As a Microsoft professional you have an opportunity to build wealth through your equity compensation, specifically Restricted Stock Units (RSUs).
This hypothetical framework is geared towards the newer Microsoft professional who would like to lean into owning shares of the company you work for while maximizing Microsoft’s benefit plans to balance the downside risks of having a concentrated Microsoft stock position.
If all goes well, in the future you will have a significant portion of your net worth in Microsoft stock and there will come a time when you will want to seriously consider diversifying your concentrated position in alignment with your financial goals.
For the tenured Microsoft professional who has already built a significant position in Microsoft stock, this framework will still be valuable. However, as the stock of the company you work for becomes a larger portion of your net worth it is important to consider the risks of the concentrated position. Diversification away from Microsoft stock should be a thoughtful option in this case.
How it works
Essentially, you are allowing your RSUs to accumulate a concentrated position in Microsoft stock. Your career goal as a Microsoft professional will be to maximize the RSU grants you receive each year as you grow with the firm. All of your other benefits will be managed with the goal of having additional diversification.
This framework will cause you to underperform vs. someone who builds a diversified portfolio if MSFT underperforms the broader market and significantly underperform if Microsoft has a crisis. However, by balancing with diversification outside of Microsoft stock you are avoiding a worse case scenario.
So, before starting on this path carefully consider how concentrated you would like to be in Microsoft stock.
Following this order of operations and leveraging your Microsoft benefits can result in efficient cash flow allocation and tax diversification (a mix of pre-tax, Roth, and taxable investments with long-term capital gains treatment) of your net worth.
Here is the framework order in short. Consider filling each bucket as your income allows in approximately this order:
- Hold all RSUs for the long term
- With any other discretionary cash compensation:
- Max ESPP and immediately sell
- Fully fund 401k to receive the maximum match
- Maximize HSA (with funds earmarked for longer term medical spending)
- Mega backdoor Roth
- Taxable investment portfolio
In Detail:
Hold RSUs for the long term.
As previously mentioned there will likely come a time where you will want to diversify these, but for now this is your primary way of accumulating Microsoft stock. As your grants vest you will owe ordinary income tax based on the market value on the vesting date. Consider letting Microsoft sell shares to pay the withholding tax. While this will result in less shares, it will free up other cash flow to maximize your other Microsoft benefits. Going forward, dividends from these shares will be taxed at the more favorable dividend rate, and sales after a year will get the lower long term capital gains rate.
Fund Your ESPP
Fully fund your ESPP and sell shares immediately upon purchase (invest or use for spending if necessary.) This may cause a cash flow crunch in the first 6 months, however afterwards you will be receiving more money than you put in due to the discount.
With the proceeds of ESPP sales, employ the funds in the following priorities. 1. Spending, if necessary, especially if spending these proceeds allows you to put more into the 401k. 2. Establish an emergency and opportunity fund that is not at risk. This money will be available if something comes up or you have a larger purchase in the near or medium term. Instead of selling company stock you will have cash to fund these purchases while your Microsoft stock hopefully continues to grow. 3. Once your emergency fund is established (and assuming you’re already maxing out your company match 401k) these funds can be used to for the HSA, Mega Backdoor Roth, or a taxable portfolio.
Max Your 401k
Participate in the 401k as much as possible to get the 50% company match. Microsoft will match 50% up to the salary deferral limit (currently $23,000 in 2024). This is a very generous benefit and should be taken advantage of. Depending on your tax bracket, apply the funds to the pre-tax or Roth account. Invest in a diversified portfolio. Avoid investing in Microsoft stock in this account. (You are already accumulating significant stock through your RSU’s.)
Max Your HSA
Consider maximizing your HSA. However, rather than use these funds for current medical expenses, consider investing them for the longer term. The HSA will eventually become a tax advantaged medical fund in your retirement. This idea assumes you have the cash flow to cover any current year out of pocket medical expenses.
Mega Backdoor Roth 401k
The Microsoft 401k allows after-tax contributions up to the IRS limit of $69,000 in 2024. After maxing out salary deferrals, and receiving the company match it is possible to allocate additional dollars to an after-tax account. These funds can be converted to a Roth IRA inside the plan.
Build a taxable account.
If you have discretionary income left over after maximizing all of these benefits consider starting to build a taxable account on your own. While this account will not have the same tax benefits as the previous options you will have more flexibility on when you use the funds and your investment options will be broader. This will also be the account you will use once you decide to diversify your RSUs.
A note on investing:
You will want to make sure to invest in a broad portfolio consistent with your goals and risk tolerance. You may consider investing these funds in a more conservative manner than you otherwise would if you did not have the concentrated position in Microsoft stock. For example, you may include more fixed-income in your portfolio.
Alternative investments such as real estate, private equity, private debt, commodities and crypto could be considered as a diversifier. You may want to avoid concentrating further in individual stocks in the technology industry, although I would not recommend entirely avoiding technology stocks assuming you are investing in a market cap weighted index fund (which will include a position in Microsoft and other large technology firms) in your 401k, etc.
With cash paying 5% plus, this could also be considered, especially if you are saving for shorter term goals such as a down payment for a home.
If all goes well, and Microsoft stock grows significantly over time you could be left with a large Microsoft stock position as well as a tax advantaged diversified portfolio using the generous benefits package Microsoft provides. As always, please use these posts as a starting point in your research. Do your research and consider consulting with your tax, financial, and benefits advisors before proceeding.
While I have attempted to convey these benefits as accurately as possible, I am not affiliated with Microsoft and it is possible there are inaccuracies in this post. Please use this post as a starting point for your research and consult with your internal Microsoft benefits team before making any decisions.
