You might not own all of the money in your 401(k)—here's how to find out


Financial advisors make a big deal of encouraging millennials to invest in company-sponsored retirement accounts — especially if your employer offers to match a percentage of your contribution. There's a lot of talk of "maxing your match" and don't leave "free money on the table." But most of the time, these advisors don't mention the fine print: You don't "own" the money contributed by your employer until you're fully vested.

"401(k) vesting is the amount that employees are entitled to keep of their matching contributions based on a vesting schedule determined by the employer," Fred Egler, certified financial planner at Betterment tells CNBC Make It.

There are two different types of vesting schedules: cliff and graded.

With graded vesting, you're gradually entitled to a bigger percentage of your employer match. A typical grading schedule looks like this: After one year working for the company, you're entitled to 0%; after two years, 20%; after three years, 40%; after four years, 60%; after five years, 80%; and after six years, 100%.

Say you make $50,000 a year and contribute enough to take full advantage of your employer's 6% match. That means you're investing $3,000 in your 401(k) each year and your employer is investing an additional $3,000. If you were to leave the job after one year, you wouldn't get any of the money that the employer invested in your 401(k). After two years, if you're 20% vested, you would get $600, plus 20% of any investment returns that money earned.

"Your vesting schedule applies to the type of money, not on the exact amount that was deposited," says Egler. "For example, if your employer contributed $100 to the match, the returns were $10 and you're 50% vested, you get $55: half the contribution, and half the earnings."

With cliff vesting, "you're entitled to essentially none of your match, and then after a certain number of years, you're entitled to 100% of the match," says Egler. For example, you may be 0% vested for two years, but after that, you're immediately 100% vested.

Companies can offer whatever timeline and percentages they want, as long as they fully vest employees after six years of service. That's a requirement set by the IRS.

It's important to review and understand how your 401(k) plan and matching program works, says Egler, because chances are, you're not fully vested right away: "It's not typical that you're going to be 100% vested in your 401(k) matching contributions as soon as you start a job." Depending on your company, vesting typically takes two to six years, he adds.

It's not typical that you're going to be 100% vested in your 401(k) matching contributions as soon as you start a job.
Fred Egler
certified financial planner at Betterment

For retirement planning purposes, you want to know how much of the match you'd be eligible to take if you ever left your job. If you don't know where to find the schedule, ask your HR department.

Regardless of your company's vesting schedule, "if you get a match through your 401(k), you should certainly take full advantage of it," says Egler. "That is free money, for the most part, that you'd be missing out on."

Plus, that money can grow significantly over time, thanks to the power of compound interest. The sooner you start putting your money to work, the less you'll have to save each month to reach your goals. On the flip side, the longer you put off saving and investing, the more catching up you'll have to do later on.

Don't miss: A surprising number of employees are missing out on a simple way to get 'free money'

Like this story? Subscribe to CNBC Make It on YouTube!

The definitive guide to retirement savings plans
The definitive guide to retirement savings plans