Although you are many years from retirement, your growing retirement plan account is important to your long-term financial security. For that reason, you should know when you become vested in your retirement plan, as this affects your long-term saving and could make a difference in your decision to change jobs.
TL;DR (Too Long; Didn't Read)
Vested interest refers to the amount of funds in your retirement plan account that entirely belongs to you even if you quit your job. Your own contributions are always considered fully vested, but your employer's contributions are vested according to a schedule.
How Vesting Works
Vested interest is a pension plan term for what portion of your retirement plan account is yours and would not be lost if you left your current job. Retirement plan vesting allows a business to offer you additional retirement benefits if you stay with the company for a certain period. The tax rules that allow your employer to offer retirement accounts such as a 401(k) also govern how the vesting schedule should work.
Your Own Contributions
Any contributions from your salary that go into your retirement account are always 100 percent vested. That money remains your money, and you can transfer your contributions and any gains earned by those contributions to another employer-sponsored retirement account or individual retirement account if you leave your job. On your retirement plan account summary – which you should receive at least quarterly – your contribution amounts are listed separately from contributions made by your employer.
Your Employer's Contributions
Retirement account contributions made by your employer are subject to the plan's vesting schedule. Although employer contributions show up in your account totals and earn money, that money is not truly yours until it is vested.
Retirement plans typically have a step vesting schedule. For example, after one year, 20 percent of the employer deposits are vested, and after two years, 40 percent are vested.
For 401(k) accounts, Internal Revenue Service rules limit the vesting schedule to a maximum of six years. Your retirement plan account will be 100 percent vested at that point.
Leaving Your Job
If you are thinking about changing jobs, check on the vesting level and year-end date of your retirement account. If you leave your job, you will lose the unvested portion of the account. You can pick up some extra money in your retirement account by staying with your current job a little longer. For example, you might notice that you jump from 60 percent vested to 80 percent vested if you stay where you are for another month and hit an anniversary date.
It may pay off to hang in there for another month before changing jobs. Before you leave, check into whether you need to roll your retirement plan to a new account.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.