Microsoft 401(k): Answers to the Most Common Questions
The Microsoft 401(k) is one of the best retirement plans in the tech industry. To help you understand your benefits, here are our answers to the most common questions about the Microsoft 401(k).
1. What is the Microsoft 401(k) plan?
The Microsoft 401(k) is a retirement plan that lets employees contribute a portion of their salary into tax-advantaged investment accounts. These investments can grow over time, helping you save more for retirement.
2. Who is eligible for the Microsoft 401(k) plan?
All Microsoft employees in the U.S. aged 18 or older are eligible to participate in the 401(k) plan. There is no waiting period or service requirement.
3. How much can I contribute to my 401(k) in 2024?
For 2024, Microsoft employees under 50 can contribute up to $23,000. If you are 50 or older, you can make an additional catch-up contribution of $7,500 for a grand total of $30,500.
4. Does Microsoft have 401(k) matching contributions?
Yes, Microsoft matches 50% of all employee contributions up to the IRS limit. This means that if you contribute the full $23,000, Microsoft adds an additional $11,500 for free.
5. When do my 401(k) contributions vest?
All Microsoft 401(k) contributions are immediately vested, including the 50% employer match. You do not have to wait to take ownership of the funds in your account.
6. Can I contribute to both pre-tax and Roth 401(k) accounts?
Yes, Microsoft allows pre-tax and Roth contributions to the 401(k). Pre-tax contributions reduce your taxable income now, with taxes paid upon withdrawal. Roth contributions are made after taxes, allowing for tax-free withdrawals in retirement.
PRO TIP: Consider using a mix of pre-tax and Roth contributions for your Microsoft 401(k). That way, you can balance the benefits of both options for maximum tax savings.
7. Does Microsoft allow after-tax contributions?
Yes, Microsoft allows after-tax contributions beyond the standard limits, enabling employees to contribute up to the IRS total contribution limit, which is $69,000 for 2024. This includes all pre-tax, Roth, and after-tax contributions, as well as the employer match.
Catch-up contributions are not counted against the $69,000 limit. With catch-up contributions added in, the total limit is $76,500.
8. What is the mega backdoor Roth program?
The mega backdoor Roth program lets you convert after-tax dollars in your 401(k) to a Roth account. This gives high-earning employees the benefits of a Roth IRA without the usual income limits. For more, check out this free guide: Microsoft Mega Backdoor Roth Conversion: How It Works.
9. Who manages the Microsoft 401(k)?
Microsoft's 401(k) plan is administered by Fidelity Investments, a leading provider of retirement and investment services. Fidelity oversees the plan’s recordkeeping and offers a range of investment options.
Meet Clients Who Chose Retirement
From Boeing Engineer to world traveler, snowboarder, and mountain biker!
10. What investment options are available in the Microsoft 401(k) plan?
The Microsoft 401(k) offers a variety of investment options, including:
Stocks
Bond funds
Mutual funds
Target-date funds (i.e., lifecycle funds)
Using these options, you can customize your investment strategy to fit your personal goals and risk tolerance.
PRO TIP: For the best results, always invest in a variety of asset types and industries. A diversified portfolio is essential to create reliable returns while minimizing risk. See: The Importance of Diversifying Your Investment Portfolio.
11. Can I invest in Microsoft stock through my 401(k)?
Yes, the Microsoft 401(k) plan includes an option to invest in Microsoft stock. You can also purchase company stock at a discount through the employee stock purchase plan (ESPP). Microsoft even grants restricted stock units (RSUs) as part of your compensation package.
Just remember, it’s never wise to put all your eggs in one basket. Always diversify your investments to mitigate company-specific risks.
12. What is the BrokerageLink option for investing?
BrokerageLink is a self-directed brokerage account provided by Fidelity Investments for the Microsoft 401(k). This option gives you access to a broader range of investment options beyond the standard plan offerings. If you are interested in a self-directed account, it is recommended to work with a fiduciary financial advisor to protect your finances.
13. Can I change my contribution amounts or investment choices?
You can adjust your contribution amounts and investment selections at any time by logging into your Fidelity NetBenefits account.
14. Is the Microsoft 401(k) the same thing as the deferred compensation plan (DCP)?
No, the Microsoft 401(k) and DCP are separate. The 401(k) is available to all eligible employees, while the DCP is exclusive to higher-level employees (level 67+). However, both do allow you to defer a portion of your income to be taxed in a later year. See: Understanding the Microsoft Deferred Compensation Plan.
15. When can I withdraw funds from my 401(k)?
You can begin withdrawing funds from your 401(k) without a penalty once you reach age 59½. If you leave the funds in longer, however, you may be able to grow your retirement savings even more.
16. Can I withdraw funds from my 401(k) before retirement?
Withdrawing funds from your 401(k) before age 59½ will incur a 10% early withdrawal penalty. Your withdrawals will also be subject to normal income taxes. There are exceptions to this penalty, such as hardship withdrawals or a loan, but these options are subject to strict criteria and should be viewed as a last resort.
17. Does the Microsoft 401(k) have required minimum distributions (RMD)?
Pre-tax contributions to your 401(k) are subject to RMDs. This means you must start making withdrawals at age 72 or 73 unless you are still employed by Microsoft. RMDs apply only to pre-tax balances. Roth funds have no RMD requirement. You can leave them in your account as long as you choose.
18. Are there penalties for not taking RMDs?
Yes, failing to take your RMDs can result in a penalty. The IRS imposes an excise tax of 25% on the amount not withdrawn by the deadline. However, if you correct the missed RMD promptly, the penalty may be reduced to just 10% or waived altogether.
19. Will my 401(k) funds be taxed in retirement?
Distributions from traditional pre-tax funds are taxed as ordinary income upon withdrawal. Roth funds are made with after-tax dollars, so withdrawals are tax-free as long as you meet the criteria. (You must be at least 59½, and the Roth account must have been open for at least five years.)
Meet Clients Who Chose Retirement
Setting a retirement date isn’t easy, but it’s a lot easier with a Fiduciary and a plan.
20. Can I roll over my Microsoft 401(k) to another account?
Yes, you can roll over your Microsoft 401(k) into another qualified retirement account, such as an individual retirement account (IRA) or a new employer's 401(k) plan. This allows you to consolidate your retirement savings and maintain tax-deferred status.
21. What happens to my 401(k) if I leave Microsoft before retiring?
Because the Microsoft 401(k) has immediate vesting, the funds in your account are always yours. You won’t ever lose them when leaving Microsoft. If you do leave Microsoft before retiring, you have several options. You can:
Leave your funds in your Microsoft 401(k) account
Roll them over to another employer's plan
Transfer them to an IRA or other account
A fiduciary financial advisor can advise you on which option is best for you.
22. What happens to my 401(k) if I retire early?
If you retire early from Microsoft, you have the same options as leaving for any other reason. You can leave the funds in your 401(k) or roll them over to a new account. Be aware that withdrawing funds before age 59½ will still incur a 10% early withdrawal penalty unless you qualify for the rule of 55.
23. What is the “rule of 55” at Microsoft?
The rule of 55 is an IRS provision that allows employees who retire early to withdraw funds penalty-free, as long as they leave the company in or after the year they turn 55. This effectively lowers the minimum retirement age from 59½ to 55. (The rule of 55 also applies when leaving the company for other reasons, but early retirement is the most common use case.)
24. What happens to my Microsoft 401(k) if I pass away?
If you pass away, your designated beneficiaries will receive the funds in your 401(k) account. This makes it essential that you designate one or more beneficiaries for your Microsoft 401(k) ASAP. This ensures that the funds in your account will be distributed according to your wishes in the event of your death.
25. What happens to my 401(k) if I become disabled?
In the event of a disability, you will be eligible to withdraw funds from your 401(k) without the usual 10% early withdrawal penalty. This helps you cover the expenses and hardships created by your disability. Beyond that, you can continue to invest in your Microsoft 401(k) to grow your wealth.
26. Do I have to pay a fee to use the Microsoft 401(k) plan?
While Microsoft covers many administrative costs, some investment options within the 401(k) plan may have associated fees, such as expense ratios for mutual funds. It's advisable to review the fee details of each investment option within your plan to understand any costs involved.
27. Can I defer bonuses into my Microsoft 401(k)?
Yes, Microsoft allows employees to defer a portion of their bonuses into their 401(k), subject to IRS contribution limits.
28. How can I maximize my Microsoft 401(k) savings?
To get the most out of your Microsoft 401(k) savings, you should:
Max out contributions: Contribute up to the 2024 limit of $23,000 ($30,500 if you’re 50 or older). This will give you more funds to invest and maximize the employer match.
Use the mega backdoor Roth program: Once you’ve maxed out your standard 401(k) contributions, you can add additional after-tax dollars and convert them to a Roth account.
Diversify investments: Utilize a mix of stocks, bonds, mutual funds, and target-date funds to manage risk and achieve stable growth.
Adjust regularly: Review your contributions and investment choices to make sure they support your goals over time.
Get professional advice: Working with a fiduciary financial advisor will help you save and grow your wealth for retirement. Fiduciary advisors are legally obligated to prioritize your best interests, so you can rest easy knowing your finances are in good hands.
Take the Next Step Toward Financial Security
By understanding the details of your Microsoft 401(k), you can make informed decisions for your future. However, retirement planning is nothing if not complicated. It’s easy to leave money on the table.
At TrueWealth Financial Partners, we specialize in guiding professionals like you through the complexities of retirement planning. Our personalized strategies are designed to align with your unique financial goals, ensuring you make the most of your 401(k) and other investment opportunities.
Ready to optimize your retirement plan? Schedule a free consultation with TrueWealth Financial Partners today. Our team is standing by!
Meet Clients Who Chose Retirement
Retiring at 55 takes a special strategy.