Vesting: How Your 401k Vested Balance Works - YouTube

When you have a retirement plan like a 401k at your job,

you might have a vesting schedule or a vested account balance that's different

from your normal account balance. So we're going to talk about what exactly

that means and how it works. And be sure to stick around as

we get into some details that might help paint the picture with some

specific vesting schedules and different money types and that kind of thing.

The vested balance is the amount that you actually own in your retirement

account, so that might be the amount you can actually take with you

when you leave your job, or it could be money that's available to

you if you want to take a loan against your account balance,

or if you want to take certain types of withdrawals, like a

hardship withdrawal from your 401k. Once the money is vested, it cannot

be taken back, so you would not forfeit that back to your employer

once it becomes vested. The reason that employers do this is they might

want to encourage you to stick with your job maybe for another year

or two, or a couple of years, because the longer you stick around

the more vested you are in your account, so this provides an incentive

for you to stay on the job, so they don't have to put

time and energy and money into finding new employees, and it can also

help your employer reduce costs on the retirement plan. But most importantly,

this is the money that you actually own. You can think of the

money in your account in two broad categories, and one of them is

an "employee" contribution. That's the money that you actually put in out

of your paycheck, for example, if you choose to contribute 15%

of your earnings to the 401K plan. That would also include money that

you might roll in from, let's say a previous job's 401k,

you can count that typically in your vested account balance. But the money

that you contribute out of your pay is always 100% immediately vested. Then

there are "employer" contributions, and this is money that your employer

puts in on your behalf, so that could be a matching contribution,

like if you put in 4%, they put in 4%, or there might

be profit sharing contributions or other types of contributions, and those

are the types of contributions that are most likely to have a vesting

schedule, so you might need to stick around at your job for a

certain number of years. So... When exactly can you take the money out?

We're going to get into the years of service in a minute,

but the vested money is available to you while you're working through loans,

for example, or a hardship distribution, or some plans let you do an

in service distribution... After age 59.5, where you could take money out

and maybe put it into an IRA with lower costs, for example,

that's something that I do with clients sometimes.

When you leave your job, you also get to take that invested money

with you, you could move it over to your next job or to

your IRA, or you could cash it out. All of these different choices

have different tax consequences, so you want to evaluate those carefully,

but your vested balance is available after you stop working at your job.

There are a couple of other situations where you might be able to

get the money out, but that covers most of them: When you quit

working, when you retire, or when you want to access the money in

your plan. So let's do a quick example here, let's say that you

have $100,000 in your 401k at your job, and you are 60%

vested. So how much of that money would you get to take if

you leave your job? Let's say you retire with that $100,000 in there...

Well, the answer is, Of course, you get to take 60%

of that or 60,000. So we've got the circles there shaded in at

about 60%. Some of that might be forfeited back to the employer,

but if you stay in your job for another couple of years,

you might eventually have access to the full 100%.

So let's talk about those vesting schedules. Again, any employee money that

you put in, for example, the amount that comes out of your paycheck

is 100% immediately vested, there might also be employer contributions that

are 100% Immediately vested as well. So if your plan uses a "safe

harbor" contribution, that would typically be 100% immediately vested, you

would be entitled to that money if you leave your job,

once you are essentially entitled to the money, doesn't even need to necessarily

hit your account in some cases, before you leave your job,

a typical vesting schedule is the six year graded vesting schedule,

because that satisfies certain rules, so that you are 0%

vested after the first year, then 20% after the second year,

then 40%, 60%, 80 and 100% after six years of service.

We're going to talk about a year of service in just a minute,

there. Is also cliff vesting, and that might be 0%,

0%, and then 100% after three years. And then there are a number

of other vesting schedules that your employer can use. Basically they might

take the six year graded schedule and do something that is more generous

than that, and as long as it is more generous, then the IRS

and Department of Labor don't have a problem with it. So they might

say 25% per year, and that way you would be fully vested after

four years instead of six. It's important to know what exactly a year

means. You might think of it as 12 months, 365 days,

but it is typically going to be a calendar year, in which you

have 1,000 hours of service. So that can be tricky, if you get

hired some time in the middle of the year, you might not know

if you're going to hit 1,000 hours or not, and that's going to

affect whether or not you get a year of service credited to your

vesting, and that's very important. By the way, before I forget,

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and it helps you stay up to date on things like this,

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that, and thanks to everybody who's already subscribed. There are also these

IRA based plans that are effectively like 100%

immediate vesting, so once the money goes in there, you could take the

money right back out whenever you want. For example, that might be a

SEP or a SIMPLE plan. Those are employer plans, but they're different from

your 401k and your 403 B, so again, you could take the money

out, there might be some taxes due, there might be tax penalties,

there could be some restrictions related to whatever product the money goes

into that your employer is using, but there wouldn't be a vesting schedule

that prevents you from taking that money out. So I hope this information

is helpful. If it is, please leave a thumbs up. That helps to

get the word out to other people, it helps to let me know

that I'm on the right track, and again, I hope you got a

lot out of this and... Take care.