Learning the ins and outs of your retirement plan can feel like learning a foreign language. Terms like "defined contribution," "employer match" and "vesting" are thrown around with little discussion of what they are or what they mean. Retirement vesting is a crucial concept to understand as you analyze your retirement savings, especially if you change jobs or are nearing retirement age.
Definition of "Vesting"
Your vested retirement benefits are the portion of your funds that you own outright and are entitled to receive when you leave the plan or take distributions. In most cases, vesting is gradual -- you need to participate in a plan for a set number of years to earn the right to all of the money deposited on your behalf. You can be partially vested, that is, you can earn the right to a certain percentage of the contributions -- 30, 50, 75, etc. -- without being entitled to the full amount.
In all cases, money you deposit to a 401k, SIMPLE IRA or other retirement plan is yours. You are always 100 percent vested in your own contributions and have full right to them if you leave the plan. Vesting comes into play when your employer deposits extra money on your behalf. This can be a payroll match, where the employer makes a contribution based on what you defer from your paycheck. It can be a non-elective match, such as a profit sharing contribution, where the employer deposits money for you without any action on your part. In either case, most employers choose to utilize a vesting schedule on the portion of your savings that they add directly.
Most plans have a vesting schedule: you earn the right to a greater portion of the employer contributions each year that you remain employed with the company. These are typically expressed as a percentage; for example, you might be 20 percent vested after the first year. This means that if you stop working for an employer after one year but before the end of the second year, you can take 20 percent of the employer contributions made to your retirement plan with you when you leave. A year in vesting is counted by hours: if you work 1,000 hours during the year, you have fulfilled that year's vesting requirement. In most cases, full-time employees will meet this requirement before the end of the calendar year.
Leaving the Plan
If you leave your employment for any reason, your vesting is calculated based on your last day of work. And employer money that you are not fully vested in is forfeited. This means that it goes back to the employer. You receive the value of your vested dollars plus any earnings when you take a distribution or complete a rollover, along with all of your own contributions and their earnings.