How do I know If I am fully vested in my 401(K)s?

When you enroll in a 401(k) plan, your financial advisor may encourage you to sign up for the employer’s “free money”. This free money is the employer’s match that a company offers to its employees up to a certain limit of their contribution. Usually, an employer may decide to match up to 100% of what you contribute to your 401(k). However, there is a rider; you don’t fully own the employer’s match until you are fully vested.

Am I Fully Vested In My 401(k)s?

If you have fulfilled the time requirements set by the employer, it means you are fully vested and you have 100% ownership of the employer’s contribution. Some employers offer instant vesting,  while in other companies, it can take up to five years to be fully vested. Check the employer’s summary plan description to know the company’s vesting schedule.

What Does Vested Mean in 401(k) Plans?

Vesting is a retirement term that refers to the ownership of your 401(k). It determines how much of your 401(k) balance you can take when you leave your employer. While the contributions you've made to the 401(k) belong to you, this may be different for your employer's match.

Each company has a different vesting policy that determines when you fully own the employer’s contribution. The vesting period may run from three to six years, and the employer may choose between graded vesting and cliff vesting schedules. If you leave before the employer’s match becomes fully vested, you will forfeit part of or all the employer’s contribution.  

Employee’s Contribution vs. Employer’s Contribution

The employee’s contributions to a 401(k) plan are 100% vested, and the money belongs to them if they leave the company. If you’ve only made a single contribution to the 401(k) when you decide to leave, you can choose to rollover to IRA or cash out as a lump sum. However, if you decide to cash out early, you will need to pay taxes and early withdrawal penalties.

In contrast, you don't own the employer's match right away, unless your employer offers immediate vesting. Immediate vesting occurs when the employer uses a safe harbor match, which allows the employee to be 100% vested in the employer's contributions to a 401(k). However, the regular employer's match is subject to a vesting schedule, and you will have to wait for the required vesting period to get full access to the employer's match.

Types of Vesting Schedules

When setting up an employer’s match, the employer may choose one of these vesting options:

Graded Vesting

With graded vesting, a specific percentage of the employer's contribution vests each year over a specific period until it is 100% vested. Depending on the number of years you have worked for the company, you may retain part of the employer’s match in your 401(k). Staying a few more years in the employer's company could add a few more thousands to your retirement savings. A typical graded vesting schedule may be as follows

Year 1- 0%

Year 2- 20%

Year 3- 40%

Year 4- 60%

Year 5- 80%

Year 6- 100%

If your employer uses this graded vesting schedule, it means you will have 100% ownership of the employer's match if you stay with the employer for at least 6 years. If you stay until the 5th year, you will get 80% of the employer’s match. However, if you resign in the first year, you will lose the entire employer's contribution to your 401(k).

Cliff Vesting

Unlike graded vesting, cliff vesting occurs at a specific time, and not gradually. This means you can be 0% vested in your second year with the employer, and become 100% vested in the third year.

Employers who choose this form of vesting can set the vesting time up to the third year. This means that, if you leave the employer after three years, you can keep all the employer’s contributions in your 401(k). However, if you exit the company before the required vesting period, you will lose the entire portion of the employer’s contribution.

Can I Access my 401(k) Money If I am Fully Vested?

If you are fully vested, you have 100% ownership of all the funds in your 401(k) account, including the employer’s contribution. When this happens, it means you have met your employer's vesting period requirements. Even if you quit, resign, or leave the company for another employer, the company cannot take back its contribution.

However, becoming 100% vested does not mean you can withdraw the funds at any time. You will be required to pay income taxes on the withdrawal, and another 10% penalty if you are below 59 ½. However, if you are 55 years when you leave the employer, and you are fully vested, you can cash out without paying the 10% penalty; you will still be required to report the distribution in your tax return for the year.

What Happens If I Leave Before I am Fully Vested?

Depending on your employer's vesting schedule, you may get zero, part of, or all the employer's match. If the employer uses a graded vesting schedule that increases by 20% from the second year, it means you will need to stick around until the 6th year to be fully vested. If you leave in the fourth year, you will only keep 60% of the employer’s match in your 401(k), and forfeit the other 40%.

If the employer uses a cliff vesting schedule, you will have to wait for a certain period to become fully vested. If you leave before the period lapses, you will forfeit the entire employer’s match to your 401(k) plan.

Sometimes, staying one or a few more months or years could add thousands to your retirement savings. However, if you are moving to a new better-paying job with a potentially higher income than what you would get from the unvested employer’s match, it may be worth it to leave the unvested amount on the table. Make the switch and rollover over your 401(k) to an IRA or a new 401(k) with the new employer.

Should I Sign Up for My Employer’s Match Even If I am Planning to Leave?

If your company offers an employer’s match, you should consider signing up for the 401(k) added benefit, even if you don’t plan on staying in the company for long. Saving more is always good for retirement, and the employer’s match counts as free money that you did not have.

Depending on your employer’s vesting schedule, you may retain a portion of the employer’s match if you stay with the employer for a few years. For example, if the employer’s vesting schedule increases by 20% from the second year, and you plan to stay for three years, you will still keep 40% of the employer’s contribution, which could be in the thousands.

Again, the situation with your current employer may change i.e. higher pay or promotion with added benefits, and this may prolong your stay with the employer. Signing up for the employer’s match now is a good thing for your retirement, and it will add money to your retirement savings when you quit or leave the company for another employer.