Investments & Financial Planning
A 401(K) Retirement Plans - What Does Vesting Mean?
The "vested" portion of your 401(k) account is the part that belongs to you and cannot be forfeited if you leave the job. There are two parts of 401(k) contributions. The contributions you make and the contributions your employer makes such as a "matching" contributions. The money you contribute, adjusted for any investment gain or loss, is always 100% vested. That means this money is always 100% yours. The contribution your employer makes may be subject to a vesting requirement. This means that you must earn your employer’s contribution over a period of time. Vesting requirements are very common in 401(k) plans. The two most common types of vesting schedules are named Graded vesting and Cliff vesting. With graded vesting you own an increasing portion of the employer contribution each year you work with your company. If your company had a 4 year vesting schedule, you would be 25% vested after one year, 50% vested after two years, etc. By law, the longest vesting schedule a 401(k) plan can have is 7 years. Employees must be at least 20% vested after 3 years, 40% vested after 4 years, 60% after 5 years, 80% after 6 years and 100% after 7 years. With Cliff vesting you become 100% vested after a set period of time. If your vesting requirement is 4 years and you leave your company after 3 years, you will not get any of the employer contributions. The vesting requirement is an incentive for employees to stay employed with the company.
Note If you need professional help with "Investments & Financial Planning" or have other tax questions, we can help you find a local licensed CPA for a free, no-obligation consultation.