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401K Vesting Schedules - Know the Impact of Your 401K Vesting Schedule

Your 401K vesting schedule determines how much your keep when you terminate.


Whenever you make a contribution to your 401(k) plan, you do not be concerned about your 401K vesting schedule. You’ll never have to forfeit your contributions due to terminated employment. (Still, the value of your investments may increase or decrease based on market changes.) On the other hand, when it comes to the employer matching contributions you might receive, the same is not true. To reduce or even eliminate the possibility of forfeiting your employer matching contributions, be sure to learn and understand the vesting schedule and rules at your company.

What is Vesting?

When you vest in your employer’s matching contributions, you obtain the legal right to keep the contributions. Specifically, you have reached the point in time that you can leave from (or be fired by) your company yet retain that contribution.

Vesting Schedules

While some employers offer immediate vesting of their matching contributions, it is more common that their rules will cause employees to vest according to a pre-determined schedule. Since employees vest based on the amount of time they have been with their employer, for practical purposes this means you typically won’t be able to quit Friday and take the matching contribution money you received Thursday.

Broadly speaking, there are two kinds of vesting schedules: graded vesting and cliff vesting.

Graded Vesting Schedule

With a graded vesting schedule, you vest in your employer’s contributions on certain anniversaries of your employment. If your employer uses a graded vesting schedule, it may be more generous than the one described below, but thanks to the Pension Protection Act of 2006, it can’t be less so:

  • After one year of service: 0% vested
  • After two years of service: 20% vested
  • After three years of service: 40% vested
  • After four years of service: 60% vested
  • After five years of service: 80% vested
  • After six or more years of service: 100% vested

Cliff Vesting Schedule

Like it sounds, a cliff vesting schedule means that for a period of time you won’t be vested at all. Then, like going off a cliff, you become vested all at once. Again, your employer’s cliff vesting schedule may be more generous than the one described below, but your vesting will occur as least as fast as the following schedule:

  • After one year of service: 0% vested
  • After two years of service: 0% vested
  • After three or more years of service: 100% vested

Remember, each employer offering an employer match vesting over time will have either a cliff vesting schedule or a graded vesting schedule, but not both.

Make sure you are aware of your employer’s vesting schedule especially before making any major decisions. Saving for retirement is important, so it’s unlikely you would ever want to voluntarily leave your job just before you were about to vest in a significant sum of employer matching contributions!

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