401(k) savings money

The decision to freeze a 401(k) is made by company management. This often occurs after a merger, while the new company decides what to do with its inherited 401(k) plan. If your 401(k) has been frozen, you won’t be able to make any withdrawals or make any new contributions as long as the freeze continues. In most cases, you can move assets from one investment to another and change the composition of your retirement portfolio during a freeze.

How Long Can A 401(k) Freeze Last?

There are no legal restrictions on how long a 401(k) plan can remain frozen. The freeze could last indefinitely until the new management decides which direction to take. Basically, management has three options for what to do with a frozen 401(k) plan:

  • Continue the plan: Existing employees with the acquired company can continue with the existing 401(k), while new employees will likely be directed into the new company’s plan.
  • Merge the 401(k) into another plan: After a merger, the new employer may decide to merge the old 401(k) plan with its own. In that case, your assets will be rolled over into the new employer’s plan and the freeze will end on your account. This process may take some time, as 401(k) plans are complex.
  • Terminate the plan: If the new company decides to terminate your 401(k) plan, it can only do so after the IRS indicates in writing that everything has been handled properly. After the plan is terminated, all your contributions, vested matches, and profits are returned to you. Your 401(k) funds can be rolled over into the new employer’s plan if it allows for rollovers.

What About Required Minimum Distributions?

A required minimum distribution is the minimum amount you must withdraw from your retirement account each year after you reach the age of 70 ½. If you have reached that age, the 401(k) plan custodian should still pay out required minimum distributions as directed by you, even if the plan is frozen. If that does not occur, request your required minimum distribution in writing and document your efforts to protect yourself from IRS penalties.

What Are Your Options If Your 401(k) Has Been Frozen?

If you are not happy with having your 401(k) account frozen indefinitely, or you don’t want to accept any of the above possible outcomes, you have another option on what to do with your funds. You can roll them over into an IRA. When you use 401(k) funds to establish a rollover IRA, they maintain their tax-advantaged status and you will not be hit with early withdrawal penalties. To protect yourself against tax penalties, arrange for a direct, trustee-to-trustee transfer of your funds from the 401(k) to the IRA.

When your 401(k) is frozen and you can’t make contributions or take money out, it can interfere with your retirement planning. Our knowledgeable agent can review your options with you so you can better decide how to proceed.