Individual Development Accounts (IDAs) may be the best resource for low-income Americans that you have never heard of. They are matching savings accounts that are targeted to promote savings in lower-income families and help them to achieve a savings goal that might otherwise be beyond their reach. Typical goals are buying a home, starting a small business, or paying for education.
Program sponsors (generally non-profit organizations) team up with banks and credit unions to offer IDAs. These sponsors bring in qualified participants, help them outline their goals, and offer necessary training to achieve their goal. The training may include basic principles of saving and budgeting as well as counseling that is more specific to a savings goal.
Meanwhile, the financial institution contributes matching funds within some set limit, as chosen by the sponsor. The participant receives notices on their statements summarizing the amount of matching funds. Matching funds may be withdrawn after a set time with the approval of the sponsor.
Matching funds for your IDA may be dollar-for-dollar to your savings or a set percentage of your savings contributions. Typically, the programs will have an overall dollar-matching limit suitable to the goal, either annually or over the entire course of the IDA. IDA programs can last anywhere from six months to five years, but one- to three-year programs are most common.
Eligibility is usually based on three aspects of financial health:
- Income and Earnings – There will be a maximum household income level to qualify for IDA assistance, depending on the sponsor and area economic factors. The limit may be based on a percentage of the federal poverty guidelines per household size (200% is common), or it may be based on the median income for your area (generally 65%-85%).
Your savings component needs to be from earned income and not gifts. Earned income can include sources such as unemployment, disability, or Social Security checks – but the important thing is that you understand how to save and manage a steady income stream. The sponsor will work with you to make sure that the savings goals are realistic for the income stream with which you have to work.
- Net Worth – Some IDA programs look at total assets such as your car, equity in your home, and other account balances when determining eligibility. Make sure that you understand the sponsor’s criteria before you apply.
- Credit and Debt – If you have a bad credit history or excessive loan debt, you have a different problem to tackle first before you can start saving toward more ambitious goals. Programs may allow you to qualify conditionally for an IDA based on paying off loan balances and/or completing a credit-counseling course.
Assuming that you qualify and are interested in an IDA, your next step is to find a grantee or sponsor near you and verify that its mission and criteria fit with your goals. IDA resource directories by state and city may be found at the Office of Refugee Resettlements and www.idanetwork.org.
The Corporation for Enterprise Development (CFED) estimates that IDAs offer a five-to-one economic return to society. According to CFED, there are over 85,000 IDAs overseen by over 1,100 sites across America. These IDAs have resulted in 6,400 new business enterprises and expansions, 7,200 educational experiences, and over 9,400 home purchases. Arguably, far less of those events would have taken place without the assistance of IDAs.
IDAs are complete win-win situations for low-income Americans. They help in achieving financial goals, build strong savings habits, promote home ownership and individual economic improvement…and they provide essentially free money. How many programs can honestly offer that benefit?
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