Having your employer match your retirement contributions is a fantastic benefit that accelerates your retirement savings growth. To foster employee loyalty, many employers set up a time frame, known as vesting, during which employees cannot access the funds contributed by the employer.
What Exactly is “Vesting”?
Vesting is essentially a period that employees must work for the company before they can avail the full money deposited by the employer in the retirement account.
In my previous role as a college instructor, I set aside 8% of my income for my retirement fund. This amount was matched by my employer, thereby growing my retirement fund by 16% of my salary each year. However, there was a stipulation. The employer’s contribution would only become accessible after five years of service. Leaving before this period would cost me the employer’s match, which was a substantial half of my retirement fund. This condition served as a robust incentive to stay for at least five years, which indeed, I did.
What Does Being Partially Vested Mean?
My employer’s arrangement may have been unique, wherein working fewer than five years would disqualify me from receiving the employer’s contributions. With most companies, full vesting occurs within 3 to 7 years of service. Some companies grant partial vesting, for instance, after one year of employment, you may receive 20% of the employer’s contributions, increasing to 60% after three years. Each company’s rules vary, necessitating a consultation with the Human Resources department to clarify your company’s policy.
How Does Vesting Impact Your Own Contributions?
Remember, vesting only applies to your employer’s contributions. Your own contributions to your retirement fund are always accessible and are not influenced by vesting schemes. If I had quit my job after four years, I would have lost my employer’s contributions but retained all of my own, which I could have transferred into an IRA.
Think Through Before Switching Jobs
When contemplating a job change, factor in the vesting period. If you are on the verge of becoming vested, it might be beneficial to hang in a little longer. Upon vesting, you won’t just retain the employer’s match but also stand to benefit immensely from compounded interest accrued over your working years.
Deciding the right time to leave a job is challenging, but if you’re nearing the vesting period, it could be worth sticking it out. Upon joining, always ascertain your employer’s contributions to your retirement savings, the duration required to be vested, and whether partial vesting is an option.
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