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Vested: What It Means for Your Retirement Plan


While your contributions to your retirement plan belong to you from the get-go, your employer’s contributions need to vest first. Employers may follow an immediate vesting schedule, a cliff vesting schedule (where you are vested after a set number of years of service) or a graded schedule (where you are vested a set percentage with each work anniversary). Companies may also use vesting schedules for stock or option bonuses. If you’re approaching retirement, a financial advisor can guide you through the transition from accumulating savings to turning them into an income.

What Is Vesting?

If you recently came across the term “vesting” for the first time, you probably just joined your first 401(k) plan or changed jobs. In this context, vesting refers to contributions your employer makes to your account. When they vest, they belong to you.

Some employers choose for their contributions to pensions or 401(k) plans to vest immediately. Similarly, SEP-IRAs, SIMPLE IRAs and other IRAs, required employer contributions fully vest immediately by law. But most companies require you to work for several years before you fully own the contributions they make to your account.

That said, regardless of what type of retirement plan you have or what company you work for, you always own 100% of the money withheld from your paycheck and put into your account. Your retirement plan’s vesting schedule will be clearly outlined in your summary plan description. You can usually obtain a copy from your HR department or the plan administrator.

How Does Vesting Work?

As mentioned earlier, vesting schedules can be immediate, graded or cliff. With the latter two, federal law dictates the maximum number of years a company can require you to work before you are fully vested in a 401(k) plan. With a graded vesting schedule, your company’s contributions must vest at least 20% after two years, 40% after three years, 60% after four years, 80% after five years and 100% after six years. If enrollment is automatic and employer contributions are required, they must vest within two years.

If your plan follows a cliff vesting schedule, you will own 100% of your employer’s contributions after working a set number of years. By law, the most this can be is three years.

Typically, if you leave your employer before you are fully vested, you will forfeit all or a portion of the employer-provided contributions to your account. So if your plan has a two-year vesting cliff and you leave after one year and 11 months, you will walk away with only the money you contributed to your own plan and any earnings it generated.

That said, if you return to an employer either within five years or within the number of years you worked, whichever is greater, the time you previously worked may count towards the number of years you need in order to become vested. Federal law also requires that you be 100% vested by the time you reach “normal retirement age.” Your plan decides what that age is, but it’s usually no more than age 65.

Can I Access My Funds If I’m Fully Vested in My Retirement Plan?

What It Means to Be Fully Vested in a Retirement Plan

When you’re fully vested in a retirement plan, you have 100% ownership of the funds in your account. This happens at the end of the vesting period. You’ve fulfilled the time requirement that your employer put in place. And since that money is yours, your boss can’t take it back, whether you are fired or laid off – or you quit.

Being fully vested in your retirement plan, however, does not mean you are scot-free to touch the money. With traditional 401(k) plans, you have to be at least 59.5 years old before you can make withdrawals without incurring a penalty. If you are younger than 59.5, you will face a 10% IRS penalty. The only exception to this is if you use the rule of 55, which allows for early, penalty-free withdrawals if you leave your job in or after the year you turn 55.

Vesting Schedules for Private-Sector Pension Plans

If you have a pension plan, aka defined benefit plan, the laws for vesting are a little different. With a defined benefit plan, the longest a cliff vesting schedule can be is five years. If the company follows a graded schedule, it can require up to seven years of service in order to be 100% vested. But it must provide at least 20% vesting after three years, 40% after four years, 60% after five years and 80% after six years. If the defined benefit plan is a cash balance plan, employees must become fully vested after years or less.

Vesting for Church and Government Pensions

The vesting rules for church and government pension plans are not set by the federal government. Instead, vesting schedules for these types of plans depend on the guidelines set by the retirement system in your state.

However, it’s important to note that church and government pension plans each cover a wide range of employees. Church plans, for example, can also cover employees of hospitals or schools associated with a church. Governmental plans can cover employees of federal, state and local governments. They can also benefit employees of agencies under these governmental bodies including school administrators and teachers.

How Much Should I Contribute to My Retirement Plan?

What It Means to Be Fully Vested in a Retirement Plan

If your employer offers a defined contribution plan like a 401(k), experts recommend contributing at least 10% of your salary. Or if you don’t like the plan options or fees, you should put in at least what it takes to max out the company match.

For example, let’s say you make $100,000, and your employer offers a company match. It’s 50% of your contributions, up to 6% of your salary. So to get the maximum company match, you should contribute at least $6,000 (6% of $100,000). Your employer would then add $3,000 (50% of $6,000) to your account, for a total $9,000 in contributions at the end of the year.

If you can invest more than this, the ceiling for 401(k) plan employee contributions in 2022 is $20,500 or $27,000 if you’re at least 50 years old. To visualize how fast your money will grow, use our 401(k) calculator.

Bottom Line

Some employers offer benefits in the form of matching funds to their employees’ retirement plans. Workers then become fully vested or own employer-provided funds, either immediately or after several years of service. Federal and state laws govern how long a company can require you to work to become fully vested. Generally, the maximum is two to seven years, depending on the kind of plan, vesting schedule and other factors.

Tips on Saving for Retirement

  • Turning your nest egg into a stream of income can be challenging if you’re not a financial pro. So why not make retirement easier by hiring a financial advisor? Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If your employer-sponsored retirement plan has high fees or few investment options, contribute enough to max out the company match. Then save what you can in a Traditional or Roth IRA. The maximum contribution for 2022 is $6,000 if you are younger than 50. It’s $7,000 if you are 50 or older. If you also contributed to a 401(k), the amount that’s deductible (for a traditional IRA) depends on your income and filing status.

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