Now that you have been promoted to Level 67 at Microsoft, you’re eligible to participate in the Microsoft Deferred Compensation Plan (DCP).
Why is this so significant?
DCP provides you with an incredible opportunity to reduce your tax bill by deferring a portion of your income. As a Level 67 at Microsoft you can potentially reduce your tax bill by tens of thousands of dollars.
When leveraged correctly, DCP is more than just a way to save on taxes, it can also set you up for a secure financial future.
You can enroll in DCP 2 times a year:
May 1-31: You can elect to defer up to 100% of next year’s bonus, typically paid in September.
November 1-30: You can elect to defer up to 75% of next year’s salary.
The benefits of Being Promoted to Level 67 at Microsoft
An example of how a Level 67 employee reduced her tax bill
Your Microsoft compensation package includes your salary, bonuses, and RSUs. With high earnings, however, come significant tax implications.
To demonstrate how to leverage the Microsoft DCP benefit, we will use an example of a fictious employee named Tina. Tina was recently promoted to Level 67 and came to us for help with her high tax bill.
Tina’s total annual compensation is $475,000:
Salary: $250,000
Bonus: $50,000
Restricted Stock Units (RSUs): $175,000
Tina’s Challenge: High Tax Liability
Tina has had a successful career at Microsoft, she has seen her income increase over the years. She has also seen an increase in how much she owes to the IRS – she has been feeling the sting of high tax bills for the last couple of years.
Tina needed to find a way to reduce her current tax obligations while ensuring she could maintain her lifestyle and plan for future financial security.
Implementing the Microsoft Deferred Compensation Plan (DCP)
Deferring Income
When she was promoted to Level 67, Tina learned that she was eligible to participate in Microsoft DCP, allowing her to defer up to 100% of her bonus and 75% of her salary.
Approach: After carefully evaluating her cash flow together, we suggested the following deferrals.
Defer 100% of her bonus: $50,000
Defer 50% of her salary: $125,000
Outcome: Tina’s taxable income was reduced from $475,000 to $300,000. This strategic deferral potentially decreased her tax bill by approximately $60,000.
Maintaining Cash Flow with RSUs
With a significant portion of her salary and entire bonus deferred, Tina needed to address her cash flow to cover living expenses and maintain her lifestyle.
Approach: Utilize Microsoft RSUs as an alternative income source. In Tina’s case, we planned to sell her vested RSUs worth $175,000 throughout the year to generate necessary cash flow.
Outcome:
Diversification: Selling RSUs prevented an overconcentration of Microsoft stock in her investment portfolio.
Liquidity: Provided immediate funds to support her expenses without compromising her financial strategy.
Tax Efficiency: By not letting RSUs accumulate, Tina can control her capital gains tax budget.
Investing Deferred Funds
The deferred amounts in Tina’s DCP were invested according to her vision for her future, lifestyle needs, and risk tolerance.
Approach:
Diversified Portfolio: Allocated funds across various investment options available within DCP, balancing growth and stability.
Alignment with Financial Plan: Ensured that investment choices complemented her overall financial objectives, including planning for retirement and wealth accumulation.
Regular Reviews: Scheduled periodic assessments of investment performance to adjust allocations/deferrals as needed and stay on track with her goals.
Outcome: By investing the deferred funds according to Tina’s overall financial plan, Tina felt in sync with her long-term picture.
Planning for Future Payouts
We worked with Tina to help her develop a comprehensive plan for receiving her deferred compensation in the future.
Approach:
Timing: Scheduled payouts during her retirement years when her taxable income would likely be lower.
Amount and Frequency: Structured payouts to spread over several years, mitigating the risk of bumping into higher tax brackets.
Integration: We helped coordinate DCP payouts with other retirement income sources, such as 401(k) distributions and Social Security benefits, to ensure a balanced and tax-efficient retirement income stream.
Outcome: Tina’s proactive planning ensured that deferred funds would support her retirement comfortably without incurring unnecessary tax burdens.
An Exclusive Benefit for Microsoft Employees Who are Level 67 and Above
Microsoft DCP: Proactive Tax Management, Cash Flow, Long-Term Growth
Tina’s experience illustrates how the Microsoft Deferred Compensation Plan can be a powerful tool for managing taxes, cash flow, and long-term financial growth.
DCP Enrollment Considerations
Tax Reduction: How much of your income should you defer to optimize current and future tax liabilities?
Cash Flow Management: What alternative income sources can you utilize to maintain your desired lifestyle while participating in the DCP?
Investment Strategy: How will you allocate your deferred funds to align with your financial goals and risk tolerance?
Payout Planning: When and how should you schedule your DCP payouts to maximize tax efficiency and support your retirement plans?
What’s Best for You? Let’s Talk.
Whether you’re newly promoted to Level 67, are DCP eligible and considering enrollment, or currently participating in DCP — we’re here to help.
Schedule a 30-minute call with one of our advisors so we can discuss the best DCP strategies for your unique financial situation and goals.