Key Takeaways
- When you’re vested in your 401(k), you’re receiving Other People’s (your employer’s) Money.
- There are two different types of vesting plans: safe harbor and discretionary match.
- At a minimum, you’ll want to contribute to your 401(k) the matching amount your employer offers.
What’s a great way to grow your 401(k)? How about using OPM, or Other People’s Money? Wouldn’t that be nice, instead of only using your own money? Well, if your employer offers a 401(k) plan, chances are good that you’ll receive OPM in the form of your employer’s contributions to your 401(k).
Now, how do you actually get that OPM? This is where vesting comes into play. Vesting means the OPM becomes yours, and there are two ways this can happen.
One way is the safe harbor match, where you’re vested 100% up front. So, for example, if you put away $5,000 and your employer provides another $3,000, and you decide to leave after two years, you get to take all of it with you.
The other way of vesting is a discretionary match, which follows a schedule. This means the amount your employer provides becomes yours over time, in percentages. It’s usually broken out over six years, and you vest 20% per year. In this case, if your employer puts in $3,000 and you leave the company after two years, you might be 40% vested in that $3,000, meaning you’d take $1,200 of it with you.
In order to take full advantage of the OPM, you’ll want to, at a minimum, contribute what your employer will match. If the vesting is a discretionary match, be aware of the vesting schedule if you’re thinking about leaving the company.
It’s a good deal – your employer is trying to help you out with saving for your retirement. That’s what vesting is all about – looking at how to get OPM appropriately through your employer. This way, you’ll be another step closer to retiring to the lifestyle that you want and have the money to do so. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy: