What does vested mean in a 401(k)?

Vested means the money is yours to keep, even if you leave the job. Everything you put in from your paycheck is always 100% vested, but your employer's match can take up to 6 years to become fully yours.

What vested means

Being 100% vested means you own that money and your employer can't take it back for any reason. Money that isn't vested yet can be forfeited, or lost, when you leave the job.

Your contributions are yours

Elective deferrals, the money taken from your paycheck, are always 100% vested. So is the growth on them. Vesting only applies to employer contributions like a match or profit sharing.

The longest schedules allowed

For a 401(k) match, the law allows at most a 3-year cliff or a 6-year graded schedule. Many plans are faster, and some vest the match right away.

When you become fully vested anyway

You become 100% vested when you reach the plan's normal retirement age, or if the employer ends the plan, no matter how many years you have worked there.

Cliff vesting and graded vesting

With cliff vesting, you own none of the employer money until a set date, then you own all of it. Under the longest cliff the IRS allows, you are 0% vested for your first 2 years of service and 100% vested after 3.

With graded vesting, you own a bigger share each year. The longest graded schedule allowed gives you 0% after 1 year, then 20% after 2 years, 40% after 3, 60% after 4, 80% after 5 and 100% after 6. Your plan can be faster than this, never slower.

Some plans use immediate vesting, which means the match is yours as soon as it lands. SEP and SIMPLE IRA plans, which some small employers use instead of a 401(k), must always vest everything right away.

How a year of service is counted

A year of service is often defined as 1,000 hours worked in a 12-month period, which is about 20 hours a week. Plans can count from your hire date or by calendar year, and that choice can move your vesting date by months.

This is why two people with the same start date can have different vested percentages. The exact rule is in your Summary Plan Description. If you are close to a vesting date, ask HR how your service is being counted.

What happens to unvested money when you leave

When you leave, you keep your own contributions, the vested part of the employer money and the growth on both. The unvested part is forfeited back to the plan, where the employer can use it under the plan's rules.

Your vested balance can then stay in the plan, move to an IRA or move to your new job's plan through a rollover. If you are rehired later, some plans let your earlier service count again. The rules vary, so ask before you assume.

Should you stay just to vest

Vesting is a real part of your pay, so put a dollar amount on it. Multiply your unvested employer balance by the share you would gain at the next step. Then compare that with the raise, signing bonus or better match at the new job.

A few months for a few thousand dollars is often worth it. Staying years in a job that is wrong for you to protect a small balance usually is not. You can also ask a new employer to cover what you leave behind with a signing bonus. Some will.