Your 401k vested balance refers to how much of your contributions you own and would if you left your company. Contributions that employees make to their 401(k) accounts are always 100% vested; they own them outright.
However, this is not always true of the money employers put into their employees’ accounts, including matching funds. Those contributions may only belong to an employee after they’ve worked for the company for a certain amount of time, the company’s vesting period.
If you were to leave your job before reaching that milestone, you could forfeit some or all of the employer-contributed money in your account. The amount that you get to keep is the “vested balance.” Other qualified defined contribution plans, such as 401(a) or 403(b) plans may also be subject to vesting schedules.
Here’s a deeper look at what being vested means and the effect it can have on your retirement savings.
401(k) Contributions Basics
Before you can understand vesting, it’s important to know how 401(k) contributions work. A 401(k) is an employer-sponsored retirement plan that allows employees to make elective deferrals of part of their salary on a pre-tax basis (they can choose how much of their salary to contribute from each pay period).
As of 2021, employees can contribute up to $19,500 annually in their 401(k) accounts, with an extra $6,500 in catch-up contributions allowed for those who are age 50 or older. Employees can then invest their contributions, often choosing from a menu of funds or other investments offered by their employer.
The IRS also allows employers to contribute to their employees’ plans. Often these contributions come in the form of a 401(k) match. For example, an employer might offer matching contributions of 3% or 6% if an employee chooses to defer 6% of their salary.
In 2021, the total contributions that an employee and employer can make to a 401(k) cannot exceed 100% of the employee’s salary or $57,000, ($63,500 including catch-up contributions,) whichever is less.
Employer contributions are a way for businesses to encourage their employees to save for retirement. They’re also an important benefit that job seekers look for when searching for new jobs.
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What Is Vested Balance?
The vested balance is the amount of money that belongs to you and cannot be taken back by an employer when you leave your job—even if you are fired.
Contributions that you make to your 401(k) are automatically 100% vested. Vesting of employer contributions typically occurs according to a set timeframe known as a vesting schedule. When employer contributions to a 401(k) become vested, it means that money is now fully yours.
Being fully vested means that when you leave the company, those employer contributions will remain in your account. It also means that you can decide to roll over your balance to a new account, start making withdrawals, or take out a loan against the account, if your plan allows it. However, keeping a vested 401k invested and letting it grow over time may be one of the best ways to save for retirement.
You’ll owe taxes on withdrawals made before age 59 ½, and they may be subject to early withdrawal penalties, plus you’ll miss out on future growth of those earnings.
Whether a company contribution is vested will depend on what type of contribution it is. Contributions known as safe harbor matches are immediately 100% vested. Employers may make these matching contributions only for employees who themselves make elective deferrals to their account. Or they can make contributions on behalf of all employees whether or not those employees make contributions themselves.
Matching contributions that do not fall under the safe harbor provision and profit sharing contributions may both be subject to a vesting schedule. While contributions to traditional and Roth 401(k)s may be subject to vesting rules, that is not the case with SIMPLE 401(K)s. All contributions to these accounts are fully vested when they are made.
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How Do I Know if I Am Fully Vested in my 401(k)?
If you’re not sure whether or when you will be fully vested, you can check their plan’s vesting schedule, usually via your online benefits portal.
Immediate vesting is the simplest form of vesting schedule. Employees own 100% of contributions right away.
Under a cliff vesting schedule, employer contributions are typically fully vested after three years of service. Federal law requires that 401(k) plans using a cliff vesting schedule wait no longer than three years for funds to be fully vested. A year of service is usually defined as 1,000 hours of work over a 12-month period.
Graded vesting is a bit more complicated. A percentage of contributions vest over the course of a set period of time, and employees gain gradual ownership of their funds. Eventually they will own 100% of the money in their account.
For example, a hypothetical six-year graded vesting schedule might look like this:
|Years of Service||Percent Vested|
All employees must be fully vested by the time they reach retirement age under the plan or if the company decides to terminate the plan.
Why Do Employers Use Vesting?
Offering 401(k) matching contributions is a benefit that employers may use to attract talented employees. More than three-quarters of companies who have a retirement plan offer some sort of employer match on contributions.
After hiring employees, the vesting schedule may help companies retain their best workers, encouraging them to stay with the company over the long term. Hiring and training new employees is a costly process for businesses. Withholding employer retirement contributions is a way to incentivize employees to stay at least as long as it takes for them to be fully vested.
You may want to take vesting schedules into account before getting a new job. If you’re only one year away from being 100% vested, you may decide it’s worth waiting the extra time before leaving the company for another opportunity. But the decision is a personal one: For example, if a potential new position offers a much higher salary, you might do your own math and decide that the gains from the higher salary overshadow the losses from leaving a percentage of unvested funds on the table.
What Happens If I Leave My Job Before I’m Fully Vested?
If you leave your job before being fully vested, you forfeit any unvested portion of their 401(k). The amount of money you’d lose depends on your vesting schedule, the amount of the contributions, and their performance. For example, if your employer uses cliff vesting after three years and you leave the company before then, you won’t receive any of the money your employer has contributed to their plan.
If, on the other hand, your employer uses a graded vesting schedule, you will receive any portion of the employer’s contributions that have vested by the time they leave. For example, if you are 20% vested each year over the course of six years, and you leave the company shortly after year three, they’ll keep 40% of the employer’s contributions.
Other Common Types of Vesting
Aside from 401(k)s, employers may offer other forms of compensation that also follow vesting schedules, such as pensions and stock options. These tend to work a little bit differently than vested contributions, but both pensions and stock options may vest immediately or by following a cliff or graded vesting schedule.
Stock Option Vesting
Stock options give employees the right to buy company stock at a set price and at a later date, regardless of the stock’s current value. The idea is that between the time an employee is hired and their stock options vest, the stock price will have risen. The employee can then buy the stock and sell it to make a profit.
With pensions, vesting schedules determine when an employee is eligible to receive their full benefit.
How Do I Find Out More About Vesting?
There are a few ways to find out more about vesting and your own 401(k) vested balance. This information typically appears in the 401(k) summary plan description and/or the annual benefits statement.
Generally, the plan administrator or human resources department of a company can also explain the company’s vesting schedule in detail, and even pinpoint exactly you are in your vesting schedule. Understanding this information can help you understand the actual value of your account.
While any employee contributions to 401(k) plans are immediately fully vested, the same is not always true of employer contributions. The employee may gain access to employer contributions slowly over time, or all at once after they’ve been employed by the company for a number of years.
Understanding vesting and your 401(k)’s vesting schedule is one more piece of information that can help you plan for your financial future. A 401(k) and other retirement accounts can be important components of a retirement savings plan. Knowing when you are fully vested in a 401(k) can help you understand how much money might be available to you when you retire.
There are many ways to save for retirement, including opening a traditional or Roth IRA. To get started with those, you can open an online retirement account on the SoFi Invest® platform. With SoFi, members can build a diversified portfolio and get advice from financial planners at no additional cost.
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