If you have a 401(k) account that offers an employer match, you may have to stay at the job for a certain length of time before those contributions become yours.
That’s called vesting and it’s important to understand how it works so you make smarter decisions about your financial future.
“401(k) vesting is typically the period in which you as the participant in the retirement plan ‘age in’ to the deposits that are made by the employer,” said Patrick Ray, senior vice president and financial advisor at Wealth Enhancement Group in St. Louis, in an email.
“This is typically done as a way for the employer to get the participant or employee to buy into the company’s values in hopes of creating a long-lasting business relationship with the employee,” Ray added.
[READ: How Much Should You Contribute to a 401(k) in 2024?]
How Does 401(k) Vesting Work?
Vesting determines how much of your employer’s contribution to your 401(k) plan you get to keep. Vesting schedules vary by company, although most employees will have cliff, graded or immediate vesting.
If your company offers immediate vesting, your employer match will be fully available after your 401(k) contribution. However, if your company’s 401(k) plan is on a cliff vesting schedule, you won’t be fully vested until you are employed for a specific amount of time. Here’s how a two-year vesting schedule would work:
— After one year, you’re 0% vested. That means if you leave the company before completing two years of service, you don’t keep any of your employer match.
— After completing two years of service, you are fully vested, meaning you keep all the employer contributions to your 401(k).
Other companies may offer a graded 401(k) vesting schedule, meaning you gradually receive your contribution match over time. For example, here’s how a six-year graded vesting schedule could be structured:
— No employer contributions are vested during the first year of service.
— After two years of service, 20% of employer contributions are vested.
— After three years, 40% of employer contributions are vested.
— After four years, 60% of employer contributions are vested.
— After five years, 80% of employer contributions are vested.
— You are fully vested after six years, meaning you keep all employer contributions.
“The plan documents you receive upon enrollment typically include the vesting schedule, while your account statement should provide a detailed breakdown of the total employer contributions and the vested portion,” said Uziel Gomez, a certified financial planner and founder of Primeros Financial in Los Angeles, in an email.
[READ: IRA Versus 401(k): Which Is Better?]
How to Figure Out Your 401(k) Vesting Schedule?
To determine your 401(k) vesting schedule, start by reviewing your plan’s summary plan description, also known as the SPD.
The SPD can help employees understand their rights and benefits under the plan. It outlines key details of your 401(k) plan including eligibility, vesting schedules, contribution limits, investment options and withdrawal rules.
“The SPD will tell you when you become 100% vested and the portion of your employer’s contributions that you are vested in,” said Annette Harris, owner of Harris Financial Coaching in Jacksonville, Florida, in an email.
[Read: 401(k) Mistakes Job Hoppers Make.]
Should You Stay at a Job Until You Are Vested?
In some cases, you may be ready to leave a job before being fully vested in your employer’s 401(k) contributions. It’s a common quandary and the best course of action will depend on several factors.
“How bad is the job? Do you have another opportunity lined up? How long until you vest? For example, if you have to wait one more week to vest another 20%, you should probably stay,” said Jeff DeLarme, a certified financial planner and president of DeLarme Wealth Management in Palos Verdes Estates, California, in an email.
“But if it’s a toxic work environment, and you have another year for more vesting, you might consider the trade-offs,” DeLarme said. “This is a deeper conversation you should probably have with your financial advisor, a trusted friend, family member or significant other.”
“While the vesting details of the plan should be considered, your decision should not be solely based on this,” said Ray. As the plan participant, it’s important to keep in mind that the money you contribute to your 401(k) is fully vested and belongs to you.
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A Guide to 401(k) Vesting originally appeared on usnews.com
