Guide to Individual Development Accounts (IDAs)

By Rebecca Lake · June 18, 2024 · 8 minute read

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Guide to Individual Development Accounts (IDAs)

An Individual Development Account (or IDA) is a special type of matched savings account that’s designed to help lower-income individuals and households achieve their financial goals. IDA accounts were first introduced in the 1990s as part of a federal initiative to encourage wealth-building among financially-challenged populations.

The IDA account program is specifically designed to encourage saving toward one of four goals, including home ownership. There are certain requirements that must be met to qualify for an Individual Development Account.

Here, take a closer look at how these accounts work and their pros and cons.

What Is an Individual Development Account (IDA)?

An Individual Development Account is a bank account that allows lower-income Americans to set aside money to fund specific goals. Generally, money in an IDA account can be used for one of four purposes:

•   Buying a car

•   Purchasing a home

•   Starting a business or supporting an existing business

•   Paying for post-secondary education or training

Some programs may allow you to use the money for other things, like home repairs and improvements or retirement.

IDA accounts are matched savings accounts that are funded partially with grant money. The IDA program can also provide other benefits to participating savers, including financial literacy training and homebuyer education.

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How Does an Individual Development Account Work?

Individual Development Accounts work by encouraging participants to save and then matching a percentage of those savings to fund specific financial goals. A sponsoring organization, which may be a non-profit or state government agency, partners with banks and other financial institutions to offer IDA accounts to underserved populations.

In terms of the matching component, IDA accounts are similar to 401(k) plans in that savers can essentially get free money for participating. The match is designed to act as an incentive to encourage account owners to save. The IDA savings match varies by program.

For example, you may be eligible for a 1:1 match, meaning you get $1 for every $1 you save. Other programs may offer a 5:1 match instead, so you get five times the matching contributions for every dollar you save (that means $5 to every dollar you tuck away). IDA programs can also cap the total maximum match allowed to a set dollar amount. In some cases, the cap will be in the $5,000 range, though higher and lower amounts are possible as well. These Individual Development Account programs typically last five years.

Once you reach your target savings amount, you can then use that money to fund your goals. So if you save $25,000, including your contributions and the match, you could then use that money to put a down payment on a home or start a business under the guidelines of the IDA program. Account minimum balance requirements and fees may be waived for IDA savers.

One word of caution: If you stop saving before you reach the goal amount or if you use the funds for a purpose other than described by the IDA, you may risk forfeiting the matching money.

History of Individual Development Accounts (IDAs)

The idea for IDA accounts was first proposed in 1991 by author Michael Sherraden. In his book, “Assets and the Poor: A New American Welfare Policy,” Sherraden proposed IDA accounts as a means of introducing real assets into the lives of poorer populations that might otherwise lack them. Specifically, the Individual Development Account was meant to be a tool for encouraging personal responsibility in building wealth.

In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act reformed welfare programs and included IDAs as an eligible use for federal funds.

How to Open an Individual Development Account

If you’d like to open an Individual Development Account, the first step is locating programs in your area. The Administration for Children and Families offers an online mapping tool to help you locate IDA programs in each state.

Once you find an IDA program provider near you, you can contact them to find out the specific steps you need to take to open an account and which banks they partner with. Keep in mind that you’ll also need to meet the following eligibility requirements to have an Individual Development Account.

Earn Less Than 200% of Federal Poverty Level

Income is a key eligibility requirement for IDA accounts. Your income has to be below 200% of the federal poverty level for your household size. These levels are set by the federal government and are also used to determine eligibility for other benefits, like Medicaid. You can use an online federal poverty calculator to determine whether your income falls within the guidelines.

Have a Paying Job

A paying job is another requirement for opening an Individual Development Account. If you’re planning to buy a home, for instance, the government wants reassurance that you’ll be able to save money now and make your payments later. There are, however, no specifications on what kind of job you need to have.

Asset Restrictions

The IDA program assumes that participants aren’t starting out with significant wealth. So another condition for eligibility may be a $10,000 cap on assets. You can, however, typically exclude the value of one home and one car from this total.

Must Take Free Financial Literacy Courses

Financial literacy and education courses are typically provided and required by IDA programs. These courses are designed to educate participants about financial basics, such as budgeting, saving, and debt. A participant might learn financial hacks, such as how a parent can set up a kids’ savings account for a child, even though the minimum age to open a bank account in one’s own name is 18. This can give a kid a head start on accumulating money. Or perhaps the class would illuminate the value of creating an emergency-fund savings account to achieve greater financial stability.

Programs can also offer additional topic-specific classes on concepts like home buying and business planning. The idea here is that an IDA isn’t just helping you build wealth, it’s also teaching you how to manage it wisely.

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Pros and Cons of an Individual Development Account (IDA)

Individual Development Accounts are designed to help people who participate in them to build wealth and get ahead financially. Those are among the upsides of these accounts. There are, however, some disadvantages to weigh against the potential benefits. Here’s a closer look:

Pros

Cons

•   Matched savings can help you fund your goals more quickly

•   The money you receive in matching contributions isn’t taxable to you

•   Financial literacy courses can help to make you more knowledgeable about money

•   IDA accounts have limited flexibility since they can only be used to fund specific goals

•   Not everyone is eligible to open and contribute to an IDA account

•   Saving money in an IDA isn’t guaranteed to improve your financial outlook

•   You may risk forfeiting the matching money if you can’t meet your goal or if you use the funds for something other than approved expenditures

Alternatives to an Individual Development Account (IDA)

An IDA account isn’t the only way to save money toward your financial goals. Some of the other possibilities for saving money include:

•   Establishing a money market account

•   Opening a brokerage account

•   Setting up one or more high-yield savings accounts

•   Contributing to a 401(k) or IRA

•   Building a CD ladder with multiple certificates of deposit

Each savings option has pros and cons, and you may need to spend a little time learning about each one. If you don’t know how a money market account works, for example, that could make it more difficult to choose the best account for your savings.

And in terms of whether an IRA vs. 401(k) is better for retirement saving, the answer depends on your goals and tax situation. In addition, not everyone has access to a 401(k) account and may need to find other ways (like an IRA) to save for their future.

Another important bit of advice: If you choose to open a savings account, keep in mind that you have options. Your decision may determine the interest rate you earn and the fees you pay. For example, a college student bank account (if you are eligible for one) might charge fewer fees than a traditional savings account.

You may also be debating whether to open a joint vs. separate bank account if you’re married and want to save for a goal like a down payment on a house. Having a joint account for shared savings goals or expenses and separate accounts for individual goals could help you to strike the right balance. But again, do your research to find the option that best suits your financial style and goals.

Recommended: Savings Account vs Money Market Comparison

The Takeaway

An Individual Development Account (IDA) was created to help lower-income individuals secure financial stability. Thanks to matching funds, it can accelerate a person’s saving towards such expenses as buying a home. However, not everyone is eligible for these accounts, and the funds, once saved, can only be used on certain expenses. Still, it’s an opportunity to possibly snag some free money and definitely worth consideration for many people who qualify.

Another way to boost your financial wellness is by partnering with a top-notch financial institution for your bank account.

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FAQ

How do I get an IDA account?

To open an Individual Development Account, you’ll need to meet the eligibility requirements. Assuming that you’re eligible, you can then contact an IDA program near you to learn what steps are necessary to open an account.

What is a federal IDA?

The federal IDA program is a savings match program that’s designed to help underserved populations build wealth. Money in an IDA account can be used to buy a home, pay for higher education expenses, start a business, or even buy a car.

Can I take money out of my IDA?

Money in an IDA can be withdrawn to fund a specific goal. For example, if you’re ready to buy a home, you can take money from your account to pay for the down payment or closing costs. Or if you’re starting a business, you can withdraw IDA money to cover operating costs. However, if you take out the money for other purposes, you may forfeit the matching funds.


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