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Just When I Thought Microsoft’s After-Tax 401(K) Benefit Couldn’t Get Any Better

As mentioned in my previous Microsoft articles, “Are you Taking Advantage of this Little Known Microsoft Retirement Plan Benefit?” and “Microsoft’s After-Tax Savings Benefit … Just Got Better”, Microsoft has a great and rarely utilized feature in their 401(k) plans. The benefit allows employees the opportunity to contribute an additional $27,500 (for 2019) of their compensation into an after-tax account. Yes, that’s an additional $27,500 on top of an employee’s $19,000 in pre-tax/Roth deferrals.

When this benefit was initially released, Microsoft workers were offered an in-plan conversion of the after-tax account into their Roth 401(k) and paid income tax only on the growth. A few years later, Fidelity updated their system allowing automatic quarterly conversions of the after-tax contributions into employees’ Roth accounts. The feature was a timesaver, but employees were still paying taxes on the growth that occurred during that quarter.

Benefit Updates

The benefit has improved yet again and beginning on April 12, 2019, employees can make automatic Roth 401(k) conversions daily rather than quarterly.

What Will the Result Be?

Any dollars saved typically won’t change in value before being converted to the Roth account, likely eliminating the possibility of paying tax on the growth. Once in the Roth, all future growth is tax-free!

Real World Example

Let’s say you contribute $10,000 into your after-tax 401(k) account during the first quarter of the year. If that $10,000 grew to $11,000, you would have to pay ordinary income tax on the $1,000 of growth when the money converted to the Roth account at the end of the quarter. With this new daily conversion feature, that $1,000 of growth would most likely occur after it was converted to the Roth account, eliminating the need to pay taxes on the growth.

Maximize the Benefit

Make sure to update the daily conversion feature on your Microsoft after-tax benefit on April 12. If this is the first time you are learning about this benefit, I encourage you to take a few minutes to review the articles mentioned above, and as always, please contact us if you have any questions.

James Nevers,CFP® is a Senior Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, directors and executives at Amazon, Microsoft, and Boeing, and other successful individuals to help them define their financial goals and implement an ongoing financial planning process.

This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Soundmark Wealth Management, LLC, its advisors and its affiliates do not provide tax or accounting services. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or accounting advice. Please consult with your tax advisor prior to engaging in any transaction.

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