Vesting is an important concept in the world of employer retirement plans. For most people, they’ll encounter the term vesting when they’re dealing with their employer-sponsored retirement plans such as a 401(k) or 403(b) plan. In this context, vesting refers to how much of your employer match is actually owned by you. Here’s how it all works.
What vesting means
Many employer-sponsored retirement plans offer an employer match on any contributions made by the employee. For example, an employer might match 50 percent of the first 6 percent of an employee’s salary deposited into the account. In this case, the employee contributes 6 percent and receives an additional 3 percent from the employer, resulting in a total of 9 percent. That’s free money, and it’s one reason that experts recommend employees take maximum advantage.
But here’s the catch: That match is not all yours from day one. Yes, your contributions always belong to you, but the money from your employer may be required to vest — potentially for years — before it becomes entirely yours. For the money to vest, you’ll need to remain an employee of the company until you’ve completed the required vesting period.
If you don’t meet the vesting requirement, you’ll forfeit any matching funds that are unvested.
Other benefits such as stock or option plans for employees may also have a vesting period.
What happens when you’re fully vested?
Once you’re fully vested, the full value of your employer’s contributions are yours and typically all future employer matches vest immediately. These will continue to be invested according to your plan and will be available to you in the event you leave the company. At that time, you’ll have the option of rolling over the account into the plan offered by your new employer, or into an IRA, which gives you greater investment options.
Here are some additional details about vesting that are useful to know:
- Vesting often takes place over a few years, typically three or four years, though some employers have immediate vesting.
- An employer match often vests proportionally each year, and this process is called graded vesting. For example, if your match vests over four years, one-fourth of the total matching amount will vest each year.
- Another type of vesting – cliff vesting – takes place all at once. Once you surpass the vesting period, 100 percent of your match belongs to you.
Why would a company require a vesting period? A vesting period may reduce employee turnover and keep employees on the job longer, helping reduce the employer’s costs.
However, many companies won’t require a vesting period, and in these cases, your match becomes all yours as soon as it’s deposited into your account. That doesn’t mean you can withdraw your retirement plan money without penalty, but you’ll be able to take the full amount – your contributions plus the employer match – with you no matter when you leave your job.
While it’s normal for 401(k) plans and others to require a vesting period, other retirement plans such as the SEP IRA and SIMPLE IRA require immediate vesting.
What happens if you leave a job before you’re fully vested?
If you’re not fully vested in your company’s plan when you leave, then you’ll lose any unvested funds. To be clear, any money that you contribute to a retirement plan will always be yours to keep. Only the unvested money contributed by the company will be forfeited if you leave.
In addition, once you reach the vesting threshold, any subsequent matching funds from your employer vest immediately. So if you have a three-year vesting period, for example, any matching funds from that time on (say, in years four or five) will immediately become yours.
An example of vesting
Graded vesting is among the most typical forms of vesting, and it offers employees a percentage of their match each year until the employee owns the whole match and any future matches. Let’s run through an example so you can see how it works in practice.
Imagine you contribute 4 percent of your salary and receive a 100 percent match on those funds. The match vests over a four-year period. For the simplicity of running the numbers, assume that you’re contributing $4,000 annually, so you receive $4,000 in matching funds.
Here’s how much of the annual $4,000 matching contribution would be vested over the first five years:
| Year / Percent vested | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Cumulative amount vested |
|---|
| 1 / 25 percent | $1,000 | – | – | – | – | $1,000 |
| 2 / 50 percent | $2,000 | $2,000 | – | – | – | $4,000 |
| 3 / 75 percent | $3,000 | $3,000 | $3,000 | – | – | $9,000 |
| 4 / 100 percent | $4,000 | $4,000 | $4,000 | $4,000 | – | $16,000 |
| 5 / 100 percent | $4,000 | $4,000 | $4,000 | $4,000 | $4,000 | $20,000 |
After Year 1, you own just 25 percent of your match, or $1,000 of the $4,000 you’ve been given. At the end of Year 2, however, this vesting schedule means you own 50 percent of what you contributed in Year 1 – $2,000 – plus 50 percent of what you contributed in Year 2 – $2,000. So cumulatively you own a total of $4,000 in employer matching funds that have vested.
By the end of Year 4, all the money that has been matched becomes yours alone. And in subsequent years, any matched funds immediately vest, so you have full ownership of them.
If you have your 401(k) funds invested in stocks and bonds, then the actual amount of the money in the account can be substantially higher (or lower) than what was matched originally.
Bottom line
Despite the annoyance of a vesting schedule, it’s important to take advantage of matching funds from your employer. And you do need to understand any economic consequences of deciding to leave your employer before your matching funds have vested completely. If the numbers work for you, it could make a lot of sense to wait a bit of extra time to secure a greater vested match.
FAQs
For the money to vest, you'll need to remain an employee of the company until you've completed the required vesting period. If you don't meet the vesting requirement, you'll forfeit any matching funds that are unvested. Other benefits such as stock or option plans for employees may also have a vesting period.
What it means to be vested? ›
“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason.
How do you become fully vested? ›
Employees begin to become vested in at least 20 percent of their accrued benefits after an initial period of employment, with 20 percent increases each year. Once an employee hits 100 percent, they are fully vested and possess irrevocable rights to the employer's contributions.
Why is it good to be vested? ›
If you can't yet take distributions, it just means all your funds are in your account and growing. And, if you leave or otherwise lose your job, being fully vested allows you to take both your contributions and your employer's contributions with you into a new retirement account.
How do you know when you are vested? ›
Being vested means that you have earned enough service credit to qualify for a pension benefit once you meet the minimum age requirements established by your retirement plan. Vesting is automatic; you do not have to fill out any paperwork to become vested.
What is an example of vested? ›
One example of vesting is seen in how money is awarded to an employee via a 401(k) company match. Such matching dollars usually take years to vest, meaning an employee must stay with the company long enough to be eligible to receive them.
Is it good to be vested? ›
A vesting period may reduce employee turnover and keep employees on the job longer, helping reduce the employer's costs. However, many companies won't require a vesting period, and in these cases, your match becomes all yours as soon as it's deposited into your account.
What does vested immediately mean? ›
Immediate vesting: Immediate vesting means that you are fully vested in 100% of your employer's contributions to your account. Even if you leave your job after a month or two, any money your employer contributed on your behalf is yours to keep.
What does vested balance mean? ›
The vested balance of your 401(k) is what you own outright, and the funds cannot be taken back by the employer if you lose your job or leave the company. That's because 100% of your employee contributions and any returns (i.e., investment earnings) associated with those contributions are vested and protected.
What does not vested mean? ›
1. not entrusted with power over or possession of a given thing. companies would be required to vest all non-vested participants. 2. (of a thing) not entrusted to a given person.
More Definitions of Vested Value
Vested Value means the value of the Member's account representing vested Company Contributions, including reallocated amounts, if any, and associated interest, gains and losses.
Should I quit before I'm vested? ›
If you leave a job before your 401(k) is fully vested, you'll likely lose the unvested portion of the account. After all, that money isn't legally yours until you've been at your job long enough to satisfy the vesting schedule used by your employer's plan.
Does vested mean exercised? ›
The process of earning the right to exercise is called vesting. You can usually only exercise vested stock options. After you hit your vesting cliff (that waiting period mentioned earlier), you should be able to exercise your vested options whenever you want (as long as you remain employed).
How many years do you need to be vested? ›
For most people, that amounts to at least five years of CalPERS-credited service. But there are a few other factors involved. To be vested, you must actually meet two requirements: age and service credit.
What does it mean to be fully vested at Walmart? ›
When am I vested in the Walmart 401(k) Plan matching contributions? You are immediately 100% vested in both the money you contribute to your 401(k) account and your Company Match account. “Vested” simply means the money belongs to you, regardless of your employment status or years of service.
What is the difference between vested and balance? ›
When you are not fully vested, you receive less than your full account balance. For example, if you quit your job and you're 40% vested, you would only get your vested balance as a rollover or cash-out payment.
What are the three types of vesting? ›
There are three common types of vesting schedules: time-based, milestone-based, and a hybrid of time-based and milestone-based.
What are the two types of vesting? ›
The two most common types of vesting are sole ownership and co-ownership. Sole ownership covers the ways in which an individual can hold title on a property. Co-ownership, on the other hand, is how more than one individual can hold title on the same piece of real property.
What does it mean for something to vest? ›
vested; vesting; vests. transitive verb. : to grant or endow with a particular authority, right, or property. the plan vests workers with pension benefits after 10 years of service.
Does vested mean ownership? ›
Title vesting is simply taking ownership and the official rights of the title on a property. It is necessary when more than one individual appears as the property owner on the title.
No matter what form of vesting is in place, it doesn't impact the actual ownership interest (Title.) What vesting can change is the owner's ability to encumber, sell, or will their interest in a property. In other words, it determines what an owner(s) can do with their property in their lifetime - and after.
What is vested benefits value? ›
Vested benefit is an amount that may be taken in cash on retirement if you were a member of a provident fund or provident preservation fund on 1 March 2021. Non-vested benefit is an amount that is not a vested benefit and is subject to the annuitisation provisions on retirement from 1 March 2021.
What does fully vested date mean? ›
Definition: Vesting date is the date from which the annuity holder starts receiving the policy benefits of a regular stream of income. This date marks the end of the accumulation phase and the start of the distribution phase of the annuity plan.
What does vested upfront mean? ›
Share vesting means the company gives its shares to an individual upfront and the shares are subject to the company's right to buy them back. These shares are known as “unvested shares”.
Why can't I withdraw my vested balance? ›
Vesting May Limit Access to Some 401(k) Funds
1 However, in practice, the balance in the account may not all be yours, because some money may have been contributed by your employer via employer matching and you may not have worked long enough in the job for those company contributions to have vested to you.
How long does a vested pension last? ›
Pension vesting for defined-benefit plans can occur in different ways. Your benefits can vest immediately, or vesting may be spread out over as many as seven years. Your plan's vesting schedule might be a factor if you're thinking about changing jobs—you might not want to leave until you're fully vested.
What happens to vested balance when you quit? ›
If it is unvested, the funds in your account will remain the property of your former employer, and you won't have access to them. However, if it is vested, then you can cash out the money or roll over the account into an IRA or another eligible retirement account.
What happens if you leave before vested? ›
When you leave a job before being fully vested, the unvested portion of your account is forfeited and placed in the employer's forfeiture account, where it can then be used to help pay plan administration expenses, reduce employer contributions, or be allocated as additional contributions to plan participants.
At what age are you fully vested in a 401k? ›
Employer contributions made to safe harbor 401(k) and SIMPLE 401(k) plans must be fully vested immediately. A 401(k) participant becomes 100% vested at normal retirement age, when meeting a company's early retirement age provision, or if their retirement plan is fully or partially terminated.
Do you get your vested pension if you quit? ›
Once an employee is vested, they have earned the right to their pension benefits even if they leave the employer before retirement age.
When you are fully vested in your pension plan, you might be able to receive a portion or percentage of your accrued benefits, even if you leave your job before retirement age. The exact amount you can receive will once again depend on your pension plan and the funds accrued.
Can I cash out my vested balance? ›
Once you quit, retire, or get fired, you should have access to your vested balance. You can withdraw those funds and reinvest in a retirement account—or cash out, although there may be tax consequences and other reasons to avoid doing so.
What are the types of vesting? ›
5 different types of title vesting
- Joint tenancy with right of survivorship (JTWROS) This is often a common vesting for married couples, but it also applies to family members planning to own a property together. ...
- Community property with right of survivorship. ...
- Tenancy in common. ...
- Sole ownership. ...
- Living trust.
Borrowing 401(k) funds to buy a home
You can take $10,000 or half your vested amount in the plan (whichever is more), up to a maximum of $50,000. This type of loan is provided by your 401(k) plan provider — double check that they do allow it — and they will set the interest rates for it and the loan term.
Can I keep my vested shares? ›
Keep vested options.
If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They'll be able to exercise their options based on the existing criteria. If a bad leaver, they will lose everything.
How much of my vested balance can I withdraw? ›
You can borrow up to 50% of the vested value of your account, up to a maximum of $50,000 for individuals with $100,000 or more vested. If your account balance is less than $10,000, you will only be allowed to borrow up to $10,000.
