What Type of IRA Is a Thrift Incentive Plan?

Thrift incentive plans typically provide myriad investment options.

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Companies offer various types of retirement plans to accommodate both their needs and the needs of their employees. Some companies provide a thrift incentive plan as a retirement plan option. A thrift incentive plan operates as a defined contribution plan to which an employee contributes before-tax dollars. Many employers match all or a portion of their employees' contributions. Nearly all thrift incentive plans are 401(k) plans; none are IRAs.


A thrift incentive plan is an employee benefit; a retirement plan that both employees and their employers make contributions to typically on a before-tax basis. Often called a thrift plan, one of its defining characteristics is that the employer makes contributions to the plan. An employee uses payroll deductions to transfer funds into an account. These funds are invested according to selections previously made by the employee. These funds, both the initial investments and the returns on the investments, accrue tax that's deferred until the employee withdraws the funds, usually post-retirement.

A 401(k) Plan

In November 1981 the IRS issued regulations under Internal Revenue Code Section 401(k) officially allowing the creation of 401(k) plans. Before this rule, many companies offered thrift plans as a retirement plan choice to their employees. 401(k) rules enabled companies to adopt plans that operated as bonus and profit-sharing plans or as thrift plans. Most companies with existing thrifts plans subsequently converted to the 401(k) thrift plan model. Accordingly, a thrift plan is a type of 401(k) plan that many of us are familiar with. It has automated salary deduction options and, usually, employer matching contributions.


As with IRAs and traditional 401(k)s, thrift plans have annual contribution limits. For 2013 the IRS set the annual contribution limit in dollar terms at $51,000 total or $17,500 when solely contributing pre-tax dollars or to a thrift Roth. In percentage terms, employees can contribute a maximum of 43 percent of their annual compensation. This drops to 25 percent when using pre-tax dollars or when contributing to a thrift Roth. Employees can also contribute up to 18 percent of their compensation after-tax. The percentages cannot exceed the dollar amounts of the annual contribution limits.


If an employee reaches the pre-tax and Roth $17,500 contribution limit, the IRS allows the employee to switch to contributing on an after-tax basis. However, the employee cannot exceed the after-tax 18 percent limit. The maximum compensation upon which the IRS bases the percentage limits is $255,000 for 2013, up from $250,000 for 2012. Compensation includes salary or wages, bonuses, overtime and shift differentials. An employee aged 50 or older can make additional catch-up contributions of up to $5,500.