Individual Development Account (IDA): A Tool for Financial Stability

An Individual Development Account (IDA) is a specialized savings account that assists low-income individuals in building assets, achieving financial stability, and promoting long-term self-sufficiency. People commonly utilize IDAs to accumulate funds to start a business, pay for educational expenses, or purchase a home.

KEY TAKEAWAYS

• An Individual Development Account (IDA) is explicitly designed to help low-income individuals accumulate assets, enhancing their financial stability and fostering long-term self-sufficiency. Individuals often use these accounts to save money for significant life goals, including starting a business, paying for education, or purchasing a home.
• To be eligible for an IDA, participants may be required to complete complimentary financial literacy training. This training covers essential topics such as money management, debt reduction, and investing, equipping individuals with the knowledge to manage their finances effectively.

Understanding Individual Development Accounts (IDAs)

IDAs are powerful tools for helping individuals achieve financial stability through various mechanisms. To be eligible for an IDA, an individual might need to complete free financial literacy training, which educates participants on crucial topics like money management, debt reduction, and investing.

One key benefit of an IDA is the matching of savings. Like a 401(k), the funds an individual saves in an IDA are matched by private or public funds, significantly boosting the total account value. Participants open their accounts with a certified financial institution and commit to making regular deposits over a defined period. The savings are then matched, usually at a ratio of 2:1 or 1:1, depending on the state and specific program.

To qualify for an IDA, individuals must meet specific income, assets, and employment criteria. Program eligibility requirements vary, but most IDAs require that an individual’s income be less than twice the federal poverty level, have earnings from employment, and attend financial literacy programs. Additional criteria may include asset limitations, citizenship or legal residency status, and credit requirements.

History of Individual Development Accounts (IDAs)

IDAs were introduced in the 1990s as a strategy to combat poverty. During the late 1990s, IDAs received federal funding through initiatives like the Assets for Independence Act (AFIA) and the Temporary Assistance for Needy Families (TANF) program. As a result, hundreds of IDA programs were established across the United States.

However, the Assets for Independence (AFI) program, which supported many IDAs, started losing federal funding beginning in 2017. Since then, individual states have been striving to compensate for the reduction in federal support by finding alternative funding sources.

Special Considerations

One important consideration for individuals receiving Supplemental Security Income (SSI) benefits is that having an IDA will not negatively impact their SSI benefits. This is because the funds deposited into the IDA, the matching contributions, and any interest earned are not considered earned income and thus do not affect SSI eligibility.

Frequently Asked Questions (FAQs)

What Is the Difference Between an IRA and an IDA?

The critical difference between an Individual Retirement Account (IRA) and an Individual Development Account (IDA) is the control over the funds. With an IRA, you can make investment decisions and move money in and out of the account. In contrast, an IDA is managed by a trustee, who oversees the deposits and withdrawals.

Can I Take Money Out of My IDA?

Once you achieve your savings goal, you can withdraw money from your IDA only with the trustee’s approval. The trustee ensures the funds are used for their intended purpose, such as starting a business, paying for education, or buying a home.

How Do You Qualify for an IDA?

Eligibility for an IDA typically depends on meeting income requirements, which are generally based on a specific percentage of the poverty level in your area. For example, your income might need to be less than 200% of the federal poverty level to qualify for an IDA.

The Bottom Line

An Individual Development Account (IDA) can be a highly effective tool for individuals with low incomes who aim to build assets and achieve financial stability. It is advisable to consult with a financial advisor for personalized guidance on how to utilize an IDA to reach your financial goals.