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What It Means to Be Fully Vested in a Retirement Plan

Not all companies have employer-sponsored retirement plans. In fact, if your job offers a 401(k), a 403(b) or a 457 plan, you’re one of the lucky ones. And if your employer agrees to match a portion of your contributions, consider yourself even more fortunate. But there’s a catch. If you leave your company before you’re fully vested, you may not be able to take all your matching funds with you. Confused? Here’s a breakdown of how vesting works and what it means to be fully vested in a retirement plan.

Find out now: How much do I need to save for retirement?

What Is Vesting?

Vesting is the process that allows the ownership of an asset or benefit to transfer to another party. When you have a vested interest in a retirement account, you permanently have access to those funds. No employer can take them from you.

If you’ve contributed money to an account on your own, don’t worry about vesting. You’ll be 100% vested in any money you save and set aside for retirement. But vesting can become an issue anytime you’re dealing with company matching funds or other assets that your employer provides. You may not immediately have access to those benefits. You may only gain rights to them as they vest over time.

How Vesting Works

What It Means to Be Fully Vested in a Retirement Plan

Vesting rules can vary depending on who you work for. But across the board, you do not own any assets that you don’t have a vested interest in. For example, let’s say you’re thinking about changing careers. If you’re 25% vested in the employer contributions in your 401(k) plan, you’ll be able to take 25% of them with you when you quit your job.

Usually, there’s a vesting schedule indicating that an employee can only own 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 graded vesting, which gradually gives employees the right to their matchings funds. They’ll have to wait until the end of the vesting period to become 100% vested.

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.

There’s also a cliff vesting schedule that gives employees 100% ownership of their benefits at once on 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 a full four years. If you walk away after two years of service, you’ll have nothing but the money you contributed to your own plan.

What It Means If You’re Fully Vested in a Plan 

When you’re fully vested in a retirement account, 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.

Different companies may have different vesting schedules. But IRS rules state that workers must be fully vested once they reach their normal retirement age (according to the plan’s terms) or their employer decides to terminate the plan. Companies may terminate their retirement plans if they want to switch over to a different kind of plan or they’re forced to file for bankruptcy.

Even if you’re fully vested in your company matching funds, you’ll still have to follow some rules, particularly when it comes to withdrawing the money you’ve earned. If you attempt to use those funds before a certain deadline (like before you reach your full retirement age), you may get hit with a penalty.

Bottom Line

What It Means to Be Fully Vested in a Retirement Plan

Some employers offer incentives in the form of matching funds for their employees’ retirement plans. But workers often only get access to that money overtime 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 for Saving for Retirement

  • Make sure you’re taking full advantage of your employer match. As illustrated by SmartAsset’s 401(k) calculator, employer contributions can seriously boost the value of your 401(k) over time. But keep in mind that the matching funds might not be yours until you become fully vested.
  • Work with  a financial advisor. According to industry experts, people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/courtneyk, ©iStock.com/PeopleImages, ©iStock.com/DragonImages

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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