A 401(k) has traditionally been an easy way for people to start investing by utilizing employer matching. Eventually, the money you or your employer contributes helps build a retirement fund that you can utilize in your later years. Some employers participate in what’s called a “vesting schedule”. This means that employees who have a 401(k) cannot use any of their invested money until they’ve been employed with the company for a specified period. To confirm if your employee uses a vesting schedule, a financial advisor in Orlando can work one-on-one with you to figure out which funds you can or cannot access.
Here are the key things you need to know about 401(k) vesting.
What Is 401(k) Vesting and How Does It Work?
In a 401(k) with an employer, there are some funds you own and some your employer will own. Vesting gives people full ownership of their funds so that an employer does not have the right to take them back. The money is always yours you contribute, but it can take up to five years before it can be fully vested. To claim the money your employer is contributing, it must be fully vested. An employee can be partially vested, but this means your employer will own a good portion of the money in a 401(k). Full vestment is defined as having full ownership of the funds in your investment account.
What Kinds of Vesting Schedules Are There?
There are two primary types of vesting schedules, graded vesting and cliff vesting. Vesting schedules are usually with the employer benefit, to retain employees for a longer period of time. If employees know they can get more out of their investments by staying with a company, it could encourage them to maintain loyalty to a business. All schedules are regulated by the government, but employers can decide which schedule they want to use.
Graded vesting, or gradual vesting, is when there is a small percentage of a 401(k) that is invested slowly over time. These percentages can be changed by the employer, as long as the employer has the benefit of their employees in mind.
Cliff vesting means there will be a time period where there is no investing. Then, there is full vesting, with three years of employment service as the maximum.
Is All the Money in Your 401(k) Actually Yours?
When you leave a job or roll over a 401(k) plan, your balance could be adjusted based on the amount of money that was vested by an employer. If you were not fully vested with an employer, the money is likely not all yours in your 401(k). Therefore, the money is only actually yours if you were fully vested with your employer for the specified period of time as decided by your employer. If you quit a job, a couple of options could be to transfer your 401(k) funds to a new employer or roll over that money into an investment retirement account (IRA). Depending on your individual circumstances, speaking with a financial advisor in Orlando will take a look at what kind of 401(k) plan your employer offers.