What Does Vesting Mean in a 401(k)? (2024)

401(k) retirement accounts are a great tool for employees to use to start saving for their golden years. Many employers match a certain percentage of your 401(k) contributions, which is like getting free money. However, there’s a chance you may not be entitled to all the money in your account (added by your employer) because of something called “401(k) vesting.” We’ve gathered what you need to know about 401(k) vesting, including types of vesting and how to hold onto all your funds.

What is a vested balance?

The vested balance of your 401(k) is what you own outright, and the funds cannot be taken back by the employer if you lose your job or leave the company. That's because 100% of your employee contributions and any returns (i.e., investment earnings) associated with those contributions are vested and protected.Many employers contribute matching or partial matching funds to their employee 401(k) plans, often starting after the employee has been with the company for a specific period of time. Most employer contributions will vest over time rather than right away. This means you may have to stay with the company for a required number of years before the funds, as well as the returns they generate, are eligible for vesting. When they are vested, you'll be entitled to those funds.¹

401(k) balance vs. vested balance

Your total 401(k) balance may be vested or just a portion; it depends on your employer’s policies and how long you’ve been with the company.

Total 401(k) balance. Your whole balance, including your contributions, your employer’s contributions and all returns.

Vested 401(k) balance. The amount of the total balance that you’re entitled to should you leave your job or be let go. This includes 100% of your contributions and can include all or some of your employer’s contributions. Employers typically use one of three different 401(k) vesting models: immediate vesting, cliff vesting or graded vesting.

Types of vesting

In 2022, around 76% of employer-provided 401(k) plans offered some type of contribution matching.² The most common match amount was 50% of the employee’s contributions, although some employers will match up to 100%.³ Keep in mind that employer contributions are usually capped at around 3% to 8% of your total salary.⁴ How much of these employer contributions are vested will depend on their vesting schedule, usually one of these three models:

Immediate vesting

As soon as any money is put into your 401(k) account, whether it’s from you, your employer or in the form of investment returns, it will be 100% vested. That means you can take it with you anytime you leave.

Cliff vesting

This type of vesting requires that you stay with your employer for a certain amount of years before being entitled to the employer’s 401(k) contributions. Once you are vested, you keep 100% of employer contributions. If you leave your employer before that date, you’ll lose any contributions they made up until that point.

Graded vesting

With this type of vesting, employer contributions become vested slowly over time. Each year, you own more and more of those funds. For example, after two years at your company, employer contributions may be 20% vested and then 30% after three years. That means if you leave before being 100% vested, you’ll keep everything you contributed, but only part of the employer contribution.

Example of vesting schedules

What happens to 401(k) money that is not vested?

If you leave or are let go from a company before all your 401(k) is vested, you will lose the unvested money. Keep in mind that 100% of the contributions you’ve made are automatically vested and will always be yours. You can only lose unvested employer contributions, along with any returns made on their investment.

How long does it take to be vested in a 401(k)?

How long it takes to become fully vested in your 401(k) depends on your employer’s vesting schedule. If they use the cliff vesting model, you could be fully vested after a few years. If they use the graded vesting model, it may be 5+ years before you are fully vested and entitled to all the money in your 401(k).

To find out which vesting schedule your employer uses, check your annual 401(k) benefits statement, read the Summary Plan Description or ask your human resources department. If you plan to leave the company eventually, it may be a good idea to schedule your exit around the 401(k) vesting schedule, so you can maximize your investment.

Can you withdraw the vested balance in a 401(k)?

Yes. You can only withdraw or borrow against the vested balance of your 401(k). You won’t have access to the portion of it that isn’t vested. Also consider that if you withdraw before the age of 59 ½, you’ll probably have to pay a 10% fee come tax time on top of ordinary income tax. If you're 59 ½ or older, but your account isn’t fully vested, you will still have to wait until the full balance becomes vested before you can withdraw the entire amount.

If you’d like to access your retirement account before official retirement, some employers let you borrow against it. You can typically borrow up to 50% of your vested balance, maxing out at $50,000 for people with a $100,000 or more vested balance.⁵

Advantages and Drawbacks of 401(k) Vesting

Pros of 401(k) Vesting

• Retirement Savings Vesting ensures that you are entitled to a portion or all of your employer's contributions to your 401(k) account. This means that over time, you can accumulate a significant amount of retirement savings with the help of your employer's contributions.

• Employer Matching If your employer offers matching contributions, vesting allows you to benefit from their financial support. This can substantially boost your retirement savings and help you achieve your financial goals faster.

• Incentive to Stay Vesting encourages employees to stay with their current employer for a longer duration. Knowing that you will lose unvested contributions if you leave prematurely can be a powerful incentive to remain loyal to your employer.

• Financial Security Vesting provides a sense of financial security, knowing that you have retirement funds waiting for you when you meet the vesting requirements. It can be reassuring to have this safety net in place.

Cons of 401(k) Vesting

• Limited Control Vesting means that you have limited control over your employer's contributions until you are fully vested. You may not be able to access these funds or make investment decisions with them until you meet the vesting requirements.

• Loss of Unvested Funds If you leave your job before becoming fully vested, you forfeit the unvested portion of your employer's contributions. This can be a significant financial loss, especially if you were counting on those funds for retirement.

• Long-Term Commitment Vesting often requires a long-term commitment to your employer. If you have career aspirations or personal reasons for changing jobs, vesting can limit your flexibility and potentially slow your retirement savings.

• Uncertainty Until you become fully vested, there is uncertainty about whether you will ultimately receive all of your employer's contributions. This uncertainty can create financial planning challenges and make it harder to estimate your retirement income accurately.

The wait might be worth it

Depending on your career goals and 401(k) vesting schedule, you may choose to stick around your job a little longer so you can leave with more of those "free money" employer contributions. Or you may decide that the benefits of taking a new position outweigh the extra retirement funds you could be passing up. Either way, it’s helpful to know when you will be fully vested so you can make informed financial decisions.

1. "Most workers wait years for company 401(k) matches to vest - CNBC." 17 Jun. 2021, https://www.cnbc.com/2021/06/17/most-workers-wait-years-for-company-401k-matches-to-vest.html. Accessed 7 Oct. 2022.
2. "SHRM Releases 2022 Employee Benefits Survey." 12 Jun. 2022, https://www.shrm.org/about-shrm/press-room/press-releases/pages/shrm-releases-2022-employee-benefits-survey--healthcare-retirement-savings-and-leave-benefits-emerge-as-the-top-ranked-be.aspx. Accessed 7 Oct. 2022.
3. "How Does Employer 401(k) Matching Work? - Ellevest." 26 Jan. 2022, https://www.ellevest.com/magazine/retirement/401k-employer-match. Accessed 7 Oct. 2022.
4. "401(k) Match of the Top 41 Employers - Beagle." https://meetbeagle.com/resources/post/401-k-match. Accessed 7 Oct. 2022.
5. "Taking Out A 401(k) Loan: Benefits And Drawbacks | Bankrate." 16 Sep. 2022, https://www.bankrate.com/investing/borrow-from-401k-loan/. Accessed 9 Nov. 2022.