Your vested balance is the amount of money in your retirement account that belongs to you. If you quit your job or leave your employer, your vested balance is the portion of the money that you can take with you.
What Does Vested Mean?
According to Webster’s, vested means:
- Fully and unconditionally guaranteed as a legal right, benefit, or privilege.
- Having a vest.
Since this isn’t a clothing blog, it’s the first definition that applies to us. The vested balance is the money in your account that belongs to you completely and unconditionally. No matter what.
Vested vs Unvested
So what distinguishes the vested balance from any unvested balance? That depends on where the money came from.
In an employer-sponsored retirement plan like a 401k or 403b, the account balance is usually a combination of your own contributions and employer matching contributions. For example, let’s say you contribute 5% of your salary and your employer matches you with another 5% of your salary.
Your contributions are always 100% vested. Period. If you leave your job at any time, for any reason, you can take that money with you. Generally, it’s best to roll that balance into an IRA or another retirement plan to avoid penalties and keep it working toward your retirement.
Any matching contributions your employer has made to your account, however, may not be vested. That’s the unvested balance. If you leave before the matching contributions vest you can’t take them with you.
How Does Vesting Work?
Matching contributions vest at a set rate that is spelled out in the vesting schedule. Vesting schedules are different from plan to plan, but do have to follow certain rules that keep them from dragging out too far.
For a defined contribution plan like a 401k, matching contributions have to be fully vested within 6 years.
Your employer can choose to allow matching contributions to become vested sooner. Some plans even have matching contributions immediately vested. That’s as generous as it gets. As soon as the money hits your account, it’s yours.
In cliff vesting, matching contributions become 100% vested at single point. Before that, your employer’s match is completely unvested. If your plan uses a cliff vesting schedule then the longest that time period can be is 3 years. Once you’ve been with that employer for three years then all matching contributions are 100% vested. The cliff can happen sooner, such as after 2 years or 1 year, it just can’t go past 3 years. Your plan will specify.
If your plan follows a graded vesting schedule then a portion of the match becomes vested each year. Again, there is a bound on how far out the employer can drag this. The least favorable a graded vesting schedule can be is 2-6 years. In a 2-6 year vesting schedule 20% of matching contributions become vested each year, beginning after you have been there two years. That means that vesting has to start occurring after 2 years and must be complete by the end of 6 years. Once you’ve been there any employer match is completely vested and you can take it with you when you leave.