When you participate in a retirement plan at your job, you might have a vested balance (and several other balances) in your retirement account. Those different “buckets” of money are typically a result of contributions that your employer makes for you. For example, you might receive matching funds on your contributions to a 403(b) plan, profit-sharing money in a 401(k), or other funds from your employer.
What Is Your Vested Balance?
Your vested balance is the amount of money you currently have ownership of. If you leave your job or want to withdraw funds from your retirement plan, your vested balance tells you how much money might be available to you.
Once you are fully vested in your retirement plan, your employer cannot take money back from your account. Plus, vesting is important because it allows you to potentially access your funds through loans and withdrawals from 401(k), 403(b), and other workplace plans.
How Vesting Works
Employee contributions: The money you voluntarily contribute from your earnings is always 100% immediately vested. You earned that money by working, so there is no vesting schedule attached to the contributions you put toward your retirement.
Employer contributions: Any money that your employer contributes on your behalf might have a vesting schedule. That’s not always the case (for example, Safe Harbor contributions should vest immediately). Employers often delay vesting to create an incentive to stay with your employer and contribute to the organization’s success.
We’ll discuss vesting for employer contributions in more detail below.
Can I Withdraw That Money?
Access to funds in your retirement account depends on your situation.
After You Leave Your Job
Once you quit, retire, or get fired, you should have access to your vested balance. You can withdraw those funds and reinvest in a retirement account—or cash out, although there may be tax consequences and other reasons to avoid doing so.
While Still Employed
While you’re still employed, you typically have limited access to money in a retirement plan—even your fully vested balance. Rules may require that you meet specific criteria and that your plan allows you to access your money. There are several potential ways to withdraw money before you leave your employer:
- Loans: You may be able to borrow the lesser of 50% or $50,000 of your vested balance, and you’ll need to repay that loan (typically through salary deferral).
- Normal Retirement Age: Reaching the plan’s “normal retirement age” might allow you to withdraw part or all of your vested balance. That’s an age that specifies when certain benefits kick in, but you can retire before or after that.
- Hardship withdrawals: If you meet certain criteria, you may be able to take a distribution to prevent financial hardship. Examples include buying a primary residence, paying for medical care, avoiding foreclosure or eviction, and others defined by the IRS.
You might become fully vested in all of your balances if your employer “terminates” or shuts down the retirement plan. Likewise, death or disability can trigger 100% vesting. Check with your employer’s plan administrator to learn about all of the plan’s rules.
Account Balance vs. Vested Balance
Why Is the Vested Balance Lower?
If your vested balance is lower than your account balance, you are not yet 100% vested in all balances. You may have matching funds or profit-sharing dollars in your account, but you have not met the service requirements to be fully vested. To get those numbers to match, you need to be 100% vested, which may require that you keep working at the same employer.
How Much Do I Get?
When you are not fully vested, you receive less than your full account balance. For example, if you quit your job and you’re 40% vested, you would only get your vested balance as a rollover or cash-out payment. However, it’s crucial to verify your exact vesting percentage with your plan’s administrator—as you read through statements and find information online, you might get inaccurate information (hopefully, you’re more vested than you think).
Types of Vesting Schedules
Employers can use a variety of approaches to vesting.
100% Immediate Vesting
When money is 100% immediately vested, you own that money without needing to wait or work additional hours. Two of the most common types of immediately vested balances include:
- Safe Harbor: If your employer uses a Safe Harbor contribution (often to avoid problems with discrimination tests), those contributions are fully vested immediately.
- Employee salary deferral: Again, the money you voluntarily contribute to the plan is 100% immediately vested. You cannot forfeit that money to your employer, although the value may rise and fall if your investments gain or lose value.
A 6-year graded vesting schedule is another popular option. With that approach, your vested portion increases by 20% each year. You start with 0% vesting after your first year, and vesting begins after that.
- Year 2: 20%
- Year 3: 40%
- Year 4: 60%
- Year 5: 80%
- Year 6: 100%
Cliff vesting is more generous, although it does not work well for employees who only work for a brief period. After your first and second year, you’re 0% vested. But after your third year, you are 100% vested.
As long as a vesting schedule is at least as generous than the IRS specifies, employers may be able to get creative. For example, some employers set vesting at 25% per year. If their guideline is to be less restrictive than the 6-year graded schedule, this might be allowed. Ultimately, it’s up to employers (and the consultants they work with) to decide if they want to be more generous.
What’s a “Year”?
In many cases, a year of service is a calendar year in which you work at least 1,000 hours. However, your workplace plan might specify something else, such as a 12-month period. It’s critical to know how your retirement plan defines years of service. Getting hired late in the year can potentially count against you, especially when you have a limited number of years to retire.
Types of Money That Might Vest (Or Not)
Examples of money types that are most likely to have a vesting schedule include:
- Employer matching: Any funds you receive as a result of your own contributions to the plan.
- Employer profit-sharing: Money you might get regardless of whether or not you contribute.
- Others, potentially
Examples of contributions that would generally not require any wait for vesting:
- Qualified non-elective contribution (QNEC): An employer contribution that’s typically used to fix mistakes or solve failed discrimination tests. For the contribution to work, it must be 100% immediately vested.
- Qualified matching contribution (QMAC): Similar to a QNEC, above, but handled differently.
- Rollover: Funds that you roll into your plan from a previous employer’s 401(k), 403(b), your IRA, etc.
IRA-based accounts, including SEPs and SIMPLEs, do not have vesting schedules. Once the money goes into your account, it’s yours to do with as you please. However, it’s critical to learn about potential tax consequences of moving or withdrawing funds from any retirement account.
Important: Speak with your tax advisor and your plan administrator before making any decisions. The information here might not apply to your plan, it may be outdated, or there may be errors or omissions that you need to address with a professional.