401k Vesting Schedules: 4 Critical Things To Know

Contributing to your 401k plan is critical for affording your retirement. Not only do you save money on taxes now by contributing to this type of retirement plan, but you also allow your money to grow tax deferred as well.

But in many cases you also get an employer match. Unfortunately, that money is not always yours right away. But 401k vesting schedules allow this become a possibility.

What are 401k vesting schedules? It protects employers in the event you leave the company after a short amount of time. Your employer wants to offer you a benefit of putting money into your retirement plan, but they also don’t want you to take advantage of them by leaving with their money quickly.

Thus they created a vesting schedule so that over time, more and more of the money they contribute to your retirement plan becomes yours.

How does all of this work? In this post, I will walk you through the ins and outs of 401k vesting schedules so you won’t be surprised when you encounter them.

#1. Your Money Is Your Money

When it comes to contributing money to your 401k plan, what you put into your account, is yours 100% of the time. For example, if you contribute $100 per paycheck into your 401k plan, that $100 is always yours.

So if in 6 months or 5 years, you decide to retire or leave your employer for another job, you can take that money with you. It is yours, no matter what. You never will lose or forfeit it.

#2. There Are Different 401k Vesting Schedules

While each company is free to set their own vesting schedule, there are 2 options that are very popular across many companies. They are as follows.

  • Cliff Vesting
  • Graded Vesting

With cliff vesting, you go from having 0% of your employers contributions vested to 100% after a short time. For example, you might have 10% vested after one year and then 20% after year two, 30% after year 3, and then 100% after the fourth year.

With graded vesting schedules, you have a set percent vest annually over a period of time. So you might have 20% vest each year and then after the fifth year, you are 100% vested.

#3. The Vesting Period Varies By Company

While the above examples are very common across employers in various sectors, not every company follows these schedules. They all make up a vesting schedule that makes the most sense for them.

For instance, when I worked at a small business, they used a graded vesting schedule. The only difference was that instead of 20% vesting each year and getting to 100% vested after 5 years, they vested 25% a year. This meant that I was fully vested after 4 years.