What is a 'Vested Interest'

Vested interest is the lawful right of an individual or entity to gain access to tangible or intangible property such as stocks, bonds, mutual funds and other securities at some point in the future. There is usually a vesting period or time span before the claimant may gain access to the asset or property.

BREAKING DOWN 'Vested Interest'

Vested interests exist in numerous entities throughout the financial landscape including pension plans and 401(k) plans.  

With an employee pension plan, contributions are under the stipulation that the participant would be entitled to the funds at some point in the future. In this case, the participant or investor has as a vested right to the earnings. The vesting period varies by pension plan before the participant gains access to funds. There may also be restrictions on withdrawal amounts to a specific percent per vested year. For example, after waiting the five year vesting period, Peter was allowed to withdraw 20% from his retirement fund each consecutive year.

Other Examples of Vested Interests

An employee who contributes money toward a 401(k) plan may also have a vested interest in the company match if the employer offers one. Typically companies that match their employee's 401(k) contributions have their distinct vesting schedules. These schedules dictate the amount of the company match an employee is entitled to based on their years of service. For example, a company may designate a 20% entitlement of matched funds for employees after one year of service. If Peter contributes to a 401(k) with a company match, he would be fully vested or entitled to the entire company match after five years of service. But if he leaves the company in three years, he would be allowed to take only 60% of the company match with him.

Some companies have vesting cycles that don't break the match down into portions. In other words, an employee is fully vested after working at the company for a set amount of time. Say Peter works for a firm in which eligible employees become fully vested in the company match after working for five years. If Peter leaves this firm after three years, he takes home none of the company match funds. Therefore, it's crucial for 401(k) participants to pay attention to their companies' vesting schedules. 

Vesting interest should not be confused with vested in interest, which applies to entities such as trusts. The beneficiary of a trust is vested in interest if they do not have to meet any condition for their interest to take effect. The recipient has a "present right to future enjoyment," such as a right to property when another beneficiary's interest ends. In this case, that beneficiary has access to the property when the primary beneficiary becomes deceased.

RELATED TERMS
  1. Cliff Vesting

    In cliff vesting, employees receive full benefits from their ...
  2. Fully Vested

    Being fully vested means a person has rights to the full amount ...
  3. Matching Contribution

    A matching contribution is a type of contribution an employer ...
  4. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer ...
  5. Employee Stock Option - ESO

    An employee stock option (ESO) is a stock option that offers ...
  6. 83(b) Election

    The 83(b) election is an IRC provision giving an employee or ...
Related Articles
  1. Retirement

    What Will Withdrawing Early from Your 401(k) Cost You?

    How to calculate the penalties on early withdrawals from your 401(k), including the 10% tax penalty, vesting and income tax.
  2. Retirement

    Five Questions to Ask About Your Company's 401(k) Plan

    Having a comfortable retirement depends on taking maximum advantage of your company's 401(k), if it's offered.
  3. Investing

    What You Need to Know About Restricted Stock Units

    Restricted stock units are a great employee bonus but they are not without risk.
  4. Personal Finance

    What to Do With Company Restricted Stock

    Having a financial plan that includes restricted stock will help you to avoid paying higher taxes.
  5. Retirement

    A Guide to Employee Stock Option Plans

    Stock option plans are among the ways employers can compensate employees. Here's how they work.
  6. Investing

    Your 401(k) Plan: Just How Outdated Is It?

    A recent GAO report indicates that many 401(k) plans are still clinging to archaic rules that hinder plan participants’ ability to save.
  7. Investing

    What Happens to Your 401(k) After You Leave a Job?

    Wondering why your 401(k) plan is unavailable after your employment termination? Here are some scenarios to consider.
RELATED FAQS
  1. Can my company ever be entitled to take my 401(k)?

    Find out why your employer may be able to take part of your 401(k) if you leave your employment too soon, including how different ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center