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WalletPrep worksheet · Investing

What does vested mean in a 401(k)?

Name ____________________ Date __________

Key ideas

  1. Your own contributions are always 100% vested. Money from your paycheck, and its growth, can never be taken back. Vesting only applies to money your employer puts in.
  2. Employer money vests by cliff or by steps. A cliff schedule gives you 0% then 100%, by year 3 at the latest. A graded schedule reaches 100% by year 6.
  3. Leave early and the unvested part stays behind. Vested percent × employer balance is what you keep. Sam is 40% vested on $9,000, so he keeps $3,600.

Vocabulary

Vesting
The rules for when your employer's contributions to your retirement plan become fully yours to keep if you leave the job.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Employer match
Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Rollover
Moving money from one retirement account to another, such as an old 401(k) to an IRA, without paying tax on it.

Work it out

Sam is leaving after 3 years of service. His 401(k) has $15,000 from his paychecks and $9,000 of employer match. The match uses a 6-year graded schedule.

  1. Sam's own money
  2. Vested match (40%)
  3. Sam keeps
  4. Employer match
  5. Vested part
  6. Left behind
  7. Extra kept at 4 years (60%)

Check yourself

  1. You have $6,000 of employer match and are 60% vested. How much of the match do you keep if you leave?

    • A. $2,400
    • B. $3,600
    • C. $6,000
    • D. $0

  2. Which money in your 401(k) is always 100% vested?

    • A. The employer match
    • B. Profit-sharing contributions
    • C. Money from your own paycheck
    • D. None of it until year 3

  3. Under a 3-year cliff schedule, how much of the match do you own after 2 years?

    • A. 0%
    • B. 40%
    • C. 67%
    • D. 100%

Your turn

Log in to your 401(k) and write down two numbers: your total balance and your vested balance. Then find your vesting schedule in the plan documents and note the date of your next vesting step.

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Answer key

What does vested mean in a 401(k)?

Work it out

  1. Sam's own money$15,000
  2. Vested match (40%)$3,600
  3. Sam keeps= $18,600
  4. Employer match$9,000
  5. Vested part− $3,600
  6. Left behind= $5,400
  7. Extra kept at 4 years (60%)$1,800
  1. After 3 years on a 6-year graded schedule, Sam is 40% vested. $9,000 × 40% = $3,600 of the match is his.
  2. He keeps all $15,000 of his own money, so he leaves with $15,000 + $3,600 = $18,600. The other $9,000 − $3,600 = $5,400 is forfeited.
  3. If he stays to reach 4 years, he is 60% vested: $9,000 × 60% = $5,400, or $1,800 more, plus any new match.

Check yourself

  1. B. $3,600 $6,000 × 60% = $3,600. The other $2,400 is forfeited. Your own contributions are kept in full on top of this.
  2. C. Money from your own paycheck Your own elective deferrals, and their growth, are always fully vested. Vesting schedules only apply to employer money.
  3. A. 0% A cliff schedule gives you nothing until the cliff date. After 3 years of service you jump straight to 100%.