Can I Freeze My 401k? What It Means & Your Options

A 401(k) plan serves as a tax-advantaged retirement savings vehicle. The concept of “freezing” a 401(k) is not a formal financial term, but it commonly refers to scenarios where access to or contributions for the account are restricted. This can involve an individual stopping personal contributions, an employer ceasing contributions, or an individual attempting to access funds. Understanding these situations is important for managing retirement savings.

Adjusting Your Contributions

Individuals can modify or stop their personal contributions to a 401(k) plan. This typically involves contacting the human resources department or accessing the plan administrator’s online portal. Through these channels, an employee can change their contribution rate, including setting it to zero percent to temporarily or permanently pause deferrals from their paycheck.

Stopping personal contributions does not affect the existing balance within the 401(k) account; the accumulated funds remain invested and continue to grow or decline based on market performance. However, discontinuing contributions often impacts eligibility for employer matching contributions. Many employers offer a matching contribution, which usually requires the employee to contribute a certain percentage of their salary to receive the full match. If an employee stops contributing, they may forfeit this “free money” from their employer, which can significantly slow the growth of their retirement savings. Contributions can be resumed later by following the same process through HR or the plan’s online system.

Accessing Your Funds

Accessing funds from a 401(k) plan, sometimes called “unfreezing” an account, is subject to strict rules ensuring the money is used for retirement. Qualified withdrawals, typically made after age 59½ or upon separation from service at age 55 or older, are taxed as ordinary income but avoid additional penalties. Distributions taken before age 59½ are non-qualified withdrawals, subject to ordinary income tax and an additional 10% early withdrawal penalty imposed by the IRS. This penalty applies unless a specific exception, outlined in Internal Revenue Code Section 72, is met.

Hardship Withdrawals

Hardship withdrawals are one exception to the 10% penalty, allowing access to funds for an “immediate and heavy financial need.” Reasons for hardship include certain medical expenses, costs to prevent eviction or foreclosure, and expenses for the purchase or repair of a principal residence following a casualty. While a hardship withdrawal may avoid the 10% penalty, the withdrawn amount is still subject to ordinary income tax and cannot be repaid or rolled over.

401(k) Loans

Another avenue is a 401(k) loan, which allows participants to borrow against their vested account balance, typically up to 50% or $50,000, whichever is less. These loans must be repaid with interest within five years, usually through payroll deductions, and are not subject to tax or penalties if repaid according to the terms. Failure to repay a 401(k) loan can result in the outstanding balance being treated as a taxable distribution, subject to income tax and potentially the 10% early withdrawal penalty.

Employer-Initiated Changes to a 401(k) Plan

Employers can implement changes to a 401(k) plan that employees may perceive as “freezing” the plan. One common scenario involves an employer suspending or reducing new contributions, such as matching contributions or profit-sharing. This can occur due to financial difficulties or corporate restructuring, though existing employee contributions remain unaffected. Employers are required to provide notice to plan participants regarding such changes, particularly for safe harbor plans, typically 30 to 90 days in advance.

In some situations, an employer might close the plan to new participants or terminate the entire 401(k) plan. When a 401(k) plan is terminated, all affected participants become 100% vested in their account balances, including employer contributions that may have been subject to a vesting schedule. Plan participants are provided options for their vested balances, which include rolling over the funds into an Individual Retirement Arrangement (IRA) or a new employer’s 401(k) plan. The Department of Labor (DOL) and IRS regulations require specific notifications and procedures for plan terminations, ensuring participants are informed of their options.