In this article:
- What It Means to Be Vested
- What Happens When You’re Fully Vested?
- What Happens if You Leave a Job Before You’re Fully Vested?
People who put money into an employer-sponsored retirement plan should be aware of an important word: "vested." When you're vested in a retirement plan, it means you own some or all of the money in your account. So, if you're 100% vested, you own 100% of your retirement funds. But if you're 20% vested, you're entitled to all of the money you've contributed and just 20% of your employer's matching contributions.
Knowing what it means to be vested can make a difference in how much money you'll have in your account for retirement or when you leave the company. Follow along to find out more about vesting.
What It Means to Be Vested
When you're vested, it means you control some or all of the money in an employer-sponsored retirement plan. The rules for vesting vary from plan to plan. For example:
- SEP individual retirement accounts (IRAs), SIMPLE IRAs and other employer-sponsored IRAs require that all of the money in these accounts is always 100% vested. So, you'll have access to all of your retirement funds—money both you and your employer have contributed—from the start.
- Qualified defined contribution plans, including workplace-sponsored 401(k)s and profit-sharing plans, don't operate under identical rules. For instance, you might be 100% vested right away at one employer or 100% vested after three years of working at another employer (known as "cliff" vesting), or an employer might use a "graded" vesting system. A graded system increases the amount of money that's vested based on a worker's number of years with the employer.
Generally, one year of service at an employer equals at least 1,000 hours worked during a 12-month span, according to the IRS.
Here's an example of how cliff vesting works.
| Cliff Vesting Example | |
|---|---|
| Years of Service | Percent of Employer Contributions Vested |
| 1 | 0% |
| 2 | 0% |
| 3 | 100% |
| 4 | 100% |
| 5 | 100% |
| 6 | 100% |
Source: IRS
Here's an example of how graded vesting works.
| Graded Vesting Example | |
|---|---|
| Years of Service | Percent of Employer Contributions Vested |
| 1 | 0% |
| 2 | 20% |
| 3 | 40% |
| 4 | 60% |
| 5 | 80% |
| 6 | 100% |
Source: IRS
Vesting for Recipients of Government Retirement Benefits
Government workers, such as teachers and police officers, who are members of a pension plan usually aren't vested until they've put in five to seven years of service. For example, a federal worker in the Federal Employees Retirement System is vested after five years. If a government employee leaves their job before vesting kicks in, they might get back only the money that they've contributed (but not money pitched in by the employer).
Members of government pension plans often qualify for benefits based on a combination of their age and their years of employment. For instance, being vested with the Texas County & District Retirement System means you've accumulated enough years of employment to get a lifetime monthly benefit when you meet eligibility requirements. The Texas system says that when a worker becomes vested, they can retire at age 60, although some employers might have a lower age threshold.
Vesting for a 401(k)
Depending on the type of vesting your employer uses, being fully vested in a 401(k) may be immediate or may be delayed.
- Immediate vesting: If your employer offers immediate vesting, you're entitled right away to all of your own contributions as well as all of your employer's matching contributions to your 401(k).
- Cliff vesting: If your employer uses cliff vesting, you're normally entitled only to what you've contributed to your 401(k), but not what your employer has contributed for a period, such as two years. But once you've reached three years of service, for example, you'll own all of the money in your 401(k)—both your own contributions and your employer's contributions—for the remainder of your tenure with the company.
- Graded vesting: If your employer uses graded vesting, the percentage vested will rise incrementally for a period of time. For example, you might be only 20% vested at the two-year mark but fully vested at the six-year mark. With 20% vesting, you would be able to retain only 20% of what your employer contributed (but all of your own contributions).
What Happens When You're Fully Vested?
Once you're fully vested in an employer-sponsored retirement plan, you have access to all your retirement funds.
If you're able to take distributions from your retirement fund, this means you've got all the money you and your employer contributed in your account. 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.
What Happens if You Leave a Job Before You're Fully Vested?
If your retirement account is fully vested, you own all of the funds regardless of whether you quit, get laid off or get fired.
Money in workplace-sponsored accounts like SEP and SIMPLE IRAs is always 100% vested. But if you have an employer-sponsored retirement plan like a 401(k) or profit-sharing plan and leave voluntarily or involuntarily before you're fully vested, you'll generally be able to keep the money that you contributed and whatever portion your employer contributed at your current vesting percentage.
The Bottom Line
It pays to pay attention to how the vesting schedule for your employer-sponsored retirement plan works. Otherwise, you could lose out on money—perhaps thousands of dollars—that an employer contributed to your account. If you're unsure about the vesting details for your retirement account, contact the employer's HR department or reach out to a financial advisor.
