You just started a new job and one of the perks of the job is a 401k. To make things even better your company also offers a match for your contributions. Who doesn’t like “free” money for investing?
Before you get overly excited, let’s look at one aspect that may impact just how much of that “free” money you get to keep. All the matching money and earnings from that money are subject to a vesting schedule.
Vesting means that you get to keep the matching money even if you are no longer employed by the company. You typically are not vested right away; instead you vest either on a gradual scale or on a cliff.
Gradual Vesting – This is when you become vested a certain amount per year that you work for the company. While the scale varies from company to company it must meet the following requirements: 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.
Cliff Vesting – Instead of becoming vested a little bit each year cliff vesting allows you to become vested all at once at a specific number of years of service to the company. This looks like: 100% vested in employer contributions at 3 years.
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