Reduce Your Tax Bill Using the Microsoft Deferred Compensation Plan
Nick Wright | April 26, 2021
Are you a Microsoft Level 67 or higher employee who wants to reduce taxes? The Deferred Compensation Plan benefit is an excellent way to reduce your tax bill by tens of thousands of dollars.
In this video we provide an overview of the benefit. We feel this section on how to reduce your tax bill is by far the most important part of this video and worth explaining in greater detail.
How Does the Microsoft Deferred Comp Plan Work?
As you know, Microsoft employees are compensated 3 different ways; you receive a salary, cash bonuses, and stock grants. When we look at your overall compensation, there are a couple of things you can control and a few things you cannot when it comes to reducing your tax bill. The Deferred Compensation Plan allows you to control how much income you realize from your salary and bonus. This deferred income is invested in mutual funds and available for access at a later date when you are in a lower tax bracket.
Example of a Level 67 Employee Using Deferred Comp
One thing you’ll never be able to control is the vesting of your Microsoft stock grants. Each quarter as those grants vest, you will realize income based on the market value of that grant and when that happens, taxes are due. Let’s look at an example of a Level 67 employee who decides to take advantage of the Deferred Compensation plan. In this example, our employee, is under 50 years old, and receives:
This employee maxes out their annual 401(k) contribution, which means they contribute $19,500. They also take advantage of the Mega Backdoor Roth benefit and contribute the max amount of after-tax dollars allowed to their 401(k). These strategies are important when it comes to saving for retirement – but only reduces taxable income by the pre-tax amount, $19,500.
In addition to salary and bonus, our employee will receive $400,000 in stock vests over the course of a year, which means they will receive $400,000 of additional income on top of salary and bonus. There is no way to reduce taxable income at this point until they decide to enroll in the Microsoft Deferred Compensation Plan (DCP). This will enable our example employee to defer up to 75% of their salary and up to 100% of their next year’s bonus.
Reduce Your Tax Bill by Tens of Thousands of Dollars
Our employee decides to contribute a total of $150,000 into the Deferred Compensation Plan. They split this amount between bonus and salary. This action allows them to lower their taxable income by $150,000, when combined with their Microsoft 401k contribution – their overall tax bill is reduced by about $50,000!
Imagine doing this for several years! The amount of taxes you end up reducing can add up to hundreds of thousands of dollars! Not to mention the tax savings on the payouts during retirement, when you are in a lower tax bracket.
Make the Most of Your Deferred Compensation Plan Benefit
We know that Microsoft employees have enough going on, and that finding the time to research, plan and make the appropriate elections into the Deferred Compensation Plan may feel overwhelming. For many Level 67+ employees, this means they put off enrolling in the DCP. This can amount to tens, if not hundreds of thousands of dollars in taxes beyond what you would pay by utilizing the Deferred Compensation Planning.
If you have questions about how 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.