When you have a retirement plan like a 401k at your job,
you might have a vesting schedule or a vested account balance that's different
from your normal account balance. So we're going to talk about what exactly
that means and how it works. And be sure to stick around as
we get into some details that might help paint the picture with some
specific vesting schedules and different money types and that kind of thing.
The vested balance is the amount that you actually own in your retirement
account, so that might be the amount you can actually take with you
when you leave your job, or it could be money that's available to
you if you want to take a loan against your account balance,
or if you want to take certain types of withdrawals, like a
hardship withdrawal from your 401k. Once the money is vested, it cannot
be taken back, so you would not forfeit that back to your employer
once it becomes vested. The reason that employers do this is they might
want to encourage you to stick with your job maybe for another year
or two, or a couple of years, because the longer you stick around
the more vested you are in your account, so this provides an incentive
for you to stay on the job, so they don't have to put
time and energy and money into finding new employees, and it can also
help your employer reduce costs on the retirement plan. But most importantly,
this is the money that you actually own. You can think of the
money in your account in two broad categories, and one of them is
an "employee" contribution. That's the money that you actually put in out
of your paycheck, for example, if you choose to contribute 15%
of your earnings to the 401K plan. That would also include money that
you might roll in from, let's say a previous job's 401k,
you can count that typically in your vested account balance. But the money
that you contribute out of your pay is always 100% immediately vested. Then
there are "employer" contributions, and this is money that your employer
puts in on your behalf, so that could be a matching contribution,
like if you put in 4%, they put in 4%, or there might
be profit sharing contributions or other types of contributions, and those
are the types of contributions that are most likely to have a vesting
schedule, so you might need to stick around at your job for a
certain number of years. So... When exactly can you take the money out?
We're going to get into the years of service in a minute,
but the vested money is available to you while you're working through loans,
for example, or a hardship distribution, or some plans let you do an
in service distribution... After age 59.5, where you could take money out
and maybe put it into an IRA with lower costs, for example,
that's something that I do with clients sometimes.
When you leave your job, you also get to take that invested money
with you, you could move it over to your next job or to
your IRA, or you could cash it out. All of these different choices
have different tax consequences, so you want to evaluate those carefully,
but your vested balance is available after you stop working at your job.
There are a couple of other situations where you might be able to
get the money out, but that covers most of them: When you quit
working, when you retire, or when you want to access the money in
your plan. So let's do a quick example here, let's say that you
have $100,000 in your 401k at your job, and you are 60%
vested. So how much of that money would you get to take if
you leave your job? Let's say you retire with that $100,000 in there...
Well, the answer is, Of course, you get to take 60%
of that or 60,000. So we've got the circles there shaded in at
about 60%. Some of that might be forfeited back to the employer,
but if you stay in your job for another couple of years,
you might eventually have access to the full 100%.
So let's talk about those vesting schedules. Again, any employee money that
you put in, for example, the amount that comes out of your paycheck
is 100% immediately vested, there might also be employer contributions that
are 100% Immediately vested as well. So if your plan uses a "safe
harbor" contribution, that would typically be 100% immediately vested, you
would be entitled to that money if you leave your job,
once you are essentially entitled to the money, doesn't even need to necessarily
hit your account in some cases, before you leave your job,
a typical vesting schedule is the six year graded vesting schedule,
because that satisfies certain rules, so that you are 0%
vested after the first year, then 20% after the second year,
then 40%, 60%, 80 and 100% after six years of service.
We're going to talk about a year of service in just a minute,
there. Is also cliff vesting, and that might be 0%,
0%, and then 100% after three years. And then there are a number
of other vesting schedules that your employer can use. Basically they might
take the six year graded schedule and do something that is more generous
than that, and as long as it is more generous, then the IRS
and Department of Labor don't have a problem with it. So they might
say 25% per year, and that way you would be fully vested after
four years instead of six. It's important to know what exactly a year
means. You might think of it as 12 months, 365 days,
but it is typically going to be a calendar year, in which you
have 1,000 hours of service. So that can be tricky, if you get
hired some time in the middle of the year, you might not know
if you're going to hit 1,000 hours or not, and that's going to
affect whether or not you get a year of service credited to your
vesting, and that's very important. By the way, before I forget,
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that, and thanks to everybody who's already subscribed. There are also these
IRA based plans that are effectively like 100%
immediate vesting, so once the money goes in there, you could take the
money right back out whenever you want. For example, that might be a
SEP or a SIMPLE plan. Those are employer plans, but they're different from
your 401k and your 403 B, so again, you could take the money
out, there might be some taxes due, there might be tax penalties,
there could be some restrictions related to whatever product the money goes
into that your employer is using, but there wouldn't be a vesting schedule
that prevents you from taking that money out. So I hope this information
is helpful. If it is, please leave a thumbs up. That helps to
get the word out to other people, it helps to let me know
that I'm on the right track, and again, I hope you got a
lot out of this and... Take care.