Microsoft Deferred Compensation

Avier Wealth Advisors is not affiliated with Microsoft. While Avier communicates with its clients regarding their Microsoft employee benefits, and educates itself on the Microsoft Benefits, there is no guarantee that the information we have provided is accurate. Microsoft employees are encouraged to contact their employer should they have any questions regarding their specific employee benefits.

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

What is the Microsoft Deferred Compensation Plan (DCP)?

The Deferred Compensation Plan is only available to Microsoft employees who are Level 67 or higher. Deferred Compensation is an opportunity to save and invest dollars on a pre-tax basis, similar to your 401(k).

Contributions to your DCP reduce taxable income in the year of the deferral and can be invested into a selection of investment options.

Use Microsoft DCP to Reduce Your Tax Bill

If you’re eligible for Microsoft DCP you have the potential to reduce your tax bill by thousands. It’s a complex benefit which requires a significant amount of planning.

Lead Advisor | Partner

Lead Advisor | Director of Financial Planning

Important DCP Dates

May 1 – 31
Elect to defer up to 100% of next year’s September cash bonus

November 1 – 30 
Elect to defer up to 75% of your salary

You’ll want to make sure you’re prepared before the enrollment windows open!

Should You Enroll in DCP?

Schedule a 30-minute video call to learn:

Strategies for reducing your taxable income

Maintaining cashflow to cover monthly expenses

Developing a comprehensive payout strategy

How Does the Microsoft Deferred Compensation Plan (DCP) Work?

You are compensated in three different ways as an employee of Microsoft: salary, cash bonuses, and stock awards. You have no control, from a timing or tax perspective, when it comes to your vesting shares. The market value on the day of the vest is recorded as income and taxed at ordinary income rates – just like your cash compensation. This can mean a huge increase to your annual tax bill. By utilizing DCP, you can control the percentage of salary and cash bonus that you receive, and therefore taxed each year, significantly reducing your total taxable income. You decide when these deferrals are paid out to you and can maximize the benefit by having payouts occur when you are in a lower marginal tax bracket, most often in retirement.

To better illustrate the tax reducing benefits of DCP, we are going to walk through an example. In this scenario our example employee has the following income sources:

Salary $250,000
Cash Bonus $112,500
Vesting Microsoft Stocks $400,000

If our example employee were to receive all of this income in a single year, their marginal dollars will be taxed in the highest income bracket. It could cause them to pay a projected tax bill of $200,000-$250,000. However, when our example employee decides to defer some of their compensation, they can lower their overall tax bill significantly.

Our example employee decides to max out their 401(k) for the year, contributing $20,500, lowering their tax bill by approximately $7,500 – this is just a mere dent in the overall tax bill. Our employee also decides to defer $150,000 between salary and cash bonus. This is where they realize the true benefit of DCP.

By deferring $150,000, our example employee reduced their yearly compensation dramatically and pays approximately $55,000 less in taxes for the year.

Microsoft DCP Guide

Download “Make the Most of Your Microsoft Deferred Compensation Benefit”

Learn more about: 

  • DCP enrollment windows
  • Income deferral considerations
  • Reducing your tax bill
  • Cashflow strategies
  • Payout considerations

What are Key Differences Between Microsoft DCP and Your 401(k)?

Like your 401(k), the Microsoft DCP is a vehicle to help defer taxable income and reduce current tax liabilities. The income you defer is invested over time and disbursed in retirement when you are in a lower tax bracket, if utilized properly.

With that being said, there are some key differences you should be aware of:

Chart showing the difference between the Microsoft 401k and DCP

Develop a Cash-Flow Plan for Living Expenses

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. Functionally, at the time of vest, it’s as if you were given cash and decided to use every dollar to purchase Microsoft stock.

We recommend you sell these shares immediately after you receive them and instead use the proceeds to help fund your cash flow. The proceeds can then be used to supplement living expenses and monthly cash-flow, in place of the salary and bonus deferrals. Your deferrals can be invested in diversified investments, so rather than keeping your money tied up in Microsoft stock, you can reduce your concentration risk and diversify your portfolio exposure. Once you’ve cashed out your RSUs, you can use any proceeds to cover living expenses or re-invest these dollars in a regular brokerage account.

Living off 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. You will need a custom plan that looks at your RSU vesting schedule and factors in the range of prices that your shares could vest at in order to ensure you have the income you need now and in retirement.

What Investment Options are Available  Within DCP?

There are 24 different investment options with DCP, the options are very similar to what you have with your 401(k). You will select your investment allocation each time you make a deferral election and have the flexibility to make changes to the allocation at any time.

In our opinion, the investment options within DCP are more robust than what you will find within your 401(k), however BrokerageLink is not an option within DCP.

The dollars that you defer are not actually invested into the funds that you choose – Instead, Microsoft tracks the performance of your selected investment options and assumes the risk to pay out your contributions and the assumed earnings. Known as “deemed-investment”.

How Do You Set Your Microsoft DCP Distributions?

Deferred Compensation is different than a 401(k) where you’re able to withdraw money early (with penalty) or wait until retirement to withdraw funds until they are depleted. DCP requires more advanced planning to ensure your money comes out on time, at the right time, and in amounts that make sense for you.

For each deferral (each year that you defer salary/bonus), you must decide when you want to start receiving your money and over what time frame. You can choose either a lump sum or to receive it over a 3-15-year installment plan.

As money is distributed, the dollars are taxed as ordinary income, so it’s important that you consider how much taxes you’re willing to pay each year after your withdrawal begins and to structure the payouts accordingly.

Schedule a 30-minute Deferred Compensation video call to learn:

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

Lead Advisor | Partner

Lead Advisor | Director of Financial Planning

The DCP benefit is powerful but very complex. Our team works with many of your Microsoft colleagues to help them build a long-term plan that maximizes their DCP, alongside the many other benefits available to Microsoft employees.


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.






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