Individual Development Account (IDA)
Individual Development Accounts (IDAs) are specialized savings accounts designed to assist low-income individuals in the United States. These accounts feature a matching savings structure, where contributions made by individuals are matched by organizations, often at a rate as high as eight to one. The primary aim of IDAs is to empower individuals to save for specific goals such as education, homeownership, or starting a business, with a defined time frame for achieving these objectives. Participants typically receive financial education and training to enhance their budgeting and saving skills, often through mandated classes.
The concept of IDAs was first introduced by Michael Sherraden in 1991, who envisioned a system that would provide low-income individuals with tangible assets rather than traditional welfare assistance. Since their inception, IDAs have spread across all states, with over five hundred programs currently available. Research indicates that participants in IDA programs are significantly more likely to achieve their financial goals, including homeownership and business creation. Despite their successes, IDAs face challenges, including funding constraints and difficulties in participant recruitment, particularly in rural areas. The program is also accessible to refugees who meet certain income and asset criteria, reflecting an inclusive approach to financial empowerment.
On this Page
Subject Terms
Individual Development Account (IDA)
Individual Development Accounts (IDAs) are special savings accounts in the United States for low-income individuals. An individual's contributions to the IDA are matched, meaning that for each dollar an individual saves, that amount will be matched by an organization with another dollar. Some organizations will even match contributions by eight to one ($8 for every $1 dollar saved). The matching money is provided by various organizations through donations and government programs, such as Temporary Assistance for Needy Families (TANF). The purpose of the IDA is to enable low-income individuals to save for a particular goal, such as furthering their education, buying a first home, or starting a business. The goal must include a defined time frame. When opening an IDA, individuals receive education or training regarding budgeting, saving, banking, etc. Many states require IDA holders to attend classes on financial education. They may also receive other training and one-on-one counseling.
Background
In 1991, Michael Sherraden wrote Assets and the Poor: A New American Welfare Policy. In the book, Sherraden conceived of IDAs and their framework. His idea was for IDAs to differ from traditional government assistance programs in several ways. Sherraden felt the IDA would provide low-income individuals with assets with genuine value rather than government vouchers with no inherent value. The approach would focus on the development of the individual, who would be responsible for and in control of their own finances. However, there would be social provisions as well. Sherraden imagined that IDAs would enable low-income individuals to be more self-sufficient by taking control of their future through long-term planning, ultimately encouraging individuals to stand independently.
In 1996, Temporary Assistance for Needy Families (formerly called welfare) underwent significant reform with the Personal Responsibility and Work Opportunity Reconciliation Act. The act made federal funds eligible for IDAs. The US Department of Health and Human Services (HHS) was authorized to provide nonprofit organizations with grants to start IDA programs. These organizations would collaborate with financial institutions, credit unions, and governments at the state and local levels.
Nonprofit or federal sponsors and financial institutions typically form IDA partnerships. They can collaborate on a regional or statewide basis or as a single-payer program. The sponsors handle fundraising, program administration, and programmatic casework. The financial institutions maintain both sponsor's and participant's accounts and are required to comply with program and regulatory rules. Financial institutions may choose to support the IDA through operating grants to sponsoring organizations, or they may contribute to the program's match fund accounts. The first state to establish an IDA law was Iowa in 1993. Eventually, every state followed Iowa's lead, and in the twenty-first century, there are more than five hundred IDA programs throughout the United States.
Because there are a variety of entities supporting IDAs, there can be significant differences in eligibility requirements, but most programs have similar characteristics. These include requiring the individual's annual household income to be under a certain threshold—typically 200 percent or less of the federal poverty income level. Other requirements are related to credit history and net worth. Participants have a specific period during which they are enrolled (one to five years). When saved earnings are taken out for eligible uses, they are matched.
Topic Today
The American Dream Demonstration (ADD) conducted a four-year survey from 1997 to 2001 to understand the effectiveness of IDAs. The survey found that low-income individuals were joining the financial mainstream and building assets with the help of IDAs. The ADD also found there were clear financial benefits for enrollees. The survey indicated that 50 percent of enrollees had become savers, depositing about $100 or more every so often, and the average enrollee was able to save nearly $3000 (including matched funds). Nearly one-third of those enrolled in the program made a matched withdrawal. When he conceived of IDAs, Michael Sherraden's goal went beyond the financial realm—he also wanted to change people's mindset. However, the psychological impact of the program has proven hard to quantify. Nevertheless, the ADD survey found that those enrolled in IDA programs gained a greater sense of confidence about the future and felt more economically secure.
Another study conducted by the ADD surveyed 485 individuals throughout the country who were enrolled in IDA programs. Of those surveyed, the average participant saved more than $900, or 1.2 percent of their earnings. Unmatched withdrawals (those done for ineligible uses) were higher than matched withdrawals during the first two years of the study, but this was not the case in the third year. Individuals enrolled in an IDA program were statistically more likely to own a home (35 percent more likely), own a business (84 percent more likely), or pursue postsecondary education (95 percent more likely) than people who were not part of the program.
Many people participate in IDA programs out of the desire to own a home, as it is the most popular savings goal. However, even those enrolled in IDAs find it challenging to buy a home. Studies have shown IDA renters are more likely to purchase a home than those who are not involved in the program. They also tend to experience foreclosure less frequently.
Analysts and scholars firmly believe that IDAs have been successful in helping low-income individuals build assets and achieve economic success. Despite this, the program faces challenges. One problem is the funding requirements for IDA program sponsors. Operating and match funds are typically hard to obtain as federal and state governments have underfunded the program. Once individuals reach their savings goals, the majority of financial institutions do not track loans. This makes progress and impact more difficult to analyze. Many financial institutions do not conduct profitability reviews of the program either.
Another challenge is getting participants to sign up. The number of participants has grown at a slow pace. Many of the five hundred IDA programs in the United States have fewer than one hundred participants. Policy initiatives should consider local community factors, particularly those in rural areas, to grow the program and enroll more participants. Factors in such areas include a high proportion of low-income jobs and a lack of local donors. Eligibility requirements and allowable uses could be restructured with these particular challenges in mind to encourage enrollment.
Through the Office of Refugee Resettlement, an office of the Administration for Children and Families, refugees and asylees can apply for the IDA program. Refugees who have been in the United States for less than five years and who have a paying job that earns less than 200 percent of the federal poverty level are eligible to participate as long as they have less than $10,000 worth of assets.
Bibliography
"Individual Development Accounts." Office of the Comptroller of the Currency, Jan. 2018, www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-individual-development-accounts.pdf. Accessed 10 Dec. 2024.
"Individual Development Accounts." Office of Refugee Resettlement, Administration for Children & Families, 9 Apr. 2024, www.acf.hhs.gov/orr/programs/refugees/ida. Accessed 10 Dec. 2024.
"Individual Development Accounts." Prosperity Now, 2009, prosperitynow.org/sites/default/files/resources/IDA‗Fact‗Sheet‗2009‗12‗12.pdf. Accessed 10 Dec. 2024.
"Individual Development Accounts: A Vehicle for Low-Income Asset Building and Homeownership." Office of Policy Development and Research, U.S. Department of Housing and Urban Development, 2012, www.huduser.gov/portal/periodicals/em/fall12/highlight2.html. Accessed 10 Dec. 2024.
Kagan, Julia. "Individual Development Account (IDA): What It Is, How It Works." Investopedia, 28 Aug. 2024, www.investopedia.com/terms/i/ida.asp. Accessed 10 Dec. 2024.
"SSI Spotlight on Individual Development Accounts." Social Security Administration, 2024, www.ssa.gov/ssi/spotlights/spot-individual-development.htm. Accessed 10 Dec. 2024.
Zdenek, Robert O. "Creating Stakeholders with Individual Development Accounts." Shelterforce, shelterforce.org/1996/01/01/creating-stakeholders-with-individual-development-accounts. Accessed 10 Dec. 2024.