Being fully vested in your retirement plan means you own 100% of funds in the account, including any employer contributions. Most retirement plans such as 401(k)s and pensions have vesting schedules. This tells you when you become fully vested in your plan. For example, your plan may let you become 20% vested in your plan after two years of service and 100% vested after seven years. This article explains all you need to know about vesting. We can also help you find a financial advisor who can guide you through making the best retirement planning decisions.
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What Is Vesting?
If you’ve just received your first 401(k) plan or changed jobs, you’ve probably come across terms like “vesting.” This simply defines the time frame in which you become the sole owner of all your benefits in the plan. Some plans allow you to become 100% vested in the plan immediately. This means all the money in your account including any money put there by your employer belongs to you at all times.
But most retirement plans require you to work for your company for a certain amount of time before you become entitled to the contributions your employer put there.
But regardless of what type of retirement plan you have or what company you work for, you’re always 100% vested in the money you put into your account on your own.
How Vesting Works
Vesting rules can vary depending on the company you work for. But across the board, you do not own any assets that you’re not vested in.
For example, let’s say you’re thinking about changing jobs. If you’re 25% vested in the employer contributions toward your 401(k) plan, you can take only 25% of employer contributions if you leave your current job. Perhaps, you may want to wait until you’re 100% vested in your retirement plan before you walk out the door. That way, you can take all your employer matches with you. This is basically free money. And you can always rollover your 401(k) assets to an individual retirement account (IRA) when you leave.
Usually, there’s a vesting schedule indicating that an employee can own only a certain percentage of their benefits after a certain amount of time has passed. The longer you work for a particular company, the more money (or assets) you have a right to claim.
There are several types of vesting schedules. There’s one that allows benefits to vest immediately. And then there’s graduated vesting. In this case, you gradually become vested in your employer matches.
Let’s say your company has a six-year graded vesting schedule. After the first year, you may be 0% vested. After two years, you may be 20% vested. You won’t be 100% vested in your account until you’ve worked for the company for six years.
Your plan may follow a cliff vesting schedule that gives employees 100% ownership of their benefits at once or after a certain date. For example, if you work for a small business with a four-year cliff vesting schedule, you wouldn’t have any rights to your matching contributions until you’ve worked at the company for four full years. If you walk away after two years of service, you’ll have nothing but the money you contributed to your own plan and any earnings it generated.
Under federal law, however, you must 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?
When you’re fully vested in a retirement plan, you have 100% ownership of the funds in that account. This happens at the end of the vesting period. You’ve fulfilled all of the requirements that your employer put in place. And since that money is yours, your boss can’t confiscate it regardless of what happens.
But even when you’re fully vested in your retirement plan, that doesn’t necessarily mean you have immediate access to those funds without penalty. Traditional 401(k) plans for example require that you be at least 59.5 years old before you make eligible withdrawals. Otherwise, you may face a 10% federal tax penalty. Nonetheless, many 401(k) plan sponsors place strict restrictions as to how you can make a withdrawal before reaching this milestone. The general rule of thumb is don’t touch your retirement savings until you retire.
Vesting Schedules for Private-Sector Pension Plans
If you have a defined-benefit pension plan, the vesting rules work a bit differently. Still, there are a few similarities between private-sector pensions and 401(k)s. For example, you’re always 100% vested in the contributions you make toward your pension. So if you contributed $500 to your pension plan with your previous paycheck and you quit your job next week, those $500 and all other contributions you’ve made toward your pension belong to you.
However, you may not be fully vested in the contributions your employer makes toward your pension if you leave your company before a certain point in time.
Pension vesting schedules can stretch up to seven years. Some plans allow you to be 100% vested immediately. However, pensions typically follow a cliff vesting or graduated vesting schedule. We explain how these apply to pensions below.
Pension Cliff Vesting: You become 100% vested in your pension benefits after being at your company for a certain number of years such as five. However, you don’t become partially vested in your pension over time. If you’re enrolled in a pension plan with a four-year vesting schedule, for instance, you’re not entitled to any of your employer’s contributions if you leave your job after three years of service.
Pension Graduated Vesting: You become partially vested in your plan by a certain percentage after every year of service until you’re 100% vested. Under federal rules, private-sector plans must let you become at least 20% vested in your benefits after year three. You must be fully vested by the time you’ve completed seven years of service.
Vesting for Church and Government Pensions
The vesting rules work a bit differently for church and government pension plans. 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?
Regardless of what type of retirement plan you have, you should contribute as much as you can toward your retirement fund. This holds especially true if your employer offers company matches. If it does, the company sets the rules as to how much they’re willing to give you. But the employer matches of a typical 401(k) look like this.
Let’s say you make $100,000 and your employer will match 50% of your contributions up to 6% of your salary. In 2019, you can contribute up to $19,000 toward your 401(k) plan or $25,000 if you’re at least 50-years-old. While that’s a major stretch for most people, it’s interesting to see how valuable employer matches can be. In this scenario, if you want to contribute as much as possible to maximize the company match, you would contribute 6% of your salary of $6,000. You company would contribute 3% of your salary (or 50% of your 6% contribution) for another $3,000, giving you $9,000 total at the end of the year in base contributions to your 401(k).
No matter what your situation, our 401(k) calculator can help you visualize what you may gain with whatever amount of contributions you choose.
How Do I Learn More About My Retirement Plan’s Vesting Schedule?
If your retirement plan undergoes a vesting schedule, it will be clearly outlined on your summary plan description. You can usually obtain a copy from your HR department or the plan administrator. Of course, it doesn’t hurt to reach out to your HR department to learn more about your retirement plan’s features and investment options.
Some employers offer incentives in the form of matching funds for their employees’ retirement plans. But workers often only get access to that money over time based on a vesting schedule. Knowing your company’s vesting policies is important if you want to take advantage of what they’re offering and eventually become fully vested.
Tips on Retirement Savings
- If you’re not too satisfied with your 401(k), consider opening an IRA or Roth IRA. While you won’t get an employer match, you would have access to nearly any investment option under the sun.
- One of the best retirement planning decisions you can make is to work with a qualified financial advisor. This individual can guide you through making investment decisions that make the most sense based on your individual situation. Our SmartAsset financial advisor matching tool can connect you with up to three local advisors who can meet your particular needs. Our platform will provide you with their profiles, so you can review their credentials before deciding to work with one.
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