401k Vesting: Not All of the Money in Your 401k Is Really Yours

Learn what a 401k vesting schedule is and how it affects you.

Now, more than ever, investing is an important part of retirement planning. And one of your investment options as an employee might be a 401k plan.

Participating employers offer 401ks for employee retirement investment plans. Over time, the money you contribute — combined with your employer’s contributions — can build your retirement nest egg. When your company participates in a vesting schedule, however, you can’t claim all of those 401k investment funds until you’ve been employed for a certain amount of time. Keep reading for everything you need to know about vesting schedules for your 401k investments.

What Is Vesting?

Vesting gives employees rights to employer-contributed funds over time and also incentivizes employees to perform well and remain with the company. So, 401k vesting represents how much of the employer-contributed funds that you own in any given year.

How Does 401k Vesting Work?

When you participate in a 401k plan, you and your employer contribute a prearranged sum of money to your account each pay period. The money you contribute to your 401k is always 100 percent yours but you must be fully vested to claim all of the money your employer contributes. Vesting typically takes three to six years depending on your company’s plan.

Fully vested, by definition, means that you own all the funds in your account. During the time period that it takes to become fully vested, you can be partially vested. Being partially vested means that you don’t own all of the funds your employer has contributed but you might own a certain portion depending on how long you’ve worked for your employer.

Learn: Borrowing From Your 401k — What You Need to Know

What Are Vesting Schedules?

Companies maintain 401k vesting schedules to encourage employees to stay with the company. Guidelines for vesting are federally regulated, but employers can choose from different schedules. Here are the available vesting schedules:

  • Cliff vesting: No vesting for a period of time, followed by immediate 100 percent vesting after no more than three years of service
  • Graded vesting: Gradual vesting, such as none the first year and 20 percent in the second, third, fourth, fifth and sixth years each to reach fully vested status at the end of the sixth year

An employer can change the actual timelines and percentages as long as the change benefits employees. For example, a company might participate in cliff vesting and fully vest employees after two, rather than three, years of service.

Many employers use the six-year graded method, according to the Society for Human Resource Management website, which partially vests employees until they’ve served six years, at which time they become fully invested. Plans vary among employers. Check with your plan administrator to find out about the specific details of your 401k plan.

FAQs About 401k Investing

Like any investment, 401k plans have pros and cons. Here are some frequently asked questions about 401k plans:

1. Am I eligible to join a 401k plan?

Typically, you must be at least 21 and have worked for a company for a year to participate in a 401k plan. Some companies, however, might have rules that allow you to participate before then.

2. Is all the money in my 401k actually mine?

For all of the funds to be yours, you must be fully vested. Whether or not you are fully vested depends on whether you’ve met the 401k vesting rules specific to your employer’s 401k plan. If you’re not yet fully vested, your 401k balance might not be an accurate reflection of what money is actually yours. Your balance might show how the amount of a fully vested employer contribution, only to have your balance adjusted to reflect your vested amount when you leave your job or roll over your plan.

Find Out About: Choosing the Best 401k Funds

3. What if I want to withdraw money from my 401k before I retire?

Depending on your employer’s plan, once you’re fully vested, you might be eligible to borrow up to 50 percent of your vested funds. Generally, you’ll repay the funds — plus interest payments — via payroll deductions.

Find Out: 11 Ways to Withdraw Money From Your 401k Without Penalty

4. What happens to my 401k when I quit my job?

You might take your 401k investment account with you when you leave your job or you might decide to leave it with your former employer. Here are your options:

  • Leave your investment with your former employer: If your new employer doesn’t offer a 401k plan, it might make sense to leave yours with your former employer. Keep in mind, however, that you won’t be able to borrow from or make additional contributions to the plan.
  • Withdraw the funds: If you’re 59.5 or older and you quit your job, you can withdraw your funds in a lump sum, which will be subject to income tax. If you withdraw your funds before you’re 59.5, however, you’ll typically have a 10 percent penalty tacked on to the income tax you’ll pay on the money.
  • Transfer the funds to your new employer’s plan: Your employer might allow you to transfer your 401k funds to its 401k plan — and you might not have to pay taxes or penalties.
  • Roll your 401k into an IRA: If your new employer doesn’t offer a 401k or doesn’t offer the investment options you prefer, you can convert your 401k into a Roth or traditional IRA. Depending on what type of IRA you choose, you might be subject to paying taxes or other fees.

Although a 401k plan can be a good retirement vehicle, not all plans are the same. Always check with your company’s benefits administrator to make sure you understand your plan’s rules — and how they will affect your retirement account.

Up Next: 15 Big 401k Questions to Ask Your Employer