What Is The Difference Between a Thrift Account & a Traditional IRA?
A thrift account, also known as a thrift savings plan, is a government-sponsored retirement plan for federal government employees and members of the military. IRA stands for individual retirement account and is an independently operated retirement savings plan. Both have similar tax benefits, but who can contribute, who runs the plan, how contributions are made, how much can be contributed per year and withdrawal conditions for each plan differ.
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Who Can Contribute
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To participate in a thrift savings plan, you must be employed by the federal government. Anyone is allowed to contribute to an IRA.
Who Runs the Plan
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A traditional IRA is set up by an individual at a bank or brokerage firm. The individual is completely in charge of making contributions to the IRA. In a thrift savings plan, the Federal Retirement Thrift Investment Board controls the plan, and the agency the employee works for is the one in charge of making deposits. The government employee tells the agency how much he or she wants to deposit each month, and the agency takes it out of the paycheck. For example, if you wanted to deposit $440 each month, the agency would pay you $440 less and put that money into your account.
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Contribution Limits
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The annual contribution limit for an IRA is $5,000 as of 2009. If you are 50 years old or older, you may set aside an additional $1,000 for a total of $6,000. For a thrift savings plan, you may contribute $16,500 as of 2009. If you are age 50 or older, you may save an additional $5,500 for a combined total of $22,000.
Withdrawl Conditions
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Under most circumstances, the money in a thrift savings plan or a traditional IRA must remain in the account until you are 59 1/2, and then it can be withdrawn penalty-free. The money in a thrift savings plan can only be withdrawn early without a penalty for a hardship event, such as the permanent disability or the death of the account holder. The IRA allows the same hardship withdrawals but also allows a first-time homebuying withdrawal of up to $10,000 as long as the money has been in the account for five tax years.
Tax Advantages
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The tax advantages of a traditional IRA and a thrift savings account are the same. The amount of money you contribute up to the limit is tax-deductible for that year. For example, if you put $2,500 in either type of account, you could deduct $2,500 from your taxable income. The money will grow tax free while it is in the account. However, when you withdraw the money from either account at retirement it is subject to taxation.
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