What Is 401(k) Vesting?
February 10, 2023
What Is 401(k) Vesting?
February 10, 2023
Share this post:
Employer matching of 401(k) contributions is a common employee benefit. If you work for an employer that matches 401(k) contributions, your retirement account can grow faster. For example, let’s say that your employer matches up to 5% of your 401(k) contributions one for one. If your monthly salary before taxes is $5,000 and you elect to contribute 5% each month (or $250) to your 401(k), your employer will also contribute 5% ($250) for a total of $500 for the month. Although your employer matched your contribution, you may not have full ownership of that contribution until the funds are fully vested. Whether you’re fully vested will depend on your employer’s 401(k) vesting schedule.
So, what does vesting mean? According to the Internal Revenue Service (IRS), “Vesting in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason. Amounts that are not vested may be forfeited by employees when they are paid their account balance (for example, when the employee terminates employment) or when they don’t work more than 500 hours in a year for five years.” It’s important to mention that any funds you contribute are automatically fully vested.
401(k) Vesting Schedule
According to In some plans, your employer’s contribution will be vested immediately, which means that you’ll have full ownership of that contribution as soon as your employer deposits the funds into your 401(k). According to The Motley Fool, “The vesting rules are set by the IRS in order to ensure that employers can use vesting to help retain employees while still giving workers ownership of their retirement savings within a reasonable time.”
There are two main types of delayed vesting:
- Graded vesting – a predetermined percentage of employer contributions vests each year over a set period of time. Per The Motley Fool, “If an employer chooses to use a graded vesting schedule, they must vest at least 20% of employer contributions at the end of two years and another 20% annually in subsequent years. The longest a graded vesting schedule can last is six years, at the end of which employees are 100% vested.”
- Cliff vesting – you will become fully vested at a predetermined date, usually before your third year of employment. The time horizon of a cliff vesting cannot be more than three years.
Graded vesting and cliff vesting encourage employee retention because the employee has to work for a set time to be fully vested. Vesting timeframes are up to the employer’s discretion as long as they fall under the maximum vesting time allowed by the IRS. Check with your employer for their specific vesting schedule.
It’s important to note that any matching funds contributed by your employer after your vesting date are 100% vested from the day they’re contributed. Also, there are several scenarios in which your 401(k) becomes fully vested, no matter your employer’s vesting schedule:
- You reach full retirement age, according to the Social Security Administration
- If you meet your employer’s early retirement age provision
- If the company terminates that retirement plan
What Happens If You Leave Before Your 401(k) Is Fully Vested?
When you leave your job and your employer’s matched 401(k) contributions are not fully vested, you leave without that money in your retirement account. It may not make financial sense to do this in some cases. However, there are more considerations than if your 401(k) is fully vested when considering if you should leave or stay at your job, including your mental and physical health and the job for which you’re leaving your current employer. You should be able to see if/how much of your current matched contributions are vested by accessing your account information.
If your employer matches the contribution to your 401(k) plan, be sure to read the fine print to know what 401(k) vesting schedule your employer utilizes. Will the employer’s matching contributions be vested immediately, gradually, or at a predetermined date? Nobody likes to leave money on the table—knowing your employer’s rules from the get-go can help you make better decisions about remaining at or taking any job.
If you want to learn about more personalized and advanced wealth management strategies, schedule a 15-minute call with the Liberty Group team.
Schedule Your Complimentary 15-Minute Call
Want expert retirement and investing advice? Subscribe to our YouTube channel and check out our weekly podcast with The Sandman!
Listen to Protect Your Assets anywhere you get your podcasts:
This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated. The information contained within is believed to be from reliable sources. However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors. This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Liberty Wealth Management, LLC or consult with the professional advisor of their choosing.
Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.
Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index.
Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser. For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA 94609, T: 510-658-1880, F: 510-658-1886, www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.
IRS (n.d.). Retirement Topics – Vesting. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting
Frankel, Matthew, CFP. (January 3, 2023). 401(k) Vesting: How It Works. The Motely Fool. https://www.fool.com/retirement/plans/401k/vesting/
O’Brien, Sarah. (April, 14l 2022). 62% of workers view 401(k) employer match as key to reaching retirement goals. But they may wait years for those contributions to be their own. CNBC. https://www.cnbc.com/2022/04/14/62percent-of-workers-view-employer-401k-match-as-key-way-to-reach-retirement.html