What Is Vested in a 401k and How Does It Work?

Vesting in a 401(k) plan refers to the ownership an employee has over contributions made to their retirement account. While your own contributions are always 100% yours, vesting specifically applies to contributions made by your employer, such as matching funds or profit-sharing. This concept encourages employee retention, as ownership of employer contributions depends on how long an employee stays with the company. Until employer contributions are fully vested, there is a risk of forfeiture if employment ends.

Understanding Vesting Schedules

Employee contributions to a 401(k) are always 100% immediately vested, meaning you have full ownership from the moment they are contributed. The rules surrounding vesting apply to funds contributed by your employer. Employers use specific vesting schedules to determine when you gain full ownership of these contributions.

One common type is “cliff vesting,” where an employee becomes 100% vested after completing a specific period of service, often two or three years. Before reaching this cliff date, the employee has 0% ownership of the employer’s contributions. For example, if a plan has a three-year cliff vesting schedule, an employee gains full ownership of all employer contributions only after completing three years of service.

Another widely used method is “graded vesting,” where an employee gradually gains ownership of employer contributions over several years. A common graded schedule might see an employee become 20% vested after two years of service, with an additional 20% vesting each subsequent year until 100% is reached after six years. This means that if an employee leaves after four years under such a schedule, they would retain 60% of the employer’s contributions.

Checking Your Vested Balance

To determine your vested 401(k) balance, the most direct source of information is your 401(k) plan statement. These statements are available through the plan provider’s online portal or via mail. They typically break down your total account balance, show your vested percentage, and provide the corresponding vested dollar amount.

The vested amount includes all your own contributions and any employer contributions that have met the vesting requirements. If you are unable to locate this information on your statements or online portal, you can contact your plan administrator directly. Your employer’s human resources (HR) department can also provide guidance on how to access this information or connect you with the appropriate plan contacts.

Managing Your Funds After Leaving Employment

When you leave a job, any employer contributions that have not yet met the vesting requirements are forfeited. These unvested funds revert to the employer or the plan. All your own contributions, along with any vested employer contributions, are yours to keep.

You have several options for managing these vested funds. One common choice is to roll over the money into an Individual Retirement Account (IRA) or into a new employer’s 401(k) plan. A direct rollover maintains the tax-deferred status of your funds, allowing them to continue growing without immediate tax implications. Rolling over funds can also offer a wider range of investment choices or simplify your retirement savings by consolidating accounts.

Another option is to leave the funds in your former employer’s 401(k) plan, provided the plan allows it and your balance meets any minimum requirements. While your money continues to grow tax-deferred, you will not be able to make new contributions, and investment options might be limited. A less advisable option is taking a cash distribution of your vested funds. This results in the entire amount being taxed as ordinary income, and if you are under age 59½, an additional 10% early withdrawal penalty may apply, significantly reducing your savings.