- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Vesting Requirements
Vesting Requirements
Vesting is the process through which your employer’s contributions to your retirement fund actually become your property. You will typically become fully vested, or gain full ownership of the contributions, after you have worked a certain number of years with the company. For example, you may own 60 percent of the employer’s contribution after two years, 80 percent after three years, and 100 percent after four years. However, vesting schedules vary depending on the company. Matching contributions must be vested according to the respective cliff schedule, which means that after a specific number of years you are immediately vested, or graded schedule, which means that you are partially vested after a specific number of years, and the vesting increases each year (see Table 6).
Table 6
Vesting Schedule for Matching Plans
| Year | Cliff |
Graded | Cliff | Graded |
| 1 | 0% | 0% | 0% | 0% |
| 2 | 0% | 20% | 0% | 0% |
| 3 | 100% | 40% | 0% | 20% |
| 4 | 100% | 60% | 0% | 40% |
| 5 | 100% | 80% | 100% | 60% |
| 6 | 100% | 100 % | 100% | 80% |
| 7 | 100% | 100% | 100% | 100% |
Contribution Limits
An annual contribution limit is the maximum amount you may invest in a particular retirement vehicle each year. In a 401(k) plan in 2006, you cannot contribute more than 25 percent of your before-tax income, and this amount cannot exceed $15,000. Employer contributions may exceed this limit. Annual contribution limits gradually increase each year. In addition to the limits listed in Table 7, a “catch-up” limit is available for those over age fifty. If you are over age 50, your annual contribution limits are the normal contribution limit (i.e. $15,500 in 2007) plus the additional contribution limit of $5,000, which would add up to $20,500. An employer match would increase this amount even more.
Table 7
Annual Contribution Limits for 401(k) Plans, 403(b) Plans, and 457 Plans**
Year Contribution Limit Catch-Up Contribution Limit*
2005 $14,000 $4,000 2006 $15,000 $5,000 2007 $15,500 $5,000 2008 Indexed Indexed 2009 Indexed Indexed
*Catch-up contribution is for those over age fifty.
** 457 plan participants also have the option of increasing their deferrals to the lesser of twice the normal limit ($31,000 in 2007) or the normal limit not applied in previous years; this option may be exercised in the final three years before retirement.
