401(k) Vesting Schedule: How It Works and Why You Should Care
Many workers who save a portion of each paycheck in their 401(k) and receive a matching contribution from their employer often wait years before the money is fully theirs.
Some don’t see any employer matching dollars because they leave the company too soon.
If you don’t want to lose your company’s 401(k) match, it’s critical to know your 401(k) vesting schedule and how it works.
What Is a 401(k) Vesting Schedule and How Does It Work?
A 401(k) vesting schedule is the length of time you have to stay working for your company for matching contributions to be 100% yours.
When you participate in your employer’s 401(k) plan, the company typically contributes a certain amount to your plan based on the amount of your annual contribution.
Vesting is your legal right to keep what your employer contributes as a company match.
However, each employer has its own requirements for vesting.
According to a 2021 report from human resources firm XpertHR, 82% of employers that offer traditional 401(k) plans say they match a portion of their workers’ account contributions, but less than 28% provide immediate employee ownership of company matched contributions.¹
Depending on your plan’s 401(k) vesting schedule, you may not own the money your employer contributed until you are fully vested.
Any money you personally contribute is always 100% vested and is yours to keep.
If you are 100% vested, this means you own 100% of your 401(k) balance and your employer cannot take it back.
Should you change jobs before you are fully vested, depending on the vesting schedule, you will have to return part or all of the money your company matched.
[Related Read:4 Ways to Potentially Maximize Your 401(k) Company Match ]
When Do You Become Vested?
The short answer is: It depends.
When you become fully vested depends on your 401(k) plan requirements, so to answer this, you need to read the information packet you received when you signed up for your 401(k). If you have no idea where that went (or you threw it out long ago), contact your plan representative or HR department to find out.
There are 3 main types of 401(k) vesting schedules: cliff, graded, and immediate.
Some 401(k) plans require you to stay employed for a specific amount of time before the money the employer contributed to your match is yours. This is known as cliff vesting.
Other companies have graded vesting. For example, 20% might be vested after your first year working, 40% vested the second year, etc., until you are fully vested.
A smaller percentage allows you to keep employer contributions as soon as the money is deposited. In this case, the matching contributions are immediately yours to keep.
The 3 Types of 401(k) Vesting Schedules
If you’re wondering why you should care about your 401(k) vesting schedule, consider this scenario: Let’s say you have worked for your employer for 5 years and have received a company match the entire time. And your company has a graded schedule.
Now, let’s say you want to leave your job. Sure, you can leave when you want, but you may not be able to take all of your employer matching dollars with you.
Understanding your 401(k) vesting schedule ahead of time helps you make a better decision about when to leave.
As you can see from the above example, being strategic about this may help you keep a lot more money and have more saved at retirement.
Take a minute to read about the 3 types of 401(k) vesting schedules, and then check out the information packet provided to you when you signed up for your 401(k).
An immediate vesting schedule means you own your employer contribution as soon as you receive it in your 401(k) account.
A graded vesting schedule means you vest a certain percentage of your employer matching dollars in a set period of time, until you are 100% vested. For example, 20% might be vested after your first year working, 40% vested the second year, etc.
By law, employers must vest employees at least 20% at the end of 2 years, and another 20% annually each year thereafter.
This means by the end of year 6 working for your company, you will be 100% vested for the company match.
If you leave the company after 4 years and your company has a 6-year vesting schedule, you will own 60% of the amount your employer has contributed if they vested 20% at the end of year 2, 20% year 3, and 20% year 4.
Some companies require you to stay employed for a specific amount of time before the money your employer contributed is yours. This is known as cliff vesting.
Employers have up to 3 years to vest employees in this type of vesting schedule.
If you were to change jobs after 2 years and your company required you to work for 3 years to vest the entire company match, you would have to forfeit the money your company contributed.
Is the Company Match Even Worth It?
Despite potentially lengthy vesting times, it’s still worth contributing enough to receive the company match because it’s one of the keys to maximizing your 401(k) and having more money in retirement.
It’s basically free money to help you grow your retirement savings. Why turn that away?
Also, another benefit is that employer contributions don’t count toward the annual contribution maximums nor are they taxable compensation.
Want to Further Maximize Your 401(k) Portfolio?
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