Understand 401(k) Vesting - Vesting can be defined as the term used for your 401(k) plan to analyze how much amount you can take or withdraw when you leave the company who has set your 401(k) account.
Vesting can be referred as how many funds you can own from your 401(k) account. It is obvious you are making some contributions to your account, and at the same, the company with whom you are working with is also making some contribution to your 401(k) plan, so must always be evaluating how much money you own from your account.
When you leave the employer in most of the cases, all of the money which you have contributed in your account will go with you, and in some cases, you can also have the full amount of your 401(k).
But there are specific rules and guidelines which you should always understand before taking retirement from your job so that you won't get subjected to any extra taxes or penalties.
Most of the companies set about minimum period of five to seven years for which you to continue working with them to claim your 100% amount in your 401(k) plan.
When you contribute to your 401(k) account whatever you put there is be yours, and what your company with whom you are working with putting in your account will be yours only if you continue working with them as per the minimum set period as mentioned above.
The schedule which decides how much you can get as per how long you are working with the company, from your 401(k) account is also called your vesting schedule.
When you leave the employer or company the whatever amount which comes to your or goes with you is called '401(k) vesting' or 'vested balance.'
Vesting is also helpful to evaluate how much amount you can borrow in the form of the loan if required at any point of time because if you need a loan in future, you can always borrow from your 401(k) plan.
What You Contribute is Hundred Percent Vested
You are hundred percent vested in your contribution that simply means is that whatever you put in your account in the form of money will always be with you.
If you contribute to your account and you have to leave the job within a brief period, in that case also whatever you have contributed will be yours when you leave the job, because the money you have contributed to your 401(k) account is from your earnings.
What Company Contribute Is Dependent Upon Following Factors
The company where you are working also contribute to your 401(k) account in various ways but the amount which you can get from their contribution depends upon the vesting schedule.
Safe Harbor Match - 100% Vested:
If you get a contribution from your company where you work or from your employer in the form of 'safe harbor match' then whatever the amount contributed will be safe goes with you or say you will be 100% vested in that contribution.
The company used to send the notice to their employers at the end of each year to match the contributions.
You also contact authorized people of the company to know about the type of contribution the company is making in your 401(k) account.
Regular Match And Profit Sharing contribution - Subject To Vesting Schedule:
If your company is contributing to your account in the form of regular matching contribution schedule, but it is not a part of what is called 'safe harbor match' and also the profit sharing contribution then both of them can be subject to vesting schedule.
The common types of vesting schedule are as follows -
Under this vesting schedule if you leave the job before three years of employment then whatever the company has contributed to your 401(k), you won't be liable to own it. But after three years whatever the company has helped will be yours.
This type of vesting allows you to keep some portion of what company has contributed to your 401(k) account, which is dependent on how many years you have worked with the company.
In graded vesting schedule you need to work with the company for at least six years and after that whatever the company has contributed will goes with you. You should see the slab for graded vesting in your statement or can contact the plan administrator to understand the graded vesting slab.
It is always advisable before you leave the job you should check the vested balance of your company retirement plan. If you understand the 401(k) rules and depending upon the vesting schedule of your company you can add a right amount of money in your account before you leave the job.
You should also keep in mind that don't withdraw the amount from your account as soon you leave the job; it may incur taxes and other penalties to you. Just let the money grow in your account, or you can also roll over it to IRA, 401(k) account is meant for your retirement expenses, so don't be in a hurry to withdraw it for your expenses.
It may also happen that you may be having your old 401(k) account which was set by your previous employer, then you need not consider the vesting as you are not there currently.
In fact, you can consolidate your old 401(k) account into IRA so that it will be easy for you to manage and track your account.
Know The Rules Which Are Affecting You
If you want to know the vesting rules and guidelines which are affecting you, then to know about your vesting schedule and rules get in contact with your plan administrator.
You should get educated from them about your vesting policies and schedule, and if you are fully aware of these policies, you can contribute a good amount for your retirement.