In a 401(k) "freeze," an employer temporarily halts all new contributions and withdrawals within its 401(k) plan.
You are most likely to experience a 401(k) freeze following a merger, while the new company determines what to do with the 401(k) plan it has inherited.
Key Takeaways
- 401(k) retirement plans may be “frozen” by a company’s management, temporarily halting new contributions and withdrawals.
- A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
- During a freeze, the investments in your 401(k) account will continue to gain or lose value with the market.
- You may have the option of rolling over the money in your frozen 401(k) into an eligible IRA.
What a Frozen 401(k) Means for You
If your 401(k) has been frozen by your company’s management, you will still retain all of the rights you had prior to the freeze. Your existing investments will still grow or shrink based on their market performance, and your retirement savings will maintain their tax-advantaged status. The only difference is that you cannot add new funds or make withdrawals from your account.
In most cases, you can change the composition of your existing retirement portfolio and shift assets from one investment to another. You should also continue to receive statements in accordance with ERISA guidelines.
What May Happento Your Frozen 401(k)
There is no legal restriction on the length of a retirement plan freeze.Your 401(k) plan may be frozen indefinitely until the new employer decides what to do with it. The new management has three primary options:
1. Merge It Into Another Plan
The new employer may choose to merge your old plan with its own 401(k) plan. In this scenario, your retirement assets are rolled into that 401(k) plan, after which your account is unfrozen. Because 401(k) plans are highly complex and often very different, this can take a long time to execute properly.
2. Terminate the Plan
The new company cannot terminate your plan until it receives a letter from the Internal Revenue Service (IRS) indicating that everything has been properly handled. After termination, your contributions, vested matches, and profits are all returned to you.
If your new employer’s 401(k) plan allows for rollovers, you can opt to have your retirement funds rolled into that plan. Note that if you are under age 59 ½, you must complete your rollover within 60 days in order to avoid a strict tax penalty.
3. Continue the Plan
In this case, existing employees from the acquired company may continue to access the legacy plan, while any new employees will most likely be directed into the new company’s 401(k) plan.
Rollover to an IRA
You can also opt to move your funds into a rollover individual retirement account (IRA) instead of accepting any of the above three scenarios. If you use your old 401(k) money to establish a rollover IRA, you'll keep the tax-advantaged status of those funds and not be hit with an early withdrawal penalty. To protect against tax penalties, be sure to arrange for a direct (trustee-to-trustee) transfer of your funds.
Frozen 401(k) plans are still required to pay out required minimum distributions (RMDs) at your request after you reach the age of 73.
How Long Can a 401(k) Be Frozen?
Legally, there are no restrictions on how long a company can keep a 401(k) plan frozen. Normally, however, management wishes to rectify the situation as soon as possible. In the event that your 401(k) plan is frozen indefinitely, you do have the option to roll it into an IRA and manage it on your own.
How Are Required Minimum Distributions (RMDs) Are Handled During a 401(k) Freeze?
If you have reached the age for required minimum distributions (RMDs) from your 401(k) account and your plan is frozen, the plan custodian should still pay out RMDs as you direct. If this does not happen, request your RMD in writing and document your efforts to avoid IRS penalties.
Can a 401(k) Be Frozen During a Bankruptcy?
No. 401(k) plan funds are generally protected from bankruptcy. That means that if your company goes out of business, your retirement plan money is protected from both your employer and its creditors. If your plan has unvested employer contributions, these may disappear, however. Also, if your plan holds company stock, these shares may become worthless.
The Bottom Line
Under certain circ*mstances, an employer can freeze your 401(k) retirement plan, preventing you from making contributions or withdrawals. However, the money is still yours, and will continue to gain or lose value depending on changes to the market. The frozen plan may eventually be shifted to a new 401(k) provider, or you may be able to roll the funds over to a new plan.
FAQs
If your 401(k) has been frozen for the management, it means you cannot make further contributions or make withdrawals from the 401(k). You will retain rights to your retirement money that is held in the 401(k), and the investments will continue growing based on how the market performs.
What happens when you freeze a 401K plan? ›
The Bottom Line
Under certain circ*mstances, an employer can freeze your 401(k) retirement plan, preventing you from making contributions or withdrawals. However, the money is still yours, and will continue to gain or lose value depending on changes to the market.
Can your 401K go to zero? ›
Any money you contribute to your 401(k), such as money contributed via payroll deduction, is money you can't lose. That employer can't take that money from you, even if you leave the company entirely. But there is another portion of your retirement plan you may not be able to claim: your vested balance.
Can I close my 401K and take the money? ›
The short answer is that yes, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences.
Can my 401k be wiped out? ›
After you leave the company, if your 401(k) balance is less than $1,000, your employer can cut you a check. Your employer can move the money into an IRA of the company's choice if your balance is between $1,000 and $5,000.
Can I keep my 401k with my old employer? ›
Leave your account with your former employer.
If your plan sponsor allows it, you can keep your retirement savings in their plan after you leave. While your earnings will still grow tax-deferred, you won't be able to contribute additional money to the account, though you can continue to manage your investments.
Are people still losing money in their 401k? ›
Rather, it's an investment option that will grow and fall over time. In fact, a recent Fidelity Investment's study found that the average 401(k) account balance in 2022 was down 23% from the prior year. If you constantly check your invested money, it may seem like your account balance is continuously in the red.
At what age does your 401k have to be depleted? ›
Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
Can I empty my 401k at any time? ›
What is a 401(k) early withdrawal? Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn.
How hard is it to cash out a 401k? ›
Generally, you'll need to complete some paperwork, and describe why you need early access to your retirement funds. Unless you're 59 1/2 or older, the IRS will tax your traditional 401(k) withdrawal at your ordinary income rate (based on your tax bracket) plus a 10 percent penalty.
Yes, it's possible to make an early withdrawal from your 401(k) plan, but the money may be subject to taxes and a penalty. However, the IRS does allow for penalty-free withdrawals in some situations, such as if the withdrawal purpose qualifies as a hardship or certain exceptions are met.
Can I move my 401k to a cash account? ›
You can roll funds from an old 401(k) into another tax-advantaged retirement account, cash it out, or keep it with an old employer.
Can I temporarily stop 401k? ›
If you don't want to invest in your 401(k), here's how to opt out or stop your contributions. If you're not interested in making paycheck contributions (known as deferrals) into your Guideline 401(k) or you'd like to pause them temporarily, you can opt out at any time by logging in your account.
Is there a way to stop 401k from losing money? ›
1. Make sure your investments are well diversified. The first thing you should do if your 401(k) or individual retirement plan (IRA) is losing money is to check that you are well diversified. You want your money distributed among many stocks, bonds, and other investment products.
What is the penalty for Cancelling 401k? ›
Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn.
How can I break my 401k without penalty? ›
Common penalty-free exceptions
- You are terminally ill.
- You become or are disabled.
- You gave birth to a child or adopted a child during the year (up to $5,000 per account).
- You rolled the account over to another retirement plan (within 60 days).
- Payments were made to your beneficiary or estate after you died.
