What is a Vested Account Balance?

Meaning of vested account balance
A vested account balance is one of the two retirement account balance components that forms a part of your retirement planning. Buzzle will tell you what a vested account balance is.
Quick Fact
If loans are allowed on your 401(k) plan, according to the law, the maximum amount you can borrow is the lesser one between USD 50,000, or 50% of your vested account balance.

Most employers offer retirement plans to employees. The account balance of a retirement plan is generally divided into two parts: vested account balance and non-vested account balance. You are eligible for the latter if you continue working under the same employer; likewise, you will have the former if you leave the employer's service midway. There are many retirement plans available, and prominent among them is plan 401(k). The paragraphs below will explain the meaning of vested account balance.

The Concept
  • When you are sponsored by your employee for your retirement plan, a part of your salary is taken and put in the retirement account.
  • A smaller fraction is contributed by your employer in the same account.
  • The part taken from you is vested immediately. This is vested account balance.
  • The part contributed by the employer is subject to certain rules and is termed as non-vested account balance.
  • There is a minimum period for which the employee has to work in that company to be able to receive the entire vested amount.
  • Once you work for the minimum vesting period, even the non-vested amount becomes vested, and you get a total vested balance.
Vesting Period
  • Long vesting periods are forbidden by the Internal Revenue Service (IRS); the minimum period is set by the IRS itself, based on essential guidelines.
  • In most retirement accounts, new employees are subject to an initial vesting period.
  • It is the duty of the retirement plan administrator to explain the details of these account balances to ensure that there is no problem ahead.
  • Most employers keep a set period as per the IRS; however, the employee receives the vested amount irrespective of whether the period is completed or not.
Accounts
  • If you have an individual-funded account, your entire account balance is vested; in this case, your statement will not show the balance at all.
  • On the other hand, in an employee-funded account, the entire amount is not vested; instead there exists a specific period before which the amount becomes vested.
  • Employer contributions are also added every month, and the employer may have different vesting schedules until the vesting period is terminated.
Vesting in the 401(k) Plan
  • Vesting schedules are regular in the 401(k) plan, which is one of the many retirement plans available.
  • Legally, this plan can have a maximum vesting period of 6 years. The two main vesting schedules here include graded vesting and cliff vesting.
  • In graded vesting, you receive a good portion of what the employer contributes, every year, until the vesting period is over, by which time, you are supposed to be 100% vested.
  • In cliff vesting, whatever your employer contributes becomes 100% vested after a period.
  • These schedules are included in this plan so that employees do not leave the company, and consider this as an incentive.
  • Again, remember that every company has different plans and guidelines with regard to vesting.
Effects
  • As already mentioned in the earlier paragraph, your vested amount belongs to you.
  • You will receive the current vested account balance irrespective of whether you are fired, you quit, or retire from work.
  • This amount includes your own contribution, as well as any part that the employer has contributed, which have now become vested.
  • However, you will lose out on your non-vested amount, which the employer has contributed, if you leave before the vesting period.
Some Vital Points
  • Your retirement plan should address the issues of vested and non-vested account balances.
  • Preferably, consult a financial adviser and then take a decision.
  • Most employees think of collecting the non-vested amount and investing it in further retirement plans; this, however, is not a very good idea.
  • If you retire before the vesting period, you will lose out on the non-vested amount and subject yourself to financial trouble in the early years of retirement.
  • Your vested balance is different from your ending balance. The former is lesser than the latter, because the contributions made in your account will be completely yours only after you spend some time in the company.
  • If you are planning to leave your job, find out when the contributions are deposited in your account. If they are deposited yearly, and you leave your employment before the contribution for the previous year is deposited, you are at a risk of losing out on contributions for a year.
  • On the other hand, if the contributions are made on a monthly basis, you are in a better position, and you will not lose a lot of amount.
Saving up for your retirement is very important. In fact, ridiculous though it may sound, experts vouch that you need to start saving up for your retirement right from your first job. Understand the concept of vested account balance and have a good retirement plan in place so that you can be financially unburdened in your sunset years.
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