Definition of Graded Vesting
Graded vesting is when an employee gradually gains ownership of employer contributions to a retirement plan provided to them or even employee stock options. Typically, the amount of ownership increases gradually over several years until it reaches 100%.
How Does Graded Vesting Work?
In graded vesting, if you leave the company before you are fully vested, you will not be able to take advantage of all of the employer contributions to your retirement plan. Therefore, if you have a matching 401(k) plan from your employer, you may miss the opportunity to benefit from it if you decide to leave the company before you are fully vested.
Graded Vesting vs. Cliff Vesting
Graded vesting and cliff vesting are two common types of vesting schedules, and companies can choose either to implement. Some companies even allow immediate vesting, which means you can start owning all the money in the retirement account as soon as you and your employer begin contributing.
Graded Vesting and Retirement Savings
Although graded vesting is a method that companies use to try to keep employees, it may not be the best system for everyone. For example, if you intend to leave the company, you may feel compelled to stay in your job for the sake of your retirement plan, even if you do not like your job or employer. And if you decide to leave before the vesting period is complete, you will lose some of the employer contributions.
However, regardless of your company’s vesting schedule, taking advantage of the retirement account offered by your employer is a benefit that can help you save more for retirement faster, especially if the company provides matching contributions. Even if you do not plan to stay at the company until you are fully vested, contributing to an account like a 401(k) gives you the opportunity to save money pre-tax. This reduces the taxable income on your paychecks.
Always remember that you are 100% vested in your own contributions to retirement accounts, regardless of how long you have worked for the company. Therefore, any retirement savings, no matter how small, will help you in the long run.
Source: https://www.thebalancemoney.com/what-is-graded-vesting-5206924
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