{"id":1159,"date":"2020-01-15T00:00:00","date_gmt":"2020-01-15T00:00:00","guid":{"rendered":"https:\/\/qa.simplifimoney.com\/blog\/what-is-vesting\/"},"modified":"2024-11-18T10:22:17","modified_gmt":"2024-11-18T18:22:17","slug":"what-is-vesting","status":"publish","type":"post","link":"https:\/\/www.quicken.com\/blog\/what-is-vesting\/","title":{"rendered":"What Is Vesting and How Does It Work in a Retirement Plan?"},"content":{"rendered":"\n

Many companies offer an employer-sponsored retirement plan<\/a>, such as a 401(k) or 403(b), and match a portion of their employees\u2019 contributions. The company match is often referred to as free money, and it\u2019s a great perk. But if you\u2019re starting a new job, you\u2019ll want to review the plan\u2019s vesting schedule\u2014the rate at which the company\u2019s contributions become yours to keep.<\/p>\n\n\n\n

Here\u2019s everything you need to know about vesting in your 401(k) and other employer-sponsored retirement plans.<\/p>\n\n\n\n

What Does Vesting Mean?<\/h2>\n\n\n\n

Vesting refers to the ownership of the money in your employee-sponsored retirement account. It can be helpful to think of the funds in your account as split into two buckets. One bucket gets filled by your contributions, and the other gets filled by your employer\u2019s contributions.<\/p>\n\n\n\n

The money you contribute is always 100% vested\u2014it was yours before you contributed it and remains yours once it\u2019s in the retirement account. However, it might take time for your employer contributions to vest, and you could lose all or part of that bucket if you leave before you\u2019re fully vested.<\/p>\n\n\n\n

For example, say you contribute $1,000 to your 401(k) plan<\/a>, and your company matches that with a $1,000 contribution. Everything gets invested in the same fund, and after six months, your total account balance is now $2,500.<\/p>\n\n\n\n

If you leave the company and are 0% vested, you can\u2019t take any of the company contributions ($1,000) or the earnings from those contributions ($250) with you, although you\u2019ll keep all the money you contributed and those earnings. If you\u2019re 50% vested, you\u2019d get to keep half the company contributions and earnings.<\/p>\n\n\n\n

Companies can set up different vesting schedules, and they all serve as ways to encourage new employees to stay at the company for at least a few years.<\/p>\n\n\n\n

The good thing is your vested percentage applies to all former and future contributions, along with the earnings from that money. In other words, you don\u2019t need to wait for new employer-contributions to vest again. Once you\u2019re 100% vested, all the money is yours.<\/p>\n\n\n\n

The Three Vesting Schedules<\/h2>\n\n\n\n

Vesting schedules generally take one of three forms. The specifics can vary depending on your employer and arrangement, and there are federal laws<\/a> that employers must follow when creating a vesting schedule.<\/p>\n\n\n\n

Immediate Vesting<\/h3>\n\n\n\n

If your plan offers immediate vesting, then your employer contributions are fully vested from day one. This may be the best arrangement for employees as you don\u2019t need to worry about losing any portion of the employer match.<\/p>\n\n\n\n

Graded Vesting<\/h3>\n\n\n\n

If your plan has graded vesting, part of your employer contributions will vest each year. For example, you might start with 0% vested, but then get 25% vested for each year of employment. Your vesting schedule could look like:<\/p>\n\n\n\n