Learn About 401(k) Vesting and What It Means for You

Your Vested Balance Is the Part That Goes With You

Money blowing around a 401(k) sign.
Before leaving your job, check your 401(k) vesting schedule. Photo: Kativ

When you put money into your 401(k) plan, the money is yours. What your company puts in could be yours only if you stay employed there the required amount of time. The schedule that determines what you get depending on how long you stay is called a "vesting schedule." 401(k) vesting, or what is called your “vested balance," refers to how much of your 401(k) balance goes with you if you leave the company.

Vesting is also used to determine how much you can borrow if you take a 401(k) loan, as you can only borrow from your vested balance. Here's how 401(k) vesting works.

Key Takeaways

  • Vesting refers to fulfilling a required amount of time at an employer to receive a benefit.
  • Your 401(k) contributions are yours, but you can only take matching contributions when you leave based on your employer's schedule.
  • There are no laws that govern the amount of time required for vesting, so vested balance schedules for 401(k)s can vary by employer.

Your Contributions – 100% Vested

You are always 100% vested in your contributions, so you always keep your own money. You could put money in today, and even if you leave tomorrow, the money you put in your 401(k) plan from your own earnings belongs to you no matter what.

Beware: That doesn't mean that you're free to withdraw the money at any time. Certain taxes and penalties may apply if you try and take distributions before the age of 59 1/2.

Company Contributions – It Depends

There are several types of company contributions and they can have different vesting schedules.

  • Safe harbor match – 100% Vested: If your employer uses what is called a “safe harbor match” then you are 100% vested in that portion of the company contribution. Each year near the end of the year the company sends a notice which describes their match provisions. This notice will let you know if they use a safe harbor match.
  • Regular match and profit sharing contributions – subject to a vesting schedule: Regular matching contributions (which are those that do not fall under the safe harbor provisions) and profit sharing contributions may both be subject to a vesting schedule.

Two Examples of Common Vesting Schedules

Cliff vesting: Under a typical cliff vesting schedule, if you leave prior to three years you cannot take any of the money the company put in for you. After three years, you are 100% vested, so all company contributions are yours from that point forward.

Graded vesting: With a graded vesting schedule, you keep a portion of the money the company has put in depending on how long you have worked there. After six years, all company contributions are yours from that point forward. Here is a common graded vesting schedule:

Year 1: 0%
Year 2: 20%
Year 3: 40%
Year 4: 60%
Year 5: 80%
Year 6: 100%

Before you change jobs you may want to check the vested account balance of your company retirement plan. Depending on your company's 401(k) vesting schedule, waiting just a bit longer before leaving your employer could add thousands to your account balance. And of course, don't cash out your 401(k) balance when you leave. Let it grow or roll it over to an IRA so it can keep working for your retirement years.

If you have old 401(k)s from previous employers you don't have to consider vesting because you're not there anymore. With old 401(k)s consider consolidating accounts into one IRA to make tracking and managing your finances easier.

Finally, resist the urge to manage the money yourself if you leave and roll it over to an IRA. Your retirement money is not a good way to learn how to invest. Let a financial adviser manage your retirement dollars and learn the basics of investing using virtual dollars. The popular search engines have fake accounts you can practice with.

Frequently Asked Questions (FAQs)

What happens to the unvested portion of my 401(k) if I quit or am let go?

When you leave your job, the unvested portion of your 401(k) goes back to the company. There are some exceptions if there was a partial or full termination of your plan due to employer-driven layoffs or the business closing.

How much should I put into my 401(k)?

This is an individual decision that rests on many personal factors, but ultimately you should shoot for 10% to 15% of your income. At the very least, contribute the amount that your company will match.

If I am terminated from my job, can I use my 401(k) for expenses until I find a job?

Once you leave your job, your 401(k) is yours. You can roll it over into another retirement plan, leave it where it is, or use it for hardship expenses. You will be expected to pay taxes on any 401(k) money you spend, and unless you are 59 1/2 or older, you will pay a 10% penalty to the IRS for early withdrawal.

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  1. Internal Revenue Service. "Retirement Topics - Plan Loans."

  2. Internal Revenue Service."Retirement Topics - Vesting."

  3. Internal Revenue Service. "Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs." 

  4. Internal Revenue Service. "401(k) Plan Overview."

  5. Internal Revenue Service. "Retirement Topics - Vesting."

  6. Internal Revenue Service. "Issue Snapshot - Partial Termination of Plan."

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