In the United States, an Individual Development Account (IDA) is a matched savings account that enables low-income American families to save, build assets, and enter the financial mainstream. IDAs supplement the savings of low-income households with matching funds drawn from a variety of private and public sources.
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Matched IDA savings accounts are typically restricted to three uses:
IDAs reward the monthly savings of working-poor families who are trying to buy their first home, pay for post-secondary education, or start a small business. Additionally, some IDA programs allow participants to save for home repairs, computers, automobiles, or retirement.[1] These matched savings accounts are similar to 401(k) plans and other matched savings accounts but include flexibility save for a range of asset investments.[2]
While anti-poverty policy makers have traditionally focused on issues of income and consumption, an expanded vision of poverty alleviation has emerged in recent years - one that encourages savings, investment, and asset accumulation in conjunction with, not instead of, traditional anti-poverty programs. Assets play a vital role in poverty alleviation by providing not only economic security but also a psychological orientation that encourages low income families to save and plan for the future.
Pioneered by Michael Sherraden in 1991, IDAs represent a new approach to combat poverty. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 authorized states to use federal grants to fund IDAs for individuals eligible to receive federal assistance under the act. Most IDAs are offered through partnerships between local non-profit organizations and financial institutions. The non-profit, or program sponsor, recruits participants into the program and provides IDA counseling and financial education. Once recruited, IDA participant open an IDA account with a partnering financial institutions and begins saving in the IDA. Every dollar that is saved in an IDA is matched with donations from government agencies, non-profit organizations and private companies.[1] Participant's savings are usually matched at 1:1 or 1:2 rate. Individual and matching deposits are never co-mingled; all matching dollars are kept in a separate, parallel account. When the IDA accountholder has accumulated enough savings and matching funds to purchase the asset (usually over two to four years) and has completed a required financial education course, payments from the IDA are made directly to the asset provider to complete the asset purchase.
IDA programs differ in eligibility guidelines, however, some of the general requirements for participants are based on a specified annual income level, earnings, net worth and credit history.[1]
Data from AFI, ORR and the American Dream Demonstration demonstrate the following results since 1999:[3]
Research on the impact of IDA programs has revealed:
While key findings show that IDAs do lead the poor to save or acquire assets, not all indicate that IDAs necessarily increase net worth (assets minus debt). While costs are declining, IDAs can be expensive to administer and run the risk of being used by the poor as a checking and savings account in addition to a means of accumulating wealth, reflecting in part the dearth of savings products aimed at the poor.[4]
The Department of Health and Human Services currently funds the majority of IDAs through Assets for Independence (AFI), a competitive grant program administered by the Office of Community Services (OCS). OCS awards grants to non-profit entities and state, local and Tribal governments that administer AFI projects. Grantees are required to raise an equal contribution of nonfederal funds to match the federal AFI grant.
Project participants may receive up to $2,000 in federal matching funds. In order for participants to be considered eligible for an IDA through AFI, participants must be TANF eligible, EITC eligible, or have income at or below 200% of the poverty level. Since the inception of the program in 1999, AFI has enabled more than 60,000 low-income earners save through an AFI IDA.
The Office of Refugee Resettlement’s (ORR) Individual Development Account (IDA) program is designed to assist refugees in purchasing assets as a means of increasing their financial independence, encouraging integration into the American financial system and increasing refugee knowledge of financial and monetary topics. ORR began funding IDA programs in October 1999. ORR invites qualified entities to submit competing grant applications for five-year projects that will establish, support, and manage IDAs for eligible low-income refugee individuals and families.
ORR IDA grantees provide matches of up to $1 for every $1 deposited by a refugee in a savings account. The total match may not exceed $2,000 for individuals or $4,000 for households. Upon enrolling in an IDA program, a refugee commits to and signs a savings plan agreement which specifies the savings goal, the match rate, and the amount the refugee will save each month. Basic financial training is provided by the grantee.
Since 1999, more than 20,000 refugee families have saved through an ORR IDA program. Eighty-one percent (16,588) have used $74.5 million in savings and match to purchase assets valued at more than $351 million. This represents a 748% leverage of match funds. An average of $4,503 was used by each refugee saver to purchase an asset. Over $226 million has been leveraged in loans for refugee asset purchases.
The Beginning Farmer and Rancher Individual Development Account (BFRIDA) program, authorized in the 2008 Farm Bill, matches the savings of and provides financial education to agricultural entrepreneurs. The objectives of BFRIDA are to promote local economic development in rural communities; increase farming opportunities among individuals who may be new to this country or otherwise lack collateral; and strengthen food security and independence.
BFRIDA allows up to $3,000 of an individual farmer or ranchers’ savings to be matched by local IDA providers at a 1:2 rate. Thus, farmers and ranchers can receive up to $6,000 in match, totaling $9,000 in leveraged savings. Program participants are required to complete financial training programs and develop a savings plan before the funds may be withdrawn for a farming related asset purchase.
The legislation authorizes up to $25 million – or five million a year over a five year period – for the program. While any tribe, non-profit, or local or state government can submit an application to receive a grant, a 50% local match is needed to obtain the federal grant which may not exceed $250,000. If fully funded, 4,000 agricultural entrepreneurs could receive matched savings over the tenure of the pilot program. Funding is yet to be appropriated. The program is to be administered by USDA’s Farm Services Agency.
North Carolina has one of the leading statewide networks of IDA programs with 32 local IDA sites in 55 North Carolina counties. These 32 programs provide matching funds and support to more than 500 low-income account holders.[5] There is a four step process when acquiring an IDA, this includes; Introduction and Orientation, Opening Accounts, Economic Literacy and Training, and finally Withdrawal, Purchasing Assets and beyond.