October 5, 2016 Leave a comment
Hello, my name is Steve and I am pretty confused about my 401(k) plan. I heard my new colleagues discussing about vesting. I do not know what it is. Since I am new to this office, and an introvert, I do not have the courage to ask what it means. I have another query too: can I borrow from my company 401(k) amount?
That’s an excellent question, Steve. Vesting is an important part of the 401(k) plan which most people are not aware of. It refers to ownership rights of the account balance of a 401(k) plan. It means any funds contributed by you, as per under Employee Retirement Income Security Act constituted in 1974-or ERISA as it is colloquially known- is completely owned by you with zero forfeiture risk. You should keep in mind, however that any contribution made by your employer on your behalf could be subjected to a certain vesting period. This refers to the minimum amount of time you must work for your present organization before you gain rights to company contributions to your account. Such vesting schedules could vary from one company to another. As an employee, you could be phased into complete ownership rights over a period of many years. When you are fully vested, it means you have earned complete rights over the money your company has contributed to your 401(k) plan.
To get a clearer picture, let us take an example. Your company may have already begun to contribute to your 401(k) plan just after you began to participate in the plan. In case the plan has a vesting requirement of a year, you will enjoy complete ownership rights only after you remain in employment with your company for a minimum of a year. Once you complete the period, you are completely vested in the contributions of the employer and you can go forward.
About whether you can borrow from your 401(k) plan, the short and sweet answer is yes, the plan permit loans. Do note that the maximum amount of money you can possibly borrow is less of the 50 percent of vested account balance. Alternatively, a maximum of $50,000. Do understand that every plan is unique and a few companies have particular conditions under which the loan can be availed. To give an example, your employer could state a minimum amount as a loan. It is also possible that the company could restrict the maximum number of loans outstanding at any given time.
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