It could take up to 6 years for all the money in your office retirement account to actually be yours

Tanza Loudenback

Jun 7, 2019, 19:24 IST

It could take up to 6 years for all the money in your office retirement account to actually be yours

Tom Werner/Getty

For just about anyone, matches give a significant boost to retirement savings - but be aware of the vesting schedule.

Your company's 401(k) is an expert-recommended tool for saving for retirement.
Salary deferrals into your 401(k) - up to $19,000 in 2019, or $25,000 if you're over 50 - are yours to invest and to take if you leave the company.
Employers also make contributions to a 401(k), often through matching contributions. Matches can help boost retirement savings, but many companies require employees to stay at the company for a period of time before they can take ownership of the money.
This is referred to as the company's "vesting schedule," which tells the employee how much of the employer's contributions they own at any given point.
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You've surely heard it before, but we'll say it again: 401(k)s are one of the best ways to save for retirement.

401(k)s make investing simple by deferring part of your pretax salary into an investment account and paring down investment options. It's impossible to ignore the tax advantages of a 401(k) - you only pay income tax when you withdraw the money during retirement, providing years of tax-free investment growth, plus your taxable income will be reduced in the year you make contributions.

Employers also get a tax break when they contribute to a 401(k), and many do so through matching up to a certain percentage or dollar amount of each employee's contributions.

For instance, say your company matches 50% of employee contributions, up to $3,000 a year. To get the full match, you'd need to defer $6,000 of your salary into your 401(k) for the year. But depending on your employer's vesting schedule, you may not be entitled to the money immediately.

For just about anyone, matches can give a significant boost to retirement savings. However, many companies require an employee to put in significant time at their post before the employer's contribution is truly theirs.

What is a 401(k) vesting schedule?

The salary deferred by an employee into their 401(k) - up to $19,000, or $25,000 for folks over 50, in 2019 - is always theirs to invest, and to take when they leave the company. In other words, whatever money you put into your 401(k) will always be immediately vested because it's money you took from your own paycheck.

But the money an employer contributes to your 401(k) may gradually become yours, dependent upon how much time you spend working at the company. This is referred to as the vesting schedule, or the set of rules that outline how much and when an employee is entitled to any employer contributions made to their 401(k).

The vesting schedule determines how many years the employee must work for the company ("years of service") to own a percentage of the employer's contribution. An employer will have immediate vesting, cliff vesting, or graded vesting.

In immediate vesting, the employee will obtain 100% ownership of any money contributed by the employer at the time it is contributed. Immediate vesting is always required for employees who reach the plan's specified "normal retirement age," regardless of the company's vesting schedule. Safe Harbor 401(k)s, a type of 401(k) that allows greater contributions for highly compensated and key employees of the company, requires immediate vesting.

In cliff vesting, the employee will own 0% of the employer's contributions (whether made through a match or otherwise) for up to three years. Once they hit the "cliff," they will own 100% of the contributions. For instance, if your company has three-year cliff vesting and you leave for a new job after two years, you won't to get to take any of the matched money with you.

In graded vesting, the employee gradually assumes ownership of the employer's contributions, ranging anywhere from two to six years. Companies must vest at least 20% of employer contributions after two years. For instance, a company with three-year graded vesting will vest employer contributions as follows: 33% after one year of employment, 66% after two years of employment, 100% after three years of employment.

You can check with your human resources team or read over the 401(k) plan documents to find out exactly how your company calculates vesting.