Vesting

Vesting is the condition attached to employer money. The match an employer puts into your 401(k) is deposited into your account and invested like the rest, but the plan keeps a claim on it for a period of service; leave before the period is up and the unvested share goes back to the plan. Your own contributions, and everything they earn, are 100% vested from the first paycheck; only the employer's contributions and their earnings vest over time. The same word covers stock options and restricted shares, which vest on their own schedules, and the same rule applies: what has vested is yours, and what has not is a promise that depends on staying.

In a sentence

• "I'm 60% vested after four years, so if I left now I'd keep $4,320 of the $7,200 they've put in."
• "His vesting is a three-year cliff: nothing until his third anniversary, then all of it at once."
• "The statement shows the whole balance. The vested balance is the part that would leave with you."

How it works

1. The plan chooses a schedule for employer contributions, and federal rules cap how long it can run. Your own contributions, including anything rolled in from another plan, are never on a schedule.
2. Service is counted in years, usually from your hire date, with a year of service defined by the plan.
3. Each year of service raises the vested percentage under a graded schedule, or the whole amount vests at once on a cliff date. Some plans vest employer money immediately.
4. At full vesting the schedule is over. Every employer dollar in the account, past and future, is yours, and the schedule never restarts.
5. Leaving before full vesting forfeits the unvested share. The vested share stays yours, whether you leave it in the plan, roll it over or withdraw it, and the forfeited share returns to the plan.

Vested balance = your contributions and their earnings + vested percentage × employer contributions and their earnings

An example

An employer match of $1,800 a year on a graded schedule that vests 20% a year after the first year, with investment growth left out so the figures stay simple.

The amount at risk peaks in the third year, at $3,240, when the pile has grown but the percentage is still low. On a three-year cliff the same employee would be $0 vested through the second year and $5,400 vested on the third anniversary, so the date of a resignation can be worth thousands of dollars either way. Your own contributions, $3,600 a year at 6% of a $60,000 salary in the same plan, are untouched by any of this.

Why it matters

Vesting changes two things: when you leave and what you count. A resignation a month before a cliff or an anniversary forfeits money that a month of waiting would have kept, and the amount is printed on the statement as the difference between the total and the vested balance, so it is worth reading before the notice goes in; a new employer's offer can also be compared on its vesting, since a generous match on a long schedule is worth less to someone who expects to move. On the net worth sheet, the vested balance is the honest figure. Counting an unvested match records money that can still be lost, and the difference is small early in a job and largest right before it vests.

Vested balance versus account balance

The account balance is everything in the account, yours and the employer's, vested or not. The vested balance is the part you would take if you left today: all of your own contributions and their earnings, plus the vested share of the employer's. The plan statement usually shows both, and the gap between them closes as the schedule runs and reaches zero at full vesting. In net worth, use the vested balance, or record the total and keep the vested figure in a note until the two match; either way, the unvested share is not an asset yet. See Liquid net worth for the further step of separating what you own from what you could spend this month.

Common questions

Are my own 401(k) contributions vested? Always, at 100%, from the day they are deducted, and so are their earnings and anything you rolled in from another plan. Vesting applies only to what the employer contributes.

What happens to unvested money when I leave? It is forfeited to the plan, which uses it for plan expenses or other employees' contributions. The vested share is yours to leave in the plan, roll over or withdraw.

Is vesting the same as eligibility? No. Eligibility is when you may join the plan and start contributing; vesting is when the employer's contributions become yours. A plan can let you join on day one and vest the match over several years.

Should I count the unvested match in my net worth? No, or not yet. Count the vested balance, which is what you would keep, and note the unvested amount beside it; the total on the statement overstates what you own by exactly that figure.

Does vesting apply to stock options and RSUs? Yes, on their own schedules, often a one-year cliff followed by monthly or quarterly vesting. Vested shares are yours at their market value; unvested shares and options are left out of net worth until they vest, because leaving forfeits them.

Go deeper

• How to track a 401(k) or pension that doesn't connect records the statement's total and keeps the vested figure in a note until they match.
• How to calculate your net worth puts the retirement accounts on the asset side at today's balance and walks through the full list on each side.
• The Retirement calculator projects what your retirement savings could grow to by the age you plan to stop working, and the monthly income it could support.