What does contribution mean

what does contribution mean

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Your Own Contributions

Any money that you contribute to your 401(k) pension plan from your paycheck is 100 percent vested immediately. This means that if you quit or are fired at any time, that money is yours to keep, as well as any earnings on that money. This money can be left in the plan with the company, or you may roll it to an IRA or 401(k) with your new company. You will still have to pay the 10 percent tax penalty plus any taxes on that amount as regular income if you choose to withdraw the money.

Company Contributions

Company contributions to your plan work differently. Your company is allowed to hold back some of that money, not making it immediately available to you. This is to give you an incentive to stay at your company longer. This withholding applies to the company's contributions, as well as any return that these contributions produce in the plan. Most retirement fund statements show the company's contributions separate from your own contributions to help you figure the vested amount in the fund. If you leave your job for any reason before the vesting period, you forfeit all of your non-vested pension plan money.

Vesting Periods - Percentage Method

As of 2011, most 401(k) plans using percentage vesting use the same schedule. You must vest at least 20 percent of your company's contribution when you have completed two years of service.

At three years, you are 40 percent vested. The vesting percentage increases by 20 percent each year, until you become 100 percent vested at 6 years of service. At that time, all of your company's contributions are available to you for retirement purposes or withdrawal for other reasons. If you have an older plan with a company you worked for before 2002, the vesting schedule may have been different.

Vesting Periods - Cliff Vesting

Your employer may not use the percentage vesting method, but may use Cliff vesting instead. Under Cliff vesting, if you left your job after 2002, you would be zero percent vested in your pension until three years of service with your company. At the three-year mark, you would become completely vested, and all of your company's contributions are yours. Cliff vesting with older plans works similarly, but the time period for 100 percent vesting may be longer than three years.

Defining Time Periods

Vesting time periods generally refer to the amount of time that you have worked for your employer, not how long you have participated in the plan, with a couple of exceptions. An employer can begin counting your years of service with the company when you turn 18 if you started working at a company at a younger age. Also, a company may define your vesting period by years of plan participation if you do not choose to start contributing to your plan when you first become eligible.

Source: ehow.com

Category: Bank

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