401k’s and vesting, what does it mean to be vested?

So it’s time to make some decisions regarding your 401k, and to be honest, you haven’t truly given it a second thought. When you were hired with your job, you simply filled out all of the forms shoved in your face, signed on some dotted lines, and shook the hand of your hiring manager/HR representative. However, now that you’ve been investing part of your income into a 401k plan, you want to know more – including, what it means to be vested. Being vested simply means that you’ve earned the full amount of your company’s match. Yep, they give you a match, but you’ve got to stay there long enough to earn it. Companies vary in their requirements, some require 5 years of service, and you earn a percentage every year you are there. In the case of a company whom requires you to be there 5 years before you are fully vested, you may earn like 20% a year of their match. By this I mean, after one year, you are guaranteed 20% of their match, after two years, you would have earned 40% and so on.

Now, if you don’t understand the basics of a 401k plan, you’re probably scratching your head right now, so let’s look at this more closely. The 401k plan was created as a sort of security blanket for those looking to fund their retirement. Wrapped up in that blanket is money that you’ve saved over the years, in addition the company you’ve worked for has contributed for you. With some companies, the longer you stay with them, the more they will match on your behalf.

For some, the bad news comes when they leave their jobs early and realize that they are not fully vested in their plan and therefore don’t have access to all of the money they thought they had. How can this happen? Keep in mind that you must work for a company for a certain amount of years to really claim all that generous match.

One thing to keep in mind with vesting is that contributing during the entire predetermined number of years before being fully vested is not required to have access to the money you’ve contributed. However, some companies may put certain restrictions on your ability to withdrawal if you are not leaving the company.

Something else to consider, say once again your company requires 5 years before you are fully vested, and you only started contributing in year two of employment, when year 5 rolls around, you’re still considered fully vested. Also, if a new vesting schedule has been implemented that changes the number of years you must work before becoming fully vested, don’t worry because the new rules don’t apply to you.