Be sure to inquire about your companies vesting schedule so that you know how much of the money your employer contributes to your 401k plan is yours and when it becomes yours.
#4. You Can Lose Money When You Terminate Employment
What happens if you leave the company, get fired or retire before you are 100% vested? The answer is you will forfeit a portion of the money your employer contributes.
Related: Connecting Economic Regimes to Factor Exposure
For example, let’s say your company uses a graded vesting schedule of 20% per year. You contribute $5,000 a year into your 401k plan and your employer contributes $1,000 a year. After two years, you leave to work for another company.
How much money do you leave with in your 401k plan? You contributed $10,000 of your own money into your retirement plan, so 100% or all $10,000 is yours to take. Your employer contributed $2,000 but since you are leaving after 2 years, you are only 40% vested. This means that $800 of what your employer contributed to your 401k plan is yours.
In total, you take $10,800 with you in your 401k plan along with any of the gains or losses associated with these contributions.
Final Thoughts on 401k Vesting Schedules
In all, 401k vesting schedules are there to protect the employer. As long as you work for your employer for at least 5 years on average, you should be entitled to 100% of the money they contribute into your 401k plan.
But if you leave sooner than this, then you are only entitled to a portion of the money. Fear not for your own contributions as all of the money you put into your account is yours, all of the time. But if you can be patient, the free money your employer contributes can be yours as well.
This article has been republished with permission from Modest Money.