Can You Freeze Your 401(k)?

A 401(k) is an employer-sponsored retirement savings plan that offers tax advantages, allowing individuals to invest a portion of their paycheck before taxes are deducted. While the term “freeze” is not a formal financial or legal designation for a 401(k), it is a common expression referring to pausing or halting certain activities related to the account. This can include stopping regular contributions, managing the account after leaving an employer, or temporarily pausing distributions. The market value of investments within a 401(k) is not literally frozen; it fluctuates with market performance.

Stopping Contributions

Individuals may choose to stop contributing to their 401(k) for various reasons, such as financial hardship, needing to prioritize other financial goals like debt repayment, or during a job change where contributions automatically cease. Stopping contributions does not affect the existing balance, which remains invested and subject to market fluctuations. The process for pausing contributions is typically managed through the employer’s payroll department or the 401(k) plan administrator.

To stop contributions, individuals contact their human resources department or the plan administrator. This often involves accessing an online portal or submitting a form to adjust the contribution percentage to zero. While many plans allow participants to change their contribution amount at any time, some employers may limit adjustments to specific periods, such as quarterly or annually. Stopping personal contributions may also mean foregoing employer matching contributions. If changes are made close to a payroll run, the new rate might be reflected in the subsequent payroll period.

Managing Your Account After Employment Ends

When an individual leaves their job, their 401(k) account becomes inactive for new contributions, but the funds remain the individual’s property. The vested balance, which includes employee and the vested portion of employer contributions, is retained. Individuals have several options for managing this inactive account, and the choice often depends on the account balance and personal preferences.

One option is to leave the funds in the old employer’s plan, if allowed, which is often the case for balances exceeding a certain threshold, such as $5,000. While the funds continue to grow tax-deferred in the old plan, new contributions cannot be made, and withdrawal options may be limited. Alternatively, individuals can roll over the funds into a new employer’s 401(k) plan, if accepted. This can simplify management by consolidating retirement savings in one place. To initiate this, one typically contacts the new plan sponsor or HR department to confirm their plan accepts rollovers and then coordinates with the old plan administrator.

Another common choice is rolling over the funds into an Individual Retirement Account (IRA), which can offer a broader range of investment choices and more control. This process usually involves opening an IRA with a financial institution and then instructing the old 401(k) provider to transfer the funds directly to the new IRA custodian. A direct rollover, where funds are sent directly from the old plan to the new account, avoids potential tax withholding. Cashing out the funds is also an option, though it is generally considered a last resort due to potential tax implications and penalties, especially if done before age 59½.

Pausing Distributions

Individuals who have begun receiving distributions from their 401(k), typically in retirement, can usually adjust or temporarily pause these payments. Once distributions commence, the schedule is set up with the plan administrator. Changes involve contacting the 401(k) plan administrator directly.

The process for pausing or modifying distributions generally requires submitting a request to the plan administrator to halt or adjust the payment schedule. It is important to be aware of Required Minimum Distribution (RMD) rules, which mandate that individuals begin withdrawing minimum amounts from most tax-deferred retirement accounts, including 401(k)s, once they reach a certain age, currently age 73. While distributions can be paused or adjusted, the underlying investments within the account remain active and are not “frozen” from market performance. Therefore, even when distributions are paused, the account value will still fluctuate with the market.