Individual Development Accounts
Individual Development Accounts (IDAs) are savings accounts that provide public matching funds when low-income families save. They also provide extensive financial education that helps families reach their goals, including purchasing a home and starting a business. This article covers the purpose IDAs and their features.
An Individual Development Account (IDA) is a special savings account that offers per-dollar matching contributions for savers who want to buy a major asset, such as a home, start a small business, or advance their education. These programs are typically run by community charities, local government agencies, and faith-based organizations, and donors who support these programs are eligible for a tax deduction. IDAs offer much more than matching dollars; however, many programs also provide financial education, case management, or homeownership counseling.
IDA programs emerged in the 1990s as an asset-building strategy for financially challenged families, and research shows that they can help people accelerate their progress toward homeownership, achieving higher education goals, starting a small business, or buying a first home. In order to qualify for an IDA, you must meet certain income standards and commit to regular deposit amounts over the course of several years.
These accounts can vary widely, but most IDA programs limit the annual household incomes eligible to participate to 200 percent of the federal poverty level or less. Most require participants to be working or have recent employment history. Some programs also restrict how the deposited funds can be used, such as purchasing a specific housing type or paying for a particular college degree.
Who is Eligible for an IDA?
To be eligible for an IDA, you must have earned income from employment and reside in the state where you want to open the account. In order to be eligible for an IDA, the participant’s annual income must be less than 200% of the federal poverty level for a household of that size. Additionally, you must have earned income from a job. Some IDAs may have slightly different earned income requirements and allow you to qualify if your earnings are between 65-85% of the median income in your area. If you are unsure whether you qualify, you can use an online federal poverty calculator.
Generally, a community organization or nonprofit with an approved bank or credit union relationship must administer the IDA program. You must attend a mandatory financial education class and can only withdraw the IDA funds once you have reached your savings goal.
How Beneficial is an IDA Program?
Research has found that IDAs are effective in increasing savings and that the increased likelihood of saving is not simply due to the dollar-for-dollar matching. While conventional tax incentives like IRAs and 401(k) contributions are important to encourage saving, researchers find that IDA programs can also increase the propensity to save, as they offer generous match payments independent of taxes and continue to provide encouragement and reminders to save.
Depending on the program, there are some restrictions on how much one can save and the type of asset one can save. For example, some IDA programs only allow savings towards homeownership, while others are more flexible and will let savers use their funds to buy other assets, such as a work-related car or computer. Additionally, many IDA programs require an individual to save for five years to achieve their goal. This is because it takes time to accumulate enough wealth to purchase a home or start a small business.
How to Apply For An IDA?
Once you’ve met the basic eligibility criteria, you can apply to an IDA through a local community-based organization that offers the program. They’ll be able to tell you more about the application process, including what the specific requirements are in your area. You’ll likely be required to attend free financial literacy classes as part of the program, so it’s important that you work with an agency that focuses on these topics.
As you save, your IDA account balance will grow through per-dollar matching contributions from the program. The match rate varies from program to program, but it’s usually around 2:1. That means for every dollar you save, the agency will match it with two dollars.
You can also open an IDA to save for a small business or education expenses, though it’s important to remember that these accounts are only available while you’re receiving Family Assistance. If you withdraw the funds for a different purpose, you’ll be penalized and may lose future opportunities.
