You are getting ready to make the big step into the commercial job market. Maybe you have already studied everything there is to know about transitioning out of the military and into civilian employment. I had not. I will never forget the day I embarrassed myself about personal finances. I knew I wanted to invest in a 401(k) program to save some dollars and reduce my tax liability. But there was so much I did not know.
I knew my company would match the first 3 percent of my investment, dollar for dollar. However, I did not know the company was going to give me an additional 1/2 percent for the 4th and 5th percent I invested. I quickly calculated that if I invested 5% of my income, the company was going to give me a match of 4 percent. Just one catch. I could not spend it until I was 59 ½ years old, with a mandatory withdraw generally starting at 70 ½. I liked the idea of long term savings and getting a tax break at the same time. I already had some IRAs with similar rules. I was also aware that not all companies match contributions, which made me even happier with my company selection.
Then I saw an asterisk indicating, “pending vestment period”. I asked some of my co-workers at the coffee pot about this phrase and they got a good laugh. After harassing me for a bit, one of the “old timers” gently explained the vestment concept to me. Turns out, vestment means different things in different companies. Here are a few examples.
How Do I Know If I’m Vested?
In most companies your personally invested dollars are yours and remain yours at time of deposit. This means if you decide to depart a company, you can generally roll your invested dollars to a new 401(k).
In many companies matching dollars are not necessarily yours until you work for a certain amount of time with the organization. To be fully vested and receive all the matching dollars deposited in your 401(k), you may need to stay three or more years. You might be 50% vested or some portion at the two-year mark, but need more time to be 100% vested. In other words, you might get to take some of the company’s matching dollars with you, if you leave before being fully vested…or…you might not. In other companies, you may be fully vested on your first day. Every company has their own rules for vestment periods for their 401(k) program and you should read and understand their policy.
How much should you contribute into your 401(k)?
On several occasions, I have been asked, ‘how much should I save in the 401(k) program?’ Bottom line, if a company is going to give you matching dollars for your 401(k), make sure you take full advantage of their program, acquiring every available matching dollar into your account. If you can save even more, great!
If you leave prior to full vestment, your invested dollars are generally yours to take with you. You may even get to take some of the matching dollars with you, if you are partially vested. Just remember, when you change jobs and with few exceptions, you will be penalized and pay taxes if you withdraw the funds and do not roll them over into another qualified 401(k) plan.
Wishing you a great transition!
