Can You Pause Your 401k Contributions?

A 401(k) is an employer-sponsored retirement savings plan. Employees contribute a portion of their paycheck directly into this account, often before taxes are deducted, which can reduce current taxable income. Funds are typically invested in various options, such as mutual funds, allowing the money to grow over time. This plan serves as a tax-advantaged way for individuals to save for their long-term financial future.

Stopping 401(k) Contributions

Employees can generally pause their 401(k) contributions if their financial circumstances change. The process involves notifying the employer’s human resources department, payroll, or the 401(k) plan administrator. Many plans offer an online portal to adjust contribution percentage.

To stop contributions, an employee changes their deferral rate to zero percent or a zero dollar amount. This adjustment is made through the online system or by submitting a specific form. Confirm payroll deadlines to ensure the change takes effect with the next pay period.

Have employee identification information ready when contacting the relevant department or accessing the online portal. Understanding the specific procedural requirements of a given plan ensures a smooth process. Plan documents or the benefits administrator can provide guidance on these steps.

Understanding Changes After Pausing

When 401(k) contributions are paused, no new money will be deducted from the employee’s paycheck and deposited into the retirement account. This means the employee’s take-home pay will increase, as the pre-tax or after-tax deductions for the 401(k) cease.

Employer matching contributions will also stop when employee contributions are paused. Most employer match programs are contingent upon the employee making their own contributions to the plan. Therefore, ceasing personal contributions means foregoing any potential matching funds from the employer.

Existing funds within the 401(k) account will continue to be invested and will grow or decline based on market performance. Without new contributions, the account will not benefit from additional compounding. Growth applies only to the balance accumulated before contributions stopped.

Pausing contributions does not typically affect the vesting schedule of employer contributions already made to the account. Employees remain vested in contributions received up to the point of pausing, according to the plan’s specific schedule. However, no further employer contributions will accrue new vested amounts while the employee’s contributions are stopped.

Resuming 401(k) Contributions

Restarting 401(k) contributions follows a similar process to pausing them. Employees need to contact their employer’s HR department, payroll, or the plan administrator to initiate the change. Many plans allow employees to adjust their contribution rate through an online portal.

Employees will need to specify their desired new contribution percentage or dollar amount. The change usually takes effect with the next available payroll cycle, depending on when the request is submitted relative to payroll processing deadlines. It is advisable to submit the request in advance of these deadlines to ensure timely resumption.

Some 401(k) plans might have specific enrollment periods or waiting periods for new participants. For employees restarting contributions after a pause, these waiting periods are less common. Employees should confirm with their plan administrator if any such conditions apply to their specific situation.

Accessing Your 401(k) While Employed

Employees may access funds from their 401(k) while still employed through specific mechanisms such as loans or hardship withdrawals, if offered by the plan. Each option has distinct rules and requirements set by the IRS and the individual plan.

401(k) Loans

A 401(k) loan allows an employee to borrow money from their vested account balance. Not all plans offer loan provisions, so employees must confirm this option with their plan administrator. The maximum amount that can be borrowed is generally the lesser of $50,000 or 50% of the vested account balance. A minimum of $10,000 may apply if 50% is less than that amount.

Repayment terms for 401(k) loans typically require the loan to be repaid within five years, though a longer period, up to 15 years, may be allowed for the purchase of a primary residence. Repayments are usually made through payroll deductions, with interest paid back into the employee’s own 401(k) account. A written loan agreement outlining the terms, interest rate, and repayment schedule is required.

Hardship Withdrawals

Hardship withdrawals permit access to 401(k) funds under specific circumstances defined by the IRS as an “immediate and heavy financial need.” Common qualifying events include unreimbursed medical expenses for the employee or dependents, costs to prevent eviction or foreclosure on a primary residence, burial or funeral expenses, and certain higher education expenses.

To request a hardship withdrawal, employees must apply through their plan administrator and provide documentation demonstrating the financial need. The withdrawal amount is limited to what is necessary to satisfy the specific need. These withdrawals are generally subject to income tax and may incur an additional 10% early withdrawal penalty if the employee is under age 59½, unless an IRS exception applies.