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
This freeze can occur due to various reasons, such as bankruptcy, mergers, or acquisitions. When a 401(k) is frozen, new contributions are halted, and participants may face restrictions in managing their account. However, the accumulated assets remain in the plan and continue to grow or decline depending on the market.
What happens to a frozen 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? ›
Vested Balance
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 a company legally hold your 401k after you quit? ›
For amounts below $5000, the employer can hold the funds for up to 60 days, after which the funds will be automatically rolled over to a new retirement account or cashed out. If you have accumulated a large amount of savings above $5000, your employer can hold the 401(k) for as long as you want.
Should I freeze my 401k? ›
Market downturns can make you feel like you're even more behind in your savings goals. “We believe the key thing to do is to keep your 401(k) funds invested. If you take them out of the market, you may lock in losses and could miss out on opportunities for market rebounds.”
Can I close my 401K and take all the money? ›
You can make a 401(k) withdrawal in a lump sum, but in most cases, if you do and are younger than 59½, you'll pay a 10% early withdrawal penalty in addition to taxes. You can take a 401(k) loan against your balance but will be subject to penalties if you default.
Can you lose your 401K if the company closes? ›
If your company closes, the money in your 401(k) doesn't disappear. The money will remain in your employer's plan unless the plan itself is terminated. In this case, the money in your account will roll over to another account on your behalf or get distributed directly to you.
Can I lose my 401k if the market crashes? ›
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
Are 401ks safe in this economy? ›
Your 401(k) probably is, too. Optimism on Wall Street is boosting stocks — and many of the retirement accounts that are tied to them. Nearly everyone, from the Federal Reserve to big-bank chiefs, thought a recession was likely to hit last year.
Is it ever OK to cash out 401k? ›
You can make a 401(k) withdrawal at any age, but doing so before age 59½ could trigger a 10% early distribution tax, on top of ordinary income taxes. Some reasons for taking an early 401(k) distribution are penalty-free, such as a hardship withdrawal or if you leave your job.
Transferring Your 401(k) to Your Bank Account
That's typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
At what age is 401K withdrawal tax free? ›
401(k) withdrawals after age 59½
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
How do I avoid 20% tax on my 401K withdrawal? ›
One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed. Some methods allow you to save on taxes but also require you to take out more from your 401(k) than you actually need.
What can you do with a frozen 401k? ›
There are several options for managing a frozen 401(k). You can leave the funds in the account, allowing them to continue growing tax-deferred. Alternatively, you could roll over the assets into a new 401(k) plan or an Individual Retirement Account (IRA).
What does it mean when a retirement plan is frozen? ›
A pension freeze affects benefit accruals. This means that your pension will no longer increase in value as of the date of the freeze; the amount of the pension will not continue to grow after the benefit accruals are frozen. You will, however, continue to accrue vesting credit. Types of benefit freezes: hard or soft.
What are three disadvantages of 401k accounts? ›
Challenges of a 401(k) retirement plan
- Most plans have limited flexibility as it relates to quality and quantity of investment options.
- Fees can be high especially in smaller company plans.
- There can be early withdrawal penalties equal to 10% of the amount withdrawn before age 59 1/2.
Amounts that are not vested may be forfeited by employees when they are paid their account balance (for example, when the employee terminates employment) or when they don't work more than 500 hours in a year for five years.
What happens if I don't rollover my 401k from my previous employer? ›
Failure to follow 401(k) transfer rules may result in extra penalties and taxes. For example, if you don't do a direct rollover and receive the funds from your previous employer's plan in the form of a check, a mandatory 20% withholding will apply.
Can I withdraw my 401k if I no longer work for the company? ›
If your 401(k) has less than $1,000 when you quit a job, the IRS allows the plan administrator to automatically withdraw your money and send you a check, minus 20% in taxes, per the IRS. You can also initiate a rollover: a direct transfer of your money from a 401(k) account to another tax-advantaged retirement account.
Can the IRS freeze your 401k? ›
Legally, the IRS has the right to seize funds from any of the following retirement accounts to cover unpaid tax liabilities: 401(k)s. Independent Retirement Accounts (IRA). Self-employed plans such as SEP-IRAs and Keogh plans.
