Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
A common term that’s used in retirement plans is “vesting”, but what does it mean and what impact does it have on my 401k account? The vested balance in your 401k account is the amount you are entitled to keep should you leave your company and take a withdrawal.
Vesting is calculated based on your years of service with your company. The vesting schedule will vary from one plan to the next, and employers have a little bit of flexibility in choosing the schedule. Some companies will indicate that once you reach 3 years of service then you’ll be 100% vested in the employer contribution, but at any point before then, you’ll be 0 percent vested–this is known as a 3 year cliff schedule. Other companies, will give you a percent each year, so for example, after 1 year of service your 25% vested, 2 years 50%, 3 years 75% and upon completing your 4th year you become 100% vested. This is known as a graded schedule. The maximum vesting schedule employers can use is a 3 year cliff schedule or a 6 year graded schedule.
Keep in mind, certain types of contributions are always immediately (or 100%) vested. This means that regardless of how long you’ve worked for the company you’ll always be entitled to keep that money. These types of contributions include:
- Your pre-tax deferrals
- Your after-tax deferrals
- Money you rolled over into the plan
- Safe harbor employer contributions
Certain events will also vest your account 100% regardless of your years of service. These events often times include reaching retirement age (as defined by your plan) or disability. Be sure to review the 401k documents for your own plan, or contact your employer so you know exactly when you’ll be entitled to keep all the money that’s in your account.
This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.
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