Vesting
Definition
The process by which an employee earns full ownership of employer-contributed benefits over time, such as retirement plan matching or stock options.
Vesting refers to the process of earning the right to full ownership of employer-provided benefits, primarily retirement plan contributions and stock options. Until benefits are vested, the employer retains the right to reclaim them if the employee leaves the company.
Common vesting schedules include cliff vesting (100% vesting after a set period, typically 3 years) and graded vesting (gradual vesting over several years, such as 20% per year over 5 years). Employee contributions to retirement plans are always immediately 100% vested.
Understanding your vesting schedule is crucial when considering job changes. Leaving before you are fully vested means forfeiting some or all employer contributions. Many employees unknowingly leave significant money on the table by not factoring vesting into their career decisions.
Related Calculators
Related Terms
401(k)
financeAn employer-sponsored retirement savings plan that allows employees to contribute pre-tax income, often with matching employer contributions.
IRA (Individual Retirement Account)
financeA tax-advantaged savings account designed for retirement, offering either tax-deductible contributions (Traditional) or tax-free withdrawals (Roth).
Equity
financeThe value of ownership in an asset after subtracting all debts and liabilities associated with it.
Compound Interest
financeInterest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow exponentially over time.
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