When planning for the future, many of us look towards the good old 401k for retirement. And, with our 401ks also comes the term “vested balance.” But what does “vested balance” mean – and how might it affect the way you save for the end of your working life?
Your vested balance refers to a portion of your 401k account you have control over – but there’s more to it than that.
Keep reading, and I’ll explain what you need to know.
What is a vested balance?
Your vested balance is the money in your 401k savings account that you currently own.
As you may know, in a 401k, the money you invest to save can be added to or even matched by your employer(s) during your lifetime.
However, if you were to leave your company tomorrow, you may not have access to all the money vested on your behalf.
If you leave your job or decide to withdraw money from your retirement plan, the vested balance is the money you can take away directly.
Vested balances and vesting schedules are common and exist in every retirement plan that is sponsored by employers, such as a 401k.
What is a vesting schedule?
The “vesting schedule” refers to a set period during which your employer wants you to stay with the company to receive their full contributions to your 401k. The schedule itself is often spread out over about six years, although your employer can choose to vary this in either direction.
It’s vital to note that you will always have 100% access to the money that you yourself contribute to the 401k, either from your paycheck or from another plan. The vesting schedule only refers to the money that your employer has directly contributed to your account.
Do also remember that the vesting period only lasts from your hire date to your termination date. If you leave any money beyond your termination date, it will not contribute towards a higher balance in your 401k.
How does vesting work?
As mentioned, there are two parties in your vested balance; you and your employer. The money that you yourself contribute is automatically vested. You earned that money, so no vesting schedule is attached to it. The money is 100% already yours and accessible.
On the other hand, the money that your employer contributes will likely have a vesting schedule. While that isn’t always the case, more often than not, employers create a vesting schedule to encourage the employees to stay with them for longer.
Vesting is – at its most basic – depositing money into a retirement account. It’s a term that commonly applies to employers contributing via 401k.
What is the difference between a vested balance and a total balance?
If your vested balance is currently lower than your account balance, then you are not yet completely vested in all balances. This means you will not yet have access to all the money in your 401k. At least, you won’t be able to make withdrawals.
To get your vested balance and total balance numbers to match, you need to be 100% vested. That means completing your vesting schedule by keeping working for the same employer until their schedule has reached its end date.
Leaving an employer early can result in imbalance – which is why it’s always important to think carefully before quitting a job!
You should ideally choose a company that appeals to your long-term career growth if you want to build a vested 401k.
Why is vesting important?
401k vesting informs you when you can use money that your employer pays into your account.
Vesting schedules can vary, which is why it is essential to know the exact terms of your vested balance, especially if you are planning on leaving a company.
Always read any contracts or agreements you’re bound to before leaping in with both feet.
What happens to 401k money that is not vested?
Money that is not vested can be forfeited by employees when they are paid their account balance. This usually occurs when the employee has terminated their employment by leaving the company.
Simply put, it means that the money contributed by the employer until that point will simply return to them instead of going to the employee. The employee effectively gives up the right to contributions if they terminate the contract before vesting schedules end.
How long does it take to be fully vested in 401K?
A precise vesting schedule depends entirely on the employer. While some employees can be 100% vested immediately, many often have to work for their employer for at least five or six years.
So, if your vesting schedule takes place over six years, and you leave your job after three, you will only be entitled to 50% of your vested money (ergo, the money that your employer has contributed).
It’s worth looking carefully at all your 401k contributions before you leave a job for good!
Can I withdraw from my vested balance?
Yes, but you won’t be able to withdraw from any non-vested balances left standing. Keep in mind, too, that you may have to pay additional taxes if you withdraw from a 401k before the age of 59.5 years!
In many cases, it’s worth leaving withdrawal until as late as possible. This way, you can make the most of your vested balance.
Can I use my 401k vested balance to buy a house?
Yes – essentially, you’ll be borrowing money from your 401k to finance major assets such as a house.
As mentioned, doing so before the age of 59.5 will mean you’re subject to some fees and penalties. You’ll also need to repay anything you borrow from your 401k with interest added on top.