This blog post was written by Student Advisory Council member, David Gonzalez.
Understanding retirement benefits can be a confusing and overwhelming task. Floods of information can be confusing and make it difficult to concern what information is most important and relevant to you. It is crucial to become familiar with the jargon behind most retirement plans today so that you may have a firm grasp on what your plan is and how to best benefit from it.
What’s a match?
“A match” refers to what an employer is willing to contribute to your employer-sponsored retirement plan. Employers will often “match” some portion of your contribution up to a particular set amount or percentage of your payment. For example, an employer may match 60% of your contributions up to 10% of your yearly salary. Typically, employers will match more if the employee contributes more.
In order to receive a match, your employer must first offer it. Usually, there will be a delay between when you start working and when your employer will begin a matching program.
The IRS limits how much of a person’s income can be “deferred” to the retirement plan. This is portion of the employee’s income set aside for the retirement plan is called an “elective-deferral contribution.” The elective deferral contribution for 2021 is $19,500.
Matches are usually not subject to taxation while within the plan but are taxable when removed. They also do not count against what you can personally contribute to your retirement account.
What does it mean to be “vested”?
In the context of retirement plans, “vesting” refers to owning. If you, as an employee, are not 100% vested, then an employer can take away a plan or a portion of it, depending on the terms of the initial agreement.
To be completely vested, an employer usually requires you to work a certain period of time with them; otherwise, any amount that is not vested will go back to them if/when you leave the company.
There are two types of vesting schedules: cliff and graded. With cliff vesting, you may not own your account completely until after a fixed period. With graded vesting, your vested percentage increases over time; this is dependent on the retirement plan agreement.
It is important to mention that your personal employee contributions are entirely vested (i.e., owned) by you.
What happens if I leave a company?
If you decide to leave your current employer, you will be faced with the decision of what to do with your retirement account. Your strategy may depend on the degree to which you are vested in your previous employer’s plan and what the terms of agreement were. Consider what most benefits you.
In the case of pensions, most employers have a cliff schedule, so you cannot keep them if you have not worked with them for the qualifying time span.
In the case of a 401(k), the plan can either be left intact with the former employer (without any further contribution), rolled over to a new employer’s plan, rolled over into an IRA, or redeemed for cash. The last option usually comes at the price of heavy penalties, which may make the process not worth it. Consider your options carefully. For more tips on how to increase savings for your retirement account, check out this blog post!
