation to a later date when your tax rate is lower. You can defer up to 75% of your salary and up to 100% of your cash bonus – reducing your overall yearly income and your tax bracket.
Let’s look at an example for Level 67
If you receive all of this income in a single year, you’re being taxed in the highest bracket, and would pay a projected tax bill of $200,000-$250,000. However, if you defer some of this compensation, you can lower your overall tax bill significantly.
Our example employee decides to max out their 401k for the year, contributing $19,500, lowering their tax bill by approximately $7,000 – small change compared to the overall bill. In addition, however, they decide to defer $150,000 in salary and cash bonus. Here is where the magic happens!
By deferring $150,000, they reduce their yearly compensation and instead pay approximately $55,000 less in taxes per year.
Sound too good to be true? It’s not! DCP is a unique program offered to Microsoft employees. Most companies aren’t able to offer such a benefit, so we really encourage high earners – Level 67 and above – to take advantage of this major tax break. It’s important to note that there is a limited window for enrolling in the DCP.You can defer up to 75% of your salary and up to 100% of your cash bonus – reducing your overall yearly income and your tax bracket.
DEADLINES TO KEEP IN MIND
Elect to defer up to 100% of next year’s bonus
Elect to defer up to 75% of your salary
Remember that your salary and cash bonus are only 2 out of 3 parts of your total compensation. As your Restricted Stock Units (RSUs) begin to vest, they are treated as income and are taxed, even if you never sell. If you do decide to hold onto those RSUs, it’s as if you’re given cold hard cash, and you choose to invest every dollar in Microsoft stock – doesn’t make much sense, right?
Instead of holding onto those RSUs, we recommend you sell them and use the proceeds to fund your cash flow. The proceeds are then used to supplement the income and cash bonuses you are deferring.
Your Deferred Comp is invested in diverse mutual funds, so rather than keeping your money tied up in Microsoft stock, you can broaden your portfolio. Once you’ve cashed out your RSUs and funded your cash flow, you can re-invest any leftover funds into more mutual funds. A win-win!
So, what’s the catch? Living off of the proceeds of your RSUs means that you’ll have several very large “pay days” throughout the year – you’ll need to manage your cash flow in between those “pay days” to ensure you have enough money to pay your bills. We have put together a short video that explains what a cash-flow strategy can look like for a Level 67.
Make the most of your Deferred Compensation plan
The DCP is not an easy program to understand and manage on your own. We know that you have enough going on, and that finding the time to research, plan and make the appropriate elections is more than challenging. For many Microsoft employees, that means they put off enrolling in the DCP, sometimes for decades! That amounts to tens, if not hundreds of thousands of dollars in taxes beyond what you would pay with Deferred Compensation planning.
You deserve to take full advantage of your compensation package and the benefits of being a Microsoft Level 67+ employee. Our team will partner with you to develop a plan, implement, and manage the process. We will help you make the most of your Deferred Compensation Plan.
Schedule a no-obligation 30-minute call with one of our Advisors to learn more about your Deferred Comp Plan.
MORE MICROSOFT INSIGHTS
For more information and advice from our Microsoft-focused advisors visit our main Microsoft page, or other pages focused on Microsoft Compensation and Miscellaneous Benefits , or Microsoft 401(k) & Retirement, or Microsoft RSUs and ESPP.
READY TO GET STARTED?
Focused on your needs, we provide comprehensive financial planning and investment advisory strategies for individuals and families. We’d love to hear from you.