Ida

What Is an Individual Development Account (IDA)?

An Individual Development Account (IDA) is a specialized savings account designed to help low-income individuals and families build assets and achieve financial stability. Part of the broader field of community development finance, IDAs encourage saving by providing matching funds, often from federal, state, or private sources. These matched savings can then be used for specific, life-changing goals, such as purchasing a home, pursuing higher education or job training, or starting or expanding a small business⁴⁶, ⁴⁷. The primary aim of an IDA is to help participants move towards greater financial independence and long-term self-sufficiency by fostering a habit of saving and investing in productive assets⁴⁵.

IDAs are a unique form of asset building because they typically combine financial incentives with financial literacy education and counseling. This approach not only helps individuals accumulate capital but also equips them with essential money management skills⁴³, ⁴⁴. The matched savings mechanism significantly amplifies the impact of a participant's own deposits, making it more feasible to reach substantial financial goals⁴².

History and Origin

The concept of Individual Development Accounts emerged from the idea that asset accumulation, rather than just income support, is crucial for breaking cycles of poverty and fostering economic mobility. Michael Sherraden, a professor at Washington University in St. Louis and founding director of the Center for Social Development (CSD), is widely credited with conceptualizing IDAs in the early 1990s⁴¹. His work emphasized that institutional structures and incentives are necessary to enable low-income households to save and build assets effectively.

The idea gained significant traction, leading to the launch of the American Dream Demonstration (ADD) in 1997 by the Corporation for Enterprise Development (now Prosperity Now). This large-scale demonstration project tested the effectiveness of IDAs as a tool for social and economic development. Following the success of the ADD, Congress passed the Assets for Independence Act (AFIA) in 1998, which authorized federal funding for IDA programs across the United States⁴⁰. This legislation provided significant support for community-based non-profits and government agencies to implement IDA initiatives, marking a pivotal moment in the widespread adoption of IDAs³⁷, ³⁸, ³⁹. Although the Assets for Independence program was defunded starting in 2017, many states and private organizations have continued to fund and operate IDA programs.

Key Takeaways

• Individual Development Accounts (IDAs) are matched savings accounts designed to help low-income individuals build assets.
• Participants typically receive matching funds on their savings, often at a rate of $1 to $8 for every $1 saved, up to a maximum³⁵, ³⁶.
• Funds saved through an IDA are restricted for specific purposes, such as buying a home, paying for education, or starting a small business³³, ³⁴.
• Most IDA programs include mandatory financial education and counseling to help participants develop strong money management skills³¹, ³².
• Eligibility for an IDA program is typically based on income thresholds, often less than 200% of federal poverty guidelines, and usually requires earned income²⁹, ³⁰.

Formula and Calculation

The core of an Individual Development Account's benefit lies in its matching formula. While the specific match rate can vary by program and funding source, a common structure involves a multiplier applied to the participant's savings.

The total amount available to a participant for an approved asset purchase can be calculated as:

Where:

• Participant Savings: The total amount of money deposited by the individual into their IDA over time.
• Match Rate: The ratio by which participant savings are matched (e.g., 1:1, 2:1, 3:1). A 2:1 match rate means for every dollar saved by the participant, an additional two dollars are provided as matching funds.

For example, if a program offers a 2:1 match, and an individual saves $1,000, the calculation would be:

The matched funds are typically held in a separate, parallel account and are disbursed directly to the vendor (e.g., a university or a home seller) when the participant is ready to make their approved purchase²⁸. This structure ensures the funds are used for their intended purpose and provides a strong incentive to save.

Interpreting the IDA

Interpreting the effectiveness and impact of an Individual Development Account involves looking beyond just the accumulated savings and considering the broader financial and social outcomes for participants. The value of an IDA is not solely in the sum of money amassed but also in its capacity to foster financial resilience and opportunity for individuals who might otherwise struggle to build wealth²⁷.

A successful IDA experience often indicates that an individual has not only met their savings goal but has also gained valuable financial knowledge and established a relationship with a mainstream financial institution²⁶. The program's design, which often includes mandatory financial coaching, aims to cultivate habits such as regular saving, budgeting, and responsible credit use. The impact extends to enabling access to assets that can significantly improve long-term economic well-being, such as homeownership or higher education, which are often out of reach for low-income households without such support²⁵. The "return" on an IDA is multifaceted, encompassing not only the financial leverage provided by matching funds but also the human capital development and increased financial stability it facilitates.

Hypothetical Example

Consider Maria, a single parent earning a modest income, who dreams of pursuing a nursing degree to improve her family's financial future. She learns about a local Individual Development Account program that offers a 3:1 match for savings designated for post-secondary education, with a maximum match of $4,500.

Maria enrolls in the program and commits to saving $100 per month. The program requires her to attend financial literacy workshops covering topics like budgeting and managing personal debt.

Over 15 months, Maria consistently saves $100 each month, totaling $1,500 of her own money.
Based on the 3:1 match rate, the program matches her savings:

• Maria's Savings: $1,500
• Matched Funds: $1,500 (Maria's savings) * 3 (match rate) = $4,500

When Maria is accepted into a nursing program, the IDA program disburses her $1,500 in savings along with the $4,500 in matched funds directly to the college. This gives Maria a total of $6,000 to put towards her tuition, significantly reducing the amount she needs to borrow and making her educational goal achievable.

Practical Applications

Individual Development Accounts have several practical applications across various facets of financial planning and economic development:

• Homeownership: IDAs are a crucial tool for aspiring first-time homebuyers from low-income backgrounds. By providing matching funds, they can significantly reduce the burden of a down payment and closing costs, making homeownership more accessible²³, ²⁴. This aligns with broader goals of increasing asset ownership and community stability.
• Higher Education and Training: Many IDA programs are geared towards funding post-secondary education or vocational training. This allows individuals to invest in their human capital, improving their earning potential and career prospects without accumulating substantial student loan debt²¹, ²².
• Small Business Development: IDAs can provide seed capital or expansion funds for micro-entrepreneurs and small business owners. This fosters local economic growth and provides opportunities for individuals to create their own income streams, contributing to economic development within their communities.
• Financial Inclusion: Beyond asset accumulation, IDA programs play a vital role in connecting underserved populations with mainstream financial services. Many participants open their first bank account or learn about credit and investing through these programs, which helps integrate them into the formal financial system¹⁹, ²⁰. The Federal Reserve System, for example, emphasizes community development efforts that promote consumer protection and economic well-being for low- and moderate-income individuals¹⁸.

Limitations and Criticisms

While Individual Development Accounts offer significant benefits, they also face certain limitations and criticisms:

• Funding Volatility: One major challenge is the reliance on ongoing funding from federal, state, and private sources. The primary federal program, Assets for Independence (AFI), was defunded in 2017, leading to a reduction in the number of available IDA programs. This makes the long-term sustainability and widespread availability of IDAs uncertain, potentially limiting their reach and impact.
• Eligibility and Access: Strict income limits and other eligibility criteria mean that not all low-income individuals qualify for an IDA¹⁷. Furthermore, even for those who qualify, finding an active program and securing a spot can be challenging due to limited capacity and demand¹⁶.
• Asset Restrictions: The funds saved in an IDA are typically restricted to specific asset purchases (e.g., home, education, business) and cannot be used for general consumption or unexpected emergencies without penalties¹⁵. While this promotes long-term asset building, it can limit the immediate financial flexibility of participants in times of need.
• Match Rate and Cap Concerns: While the matching feature is a strong incentive, the maximum match amount and the specific match rate can vary significantly between programs. For individuals with very low incomes, even saving the required amount to receive the full match can be difficult, and the overall cap may still be insufficient for large asset purchases like a home in high-cost areas.
• Program Complexity and Administrative Burden: Administering IDA programs can be complex for the organizations involved, requiring significant resources for participant recruitment, financial education delivery, and compliance with various funding regulations. This administrative burden can limit the scale at which programs can operate. Research from the Urban Institute has highlighted the importance of robust program design for IDAs to achieve their intended outcomes¹⁴.

IDA vs. Child Development Account (CDA)

While both Individual Development Accounts (IDAs) and Child Development Accounts (CDAs) are asset-building tools designed to help individuals accumulate wealth, they differ significantly in their target beneficiaries and primary objectives.

The key distinction lies in their time horizon and the age of the primary beneficiary. IDAs empower adults to build assets for current and near-future needs, whereas CDAs focus on establishing a long-term savings foundation for children, aiming to promote future educational attainment and overall financial well-being from an early age¹³. Both, however, represent a shift in social policy towards asset-based approaches to poverty alleviation, emphasizing saving and investment over traditional income support¹².

FAQs

What can an IDA be used for?

Individual Development Accounts are specifically designed to help participants save for one of a few key assets: purchasing a first home, pursuing post-secondary education or job training, or starting or expanding a small business¹⁰, ¹¹. Some programs may also allow funds for other purposes, such as car purchases for employment⁹.

Who is eligible for an IDA?

Eligibility for an IDA typically depends on income and asset limits, which vary by program. Generally, participants must have an annual household income below a certain percentage of the federal poverty guidelines (often 200%) and demonstrate an ability to earn income⁷, ⁸. Many programs also require participants to attend financial planning and literacy courses.

How do I find an IDA program?

While the federal Assets for Independence program has been defunded, many state and local organizations, non-profits, and community development financial institutions still offer IDA programs. You can often find information through local United Way chapters, community action agencies, or by searching for "Individual Development Accounts" in your state or region. Organizations like Prosperity Now also provide resources and connections to IDA programs⁶.

Do IDA savings affect other benefits?

For federally funded IDA programs, the savings in an Individual Development Account typically do not count against asset limits for other means-tested public benefits, such as Supplemental Security Income (SSI) or Temporary Assistance for Needy Families (TANF)³, ⁴, ⁵. This is a significant feature designed to encourage saving without penalizing participants.

How are IDA matching funds managed?

Matching funds in an IDA are usually held in a separate account by the program administrator or a partner financial institution, not directly in the participant's personal savings account². When the participant is ready to make an approved asset purchase, their accumulated savings and the corresponding matched funds are disbursed directly to the vendor (e.g., a university, a home seller, or a business supplier)¹.