What is vested balance?

A vested balance refers to the portion of a retirement account or other benefit plan that an employee has earned and owns unconditionally. It's the amount of money that cannot be forfeited, even if the employee leaves the company before retirement. The opposite is a non-vested balance, which is the portion of the account that the employee would forfeit if they left their job before a specific time or event.

Here's a breakdown of key aspects:

• Vesting Schedules: Most retirement plans, particularly those offered by employers, have vesting schedules. These schedules determine how much of the employer's contributions become vested over time. Common schedules include:

  • Cliff Vesting: You own nothing until you reach a certain point (e.g., after 3 years of service), at which point you own 100% of the employer's contributions.
  • Graded Vesting: You gradually earn ownership of the employer's contributions over a period of time (e.g., 20% vested after 2 years, 40% after 3, etc., until fully vested).

• Employee Contributions: Employee contributions to a retirement plan are usually always vested immediately. This means you always own the money you personally contribute.

• Forfeiture: If an employee leaves a company before their contributions are fully vested, the unvested portion of the employer's contributions typically reverts back to the company's plan.

• Importance of Understanding Vesting: Understanding vesting is crucial for employees. It impacts retirement planning and financial security, as it directly affects how much money you can take with you when you leave a job. It's essential to review your plan documents to understand your vesting schedule.

• Different Plans, Different Rules: Vesting rules can vary significantly depending on the type of retirement plan (e.g., 401(k), pension plan, profit-sharing plan).

In short, a vested balance represents your guaranteed ownership in a retirement plan, while a non-vested balance is conditional on continued employment. Knowing your vesting schedule is critical for responsible retirement planning.