What are rollover contributions in the context of 401(k) plans?

Rollover contributions refer to the movement of funds from one retirement account to another, particularly from existing retirement plans such as another 401(k) or an individual retirement account (IRA) to a new 401(k) plan. This process allows individuals to maintain the tax-deferred status of their retirement savings while enabling them to consolidate their accounts for better management and potentially enhanced investment options.

When a participant changes jobs or retires, they often choose to roll over their old plan's balance to a new employer's 401(k) plan or into an IRA. By doing this, they can avoid the tax implications that would otherwise arise from cashing out their retirement benefits. It's a critical mechanism within retirement planning that ensures individuals keep their retirement funds intact and continue to work toward their long-term financial goals.

The other options do not accurately describe rollover contributions. For instance, transferring funds from one investment to another does not address the nature of rollover contributions, which focuses specifically on retirement account transfers. Contributions made by employers are regularly scheduled payments based on a plan’s terms, and excess contributions relate to amounts that surpass allowable limits, neither of which captures the essence of a rollover.