Individual Development Accounts (IDAs) are matched savings for particular purposes. IDAs enable low-wealth families to save and enter the financial mainstream.
IDAs also provide low-income families with an opportunity to build assets and reach life goals.
Like 401(k)s, where an employer matches an employee’s savings, IDAs encourage savings by offering a match on deposits (often 1:1 or 2:1). These savings can be used to buy a home, pay for post-secondary education, or start a small business. Financial education is usually required for IDA account holders, including education on specific asset purchases such as home ownership.
Legislation supporting IDA programs nationwide was originally passed at the federal level in the Assets for Independence Act (AFIA) of 1998. Some states have included IDAs in their state Temporary Assistance for Needy Families (TANF) plans. Beginning in 1997, CSD conducted extensive research on the first nationwide demonstration of IDAs, the American Dream Policy Demonstration (ADD).
Frequently Asked Questions about IDAs
Who administers IDAs?
IDA programs are implemented by community-based organizations in partnership with a financial institution that holds the deposits.
Who provides the matching funds?
Federal and state governments and/or private sector organizations and individuals can match deposits for low-income families. There is potential for creative program design and partnerships among the public, private, and nonprofit sectors in cooperation with account holders themselves. The savings and financial literacy components of IDAs are attracting the financial community to be involved in IDA programs. Several financial institutions across the U.S., including community banks and credit unions, are currently running IDA programs, and many other financial institutions are funding IDA programs and holding accounts.
Who benefits from IDAs?
IDAs make it easier for low-income families to build the financial assets they need to achieve the American Dream. Populations that have benefited from participation in IDA programs include former welfare recipients, youth in disadvantaged urban and rural schools, recent refugees, and the working poor. Communities also benefit from homeownership, entrepreneurship, and educational attainment that result from participation of community members in IDA programs.
Why focus on assets?
More than income enhancement, asset accumulation affects individuals’ confidence about the future, willingness to defer gratification, avoidance of risky behavior, and investment in community. In families where assets are owned, children do better in school, voting participation increases, and family stability improves. Reliance on public assistance decreases as families use their assets to access higher education and better jobs, reduce their housing costs through ownership, and create their own job opportunities through entrepreneurship.
Do IDAs work?
The American Dream Policy Demonstration (ADD), a test of 14 IDA programs nationwide, has proven that low-income families, with proper incentives and support, can and do save for longer-term goals. In ADD, average monthly net deposits per participant were $16.60, with the average participant making deposits in 1 of every 2 months the account was open. Participants accumulated an average of $576 per year including matches. Importantly, saving rates improved as match rates increased, indicating that low-income families’ saving behavior, like that of wealthier individuals, is influenced by the incentives they receive.
Why do IDA programs include financial education?
Financial literacy creates savers and savvy consumers. ADD participants saved significantly more per month with each additional hour of financial education up to 10 hours. Information about repairing credit, reducing expenditures, applying for the Earned Income Tax Credit, avoiding predatory lenders, and accessing financial services also helps IDA integrate themselves into the mainstream economic system.
The encouragement and connection to supportive services keep early withdrawals to a minimum and reduce obstacles to saving. Banks and credit unions benefit from these new customer relations, and states benefit from decreased presence of check-cashing, pawnshop, and other predatory outlets.
Are IDAs cost-effective?
According to the ADD research, start-up costs for an IDA program are significant, approximately $70 per participant per month, but these costs decrease over time. Average program expenses after start-up in ADD were less than $45 per participant per month.