Vested vs. Nonvested Retirement Accounts: Understanding Your Balance

Be sure you understand the difference between your vested and nonvested account balances.

Retirement plan account balances are separated into vested and nonvested components. A vested account balance is the amount you keep if you stop working for your employer immediately. A nonvested balance is the amount that you become eligible to keep if you continue working for a predetermined amount of time. Retirement planning includes both your vested and nonvested account balances.

Vested Account Balance

You can find a vested account balance in most employer-sponsored retirement accounts. You typically contribute a portion of your salary into the retirement account, and your employer contributes a smaller portion into your account. The amount of money you contribute is immediately vested. The amount your employer contributes is generally subject to vesting rules and remains nonvested for a specific period of time. Once you've worked for the employer for more than the minimum vesting period, all money contributed to your retirement account becomes vested.

Impact of Vesting

Your vested account balance belongs to you even if you quit, are fired or retire. This includes both the amount you contribute yourself and any amounts contributed by your employer that have vested over time. You nonvested account balance is lost if you stop working for your employer for any reason.

Vesting Period

The Internal Revenue Service issues strict guidelines regarding vesting (see Resources). Employers are prevented from mandating lengthy vesting periods, and the maximum vesting schedule is set by IRS restrictions. Your retirement plan administrator must set provide you with information regarding your vesting period, as well as both your vested and nonvested account balances. In a typical retirement account, there's an initial vesting period for new employees and a subsequent vesting period for money contributed on behalf of veteran employees.

Typical Accounts

Vested account balances are shown only in accounts that have some form of employer-provided funding. Conversely, for an individual account such as an IRA, your entire account is automatically vested by definition. Your IRA statement never shows a vested account balance because your entire account is always vested.

For an employer-funded account such as a defined benefit plan or 401k with employer match, you generally see a specific period of time, such as three years, before the retirement account becomes fully vested. In more complex plans, the employer may use a sliding scale where additional percentages of the account balance become vested each month of employment.

Warning

When planning for your retirement, be sure you differentiate between vested and nonvested account balances. Employees often assume they'll eventually collect nonvested balances and use these sums in retirement planning. This is a dangerous assumption.

If you base your retirement timing on a nonvested account balance and you subsequently stop working for your employer before the vesting period is over, you could leave yourself with a lower standard of living throughout your entire retirement. Your plan administrator or financial adviser can provide information on your specific account's vesting period.