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What is a Thrift Plan?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

A thrift plan is a plan which people can use to save for retirement with the assistance of contributions from their employers. Thrift plans are structured as tax deferred retirement accounts, which means that people do not pay taxes on the money they have saved in a thrift plan until they take money out. Once someone enters retirement, regular disbursements are made from the thrift plan to provide the retiree with a steady income which can be used in retirement.

The structure of a thrift plan can vary. As a general rule, the yearly contributions are limited by law so that people cannot save money above a certain amount in the plan. Employers can make a one to one match for contributions, or they may work out a different matching schedule. The employee decides how much money to set aside in the thrift plan and the money is taken directly out of the employee's paychecks, before taxes have been calculated. These types of pension plans are known as defined contribution plans because the employee defines the amount of contributions.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Employees can take their thrift plans with them and convert plans, and are allowed to move money between thrift plans without a cap on these types of contributions. The goal of a thrift plan is to support people who wish to save money so that they have a reliable income available during retirement. Funds deposited in the plan are invested so that an employee's contributions will grow over time. People are usually able to diversify their investments between several approved investment opportunities.

A notable example of a thrift plan is the Thrift Savings Plan (TSP) available to employees of the United States government. People who participate in the TSP can invest in a number of funds approved by the government and will have their contributions matched by the government. For people transitioning into government employment, funds from an older thrift plan can be converted and added to the employee's TSP, and vice versa.

Saving for retirement can get complicated. Before investing in a thrift plan, it is advisable to meet with a financial consultant to discuss investment options and to determine which choice would meet someone's needs most appropriately. Financial consultants have a great deal of experience and are also familiar with the best investment options available to their clients at any given time. Some banks offer financial consulting among the services available to their customers.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

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