Did you know that you could potentially triple your savings for a down payment on a home loan, starting a business, or even going back to school? If you’re willing to do some legwork and learn even more about managing your finances, it’s time to look into an Individual Development Account (IDA).
An IDA account is essentially just a savings account that offers matched funds within a specified time frame. Similarly set up like a 401(k) account, this provides extra support to qualifying individuals. If you are interested in qualifying you either need to be low-income and/or low-wealth. You could reach your goals with an IDA. The money saved can go towards the financial goals and help families invest in long-term assets that have a high-return. Common goals of IDA holders are usually to achieve ownership whether a home or a small business. Another popular goal is to get a higher education.
IDAs are an option that is offered by a partnership between sponsoring organizations and financial institutions like banks. The sponsoring organizations are usually non-profits or a part of local government agencies. These accounts have been around since the 1990’s as a strategy to build assets.
IDA programs all have the same goal but are different in their set up. Regardless, they will all match funds of the eligible low-income individuals that have these accounts. The savings that people get from an IDA should be used for goals like becoming a homeowner, getting a higher education, or owning a small business.
The History of Individual Development Accounts
Sociologist Michael Sherraden first discussed these accounts in his 1991 book, Assets and the Poor: A New American Welfare Policy. He acknowledged the fact that a normal welfare program is different from an IDA program in it’s setup. Instead it would provide low-income individuals the opportunity for actual assets. Similar to the goal of TANF, IDAs promote individual development.
In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act drastically reformed how the government dealt with welfare. It was in response to the debate over welfare. Many people believed that welfare was acting as a crutch and did more harm than good. This act addressed those concerns. A part of this act was the addition of federal funding towards this program.
Two years later in 1998, the Assets for Independence Act granted the Department of Health and Human Services (HHS) the opportunity to give nonprofit organizations grant funds specifically for IDAs. They could do this through partnerships with local banks, financial institutions, qualified credit unions, tribal governments, local governments, and state governments.
Setup of IDAs
According to the Corporation for Enterprise, over 500 IDA programs are active across the country. Besides the 1998 Assets for Independence act, other key funders of IDA programs are the agency’s Office of Refugee Resettlement, Federal Home Loan Banks, Temporary Assistance for Needy Families program, local corporations, and philanthropies.
Since there are a lot of different sources of funding, IDA programs are set up differently in terms of design and qualifying criteria. Luckily, a lot of the programs have similar key components. If you are interested in qualifying, eligibility will vary. However, a good rule of thumb to follow is that annual household income has to be below a specified amount. This amount is typically 200% below the federal poverty level.
Using an IDA
Other potential criteria may include wealth limits and qualifying credit scores. People who are a part of these accounts are typically a part of the program for one to three years. The amount matched will vary. Typically these accounts match at a 1:1 rate. That means if you deposit $1 then $1 will be matched, totaling $2. However, according to the Office of Policy Development and Research, matched savings can even be as high as six matched dollars per every one dollar saved. That means if you deposit $1 then $6 additional dollars would be matched to total $7 in the account. Programs can also have annual caps and match limits over the lifetime of enrollment.
There are more options for an IDA account besides a higher education, homeownership, and small business ownership. Depending on the program, you may be able to use the money towards home repairs, retirement, work-related car purchases, and work-related computer purchases. Not only do these accounts have matched saving services, but they provide other services. They provide financial counseling, and training based on financial goals of the individual enrolled.
Understanding Individual Development Accounts and Homeownership
The big goal of IDAs is to help asset-building amongst low-income individuals. However, a part of that goal specifically is homeownership. When an individual achieves homeownership, there are multiple aspects of their life that may improve. Economists Raphael Bostic and Kwan Ok Lee found that low-income households that had the ability to make high down payments and build equity faster saw more financial benefits. In conclusion to their research, Bostic and Lee agreed that if low-income households improved their savings rates, then homeownership manageability would improve.
Homeownership is the most popular goal that people have when they use their IDA funds. Besides savings matches, popular services offered by IDA programs for homeownership include counseling that help consumers better manage their mortgage.
There have been many studies conducted in regards to IDA accounts. Researchers who looked into long-term effects of IDA programs found some interesting results. Overall the results showed that those who participated in IDA programs were able to achieve homeownership faster. Not only did they find this information, but they also found that the duration of homeownership, and success of homeownership increased, while instances of foreclosure decreased. It is important to note that program success varies by area.
The Department of Housing and Urban Development’s Family Self-Sufficiency (FSS) Program
This is another program that is able to help families who receive housing vouchers achieve the goal of self development and reduced welfare reliancy. If a family qualifies for this program, the head of the family and local Public Housing Authority (PHA) sign a Contract of Participation. This contract goes over the responsibilities of each party. These contracts are usually eligible for 5 years but have the option to be extended. The local PHA can increase the contract terms by another 2 years if deemed necessary. This program employs the same strategies of an IDA program for asset-building strategies. Other services provided by the program include additional financial literacy education and supportive services like education assistance and childcare.
Once done with the contract, the local PHA will manage and provide an escrow account for the recipient. This escrow account acts to provide an additional means of support. When a family’s income rises, so does their rent. However, when enrolled in the FSS program, the credits based on the elevated income go into the family’s escrow account. This acts similarly to the matched savings offered in IDA programs. Once complete with this program, recipients will be able to receive the amount that they banked as well as the interest accrued.
An important difference between IDA programs and HUD’S FSS program is how the funds are able to be used. In an IDA, you must spend the money on the goal you set. On the other hand, in HUD’S FSS program, the money doesn’t have any limitations.
Commonly Asked Questions About IDAs
Can You Provide a Basic Understanding of an IDA?
IDAs can be a bit complicated to understand. That is why some people may need a more simple explanation. Basically you can think of an IDA as a certain bank account that can help you reach your goals. These goals are usually to get an education, buy a home, or start a business.
How do IDAs Help Me Increase My Money?
The money that you earn from work needs to go into your IDA. Special funds will match your money that you deposit into your account. These funds can come from your state’s Temporary Assistance for Needy Families program or from “demonstration project” money.
What is “Demonstration Project” Money?
This is a form of money that helps a project. The money can help the project “demonstrate” a specific approach.
Why Do IDAs Match My Deposited Money?
IDAs are designed to help recipients achieve their goals. When the money deposited gets matched, it provides more opportunity. This opportunity can help recipients get long-term assets that people may normally struggle more to get. These assets can provide more financial stability.
Are All IDAs the Same?
No. Individual Development Accounts vary depending on the area you are in. Each program has its own design.
Who Qualifies for an IDA?
You may be eligible for an IDA if you are currently working and receive TANF benefits or if you are working and have other qualifying criteria met. For more information about eligibility you can contact your state’s TANF office. From there they could provide you with the information you need.
Can an IDA Impact My SSI Benefit?
An IDA could impact your SSI Benefit. However, not how you might think! This account could actually increase your SSI benefits. This could happen because money that goes into your IDA will not be counted towards income for your SSI benefits.
Would I Need to Use IDA Funds for a Specific Goal?
Even though commonly people choose to become a homeowner, start a business, or pursue a higher education, every program is different. You may have the ability to use the money on other goals like home repairs, retirement, a work-related car, or a work-related computer. Some other programs may limit what you can spend the money on. While one program may offer more options, another may limit them. It depends on the area.
Is an IDA a Good Option for Me?
An IDA may be a great option for you. Equally, it may not. An online search cannot decide that for you. Instead, you will need to decide that with your state’s office. Here they can determine your eligibility based on their criteria. If you qualify for the program, you should try to get all the help you can get.
What are Some Components of Eligibility for an IDA?
Even though every IDA program is different, there are some aspects you can keep in mind when seeing if you are eligible. When determining eligibility for this program, factors like Income, earnings, net worth, and credit history all may be examined.
How Long Can I Save with My IDA?
Every program has their own guidelines for the terms of the account. You can typically see recipients have these accounts between one to three years.
Do I Need to Save a Certain Amount Every Month with an IDA?
There may be some rules in place for account deposits. Some programs may require monthly minimum deposits. Others may not have these rules. It depends on the program you are enrolled in. Before you decide to enroll in an IDA, you should see if this applies to your account. You want to have a clear understanding of the terms before you enroll.
Is There a Certain Amount of Money That I Need to Put Into an IDA?
Maybe! Some programs may only be able to match a specific amount every year. Even though you can continue to use the account as you normally would, the amount of money that is capable of getting matched may be limited. Again, it is important to discuss all the details of your specific IDA program before enrolling.