One of the best perks of being an employee — as opposed to self-employed — is that many employers offer a match to your retirement contributions. An employer match can be a powerful tool to help you grow your retirement savings more quickly. However, many employers do not let the employee access the money the employer contributes until the employee is “vested.”
What does “vested” mean?
Vested refers to the amount of time you must work for your employer before you are entitled to the full amount of money they deposit in your 401(k) retirement account. An employee is fully vested in a retirement plan if they own 100% of funds in the retirement account. For instance, your employer’s plan may give you access to 20% of your funds after 2 years of service and 100% after 7 years.
What is partially vested?
In most companies, you are fully vested at some point from three to seven years. Other companies offer partial vesting. For instance, after one year on the job, you may receive 20% of your employer’s contributions. After three years, you may receive 60% of your employer’s contributions. Each company has different rules, and you will need to check with the Human Resources department to learn the rules of your company.
How are your contributions affected?
Vesting refers to your employer’s contributions. Your retirement contributions are yours and are not affected by vesting. If you leave before you are vested, you may forfeit your employer’s contributions, but you won’t lose your contributions.
Do the math before changing jobs
When you are considering changing jobs, the vestment duration should play a part in your decision. If you are only a year away from being vested, it may be worthwhile to stay on the job. Keep in mind, if you are vested, you are not only walking away with your employer’s match, but you stand to make a great deal more in compound interest while the money is growing in your retirement account.
Deciding when to leave a job is never easy. But if you are close to being vested, it may be worthwhile to stick it out. When you are hired, make sure to find out how much your employer contributes to your retirement on your behalf, how many years are required to be vested and if the company offers partial vesting.