Vesting refers to the ownership of your 401(k). When you are considering your contributions to your 401(k), you may be wondering how much of the money is yours. All of the money that you contribute to your 401(k) is yours, but your employer may have set up vesting guidelines on the amount that they have contributed in the form of an employer match. Many companies range from three to seven years in order for you to be fully vested in your 401(k). Some may have you be vested in a percentage that increases each year until you reach the maximum amount.
For exampl,e if you have a plan that increases the amount your vested in your plan each year by twenty percent so that you are fully vested at five years, you will be sixty percent vested at three years. This means that if you quit your job you will take sixty percent of the amount your employer contributed to your 401(k) plan with you. If your employer does not have a plan that increases your vested amount each year, but waits until you have reached the five year mark, when you quit at three years you will lose all the money that your employer has contributed to your 401(k) plan.
One reason that employers do this is encourage longevity of their employees. Many employees will stay in their jobs until they are fully vested in their 401(k) before looking at a job in another company. This may be a consideration when it comes time to look for a new job. It is always important to consider the financial impact of a new job. If your salary is going to increase significantly, you may be willing to take the hit on your 401(k) balance, especially if you have only been with the company for a year or two. However if you are close to the point of being fully vested in your 401(k) it may be better to wait the next few months or year in order to take advantage of the money your employer has contributed. This will apply if you roll your 401(k) into a IRA account.
If you want to fully understand the vesting policies of your company you need to speak to your Human Resources department. They should be able to explain the company’s, vesting policy and schedule. Being aware of this policy can help you to make the most of your retirement contributions and accounts.