Author: Damian Davila / Source: Wise Bread
One of the biggest advantages to a 401(k) plan is having an employer that offers a match on your contributions. This is fairly common practice; in a review of 4.4 million retirement plan participants, Vanguard found that 94 percent of plans offered employer contributions.
Knowing that your employer is contributing or matching your contributions to your workplace retirement plan is awesome (who doesn’t like free money?). Still, it’s important to be aware that sometimes part of those contributions aren’t fully yours until some conditions are met. That’s called vesting.
What’s vesting?
Let’s get one thing clear: All of the money that you personally contribute to your retirement account always becomes immediately yours. When you have full ownership of funds in your 401(k), it means that you’re fully vested (or 100 percent vested) on those funds.
On the other hand, employer contributions and matching contributions may be subject to some restrictions before they can become fully vested. Nearly half all employer-sponsored 401(k) holders are in plans with some type of vesting requirement for employer and matching contributions. All vesting schedules can be categorized as cliff or graded vesting. (See also: 7 Things You Should Know About Your 401(k) Match)
Graded vesting
Graded vesting is the most common way for employers to delay ownership of employer or matching contributions. Through graded vesting, you gradually gain ownership of employer or matching contributions over time. Around 30 percent of 401(k) plans with employer-matching contributions use a five- or six-year graded vesting schedule. For example, an employer could grant you 20 percent ownership over a five-year period. Assuming a $1,000 matching contribution, you would be fully vested to $200 (plus applicable capital gains) at the end of every year over a five-year period.
However, there are shorter (and longer!) graded vesting schedules. For example, an estimated 5 percent and 3 percent of 401(k) holders are in a plan with a three- and four-year graded vesting rule for…
The post Here’s What It Means to Be Vested in Your 401(k) appeared first on FeedBox.