What to Know About 401(k) Vesting When Changing Jobs

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Vesting refers to the ownership of the contributions made into a 401(k) by employees and their employers. Vested funds are any funds you, the employee, own. The contributions you make are always 100% vested, but the vested percentage of your employer's contributions depends on the amount of time you were employed by the company. When you are fully vested, you have the right to keep the employer's contributions whether you willfully leave or your employer terminates you.

If your retirement strategy includes a 401(k) and you plan to leave your job in the near future, you need to understand the plan's vesting schedule. If you leave your current job to pursue new career opportunities, you'll generally still have access to your former employer's 401(k). However, the vesting schedule may influence when you decide to leave. If you're not yet fully vested, it may be in your best interest to postpone your departure until you are. That way, you can walk away with 100% of the employer's contributions. In other words, if you leave too soon, you may have to forfeit a portion of your 401(k) balance that was contributed by your employer.

You have options when deciding how to handle an existing 401(k) plan when you leave a job. You can borrow against the retirement fund, cash it out, convert it to an IRA or roll it into the 401(k) plan at your new job. However, when people change jobs and take their 401(k) funds with them, they're sometimes surprised to find that the vested balance — the amount available to departing employees when they decide to leave a company — is less than they expected.

Two types of vesting: graded and cliff

There are a couple of types of vesting you may encounter with a 401(k) plan. With graded vesting, the employee becomes gradually vested over time, on specific anniversary dates of employment. Employees begin to become vested in at least 20 percent of their accrued benefits after an initial period of employment, with 20 percent increases each year. Once an employee hits 100 percent, they are fully vested and possess irrevocable rights to the employer's contributions.

Cliff vesting does not involve a gradual percentage increase. Rather, the employer's contributions become the property of the employee on a specific date after employment. In other words, after an initial waiting period, it is a sudden dive off the cliff to 100 percent vested.

Employers make the decision about which type of vesting schedule to offer, and your individual 401(k) balance is partly dependent on the health of the financial markets, but you do have some control and education is still important. With a full understanding of your employer's 401(k) plan and its vesting schedule, you can make an informed decision about the most advantageous time to make a career move without leaving any of your hard-earned money on the table.

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