Individual Development Account

An Individual Development Account (IDA) is an asset building tool designed to enable low-income families to save towards a targeted amount usually used for building assets in the form of home ownership, post-secondary education and small business ownership. In principle IDAs work as matched savings accounts that supplement the savings of low-income households with matching funds drawn from a variety of private and public sources. An Individual Development Account (IDA) is an asset building tool designed to enable low-income families to save towards a targeted amount usually used for building assets in the form of home ownership, post-secondary education and small business ownership. In principle IDAs work as matched savings accounts that supplement the savings of low-income households with matching funds drawn from a variety of private and public sources. While anti-poverty policy makers have traditionally focused on issues of income and consumption, an expanded vision of poverty alleviation has emerged in recent years—one that encourages savings, investment, and asset accumulation in conjunction with, not instead of, traditional anti-poverty programs. Assets play a vital role in poverty alleviation by providing not only economic security but also a psychological orientation that encourages low income families to save and plan for the future. In his book, Assets and the Poor: A New American Welfare Policy (1991), Michael Sherraden proposed establishing individual savings accounts for the poor calling for the government and the private sector to match individual contributions to IDAs as a means of encouraging savings and breaking the cycle of poverty. Sherraden argued that asset and saving accumulation requires institutional structures and incentives and that asset based development policies can have psychological, social and economic impacts. Since then IDAs have been adopted by United States federal legislation via the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 and in more than 40 states of the country. Evidence of IDA programs also exists outside of the continental United States especially in Hawaii and Sub Saharan Africa. Most IDAs are offered through programs that involve partnerships between local nonprofit organizations, also called IDA program sponsors, and financial institutions. The IDA program sponsor recruits program participants and provides financial literacy classes. Additionally they may also provide counseling and training for efficient saving practices and money management. When recruiting, IDA program sponsors need to ensure that participants meet certain criteria that the Corporation for Enterprise Development specifies as follows: The number of eligibility criteria employed varies by the IDA program sponsor and their funding sources. Once recruited, participants open IDA accounts with the partnering financial institution and begin making deposits. Account holders generally make monthly contributions to an account, usually over a period of one to four years, and their savings are matched by donations typically at a rate ranging from 1:1 to 3:1. Match dollars for IDAs come from many different places, such as government agencies, private companies, churches, or local charities. Any individual, organization or business can contribute match dollars to IDAs. In most cases, donors can get a tax deduction for contributions to IDAs, and they are also recognized for helping others in their community. Each month, IDA participants receive a report telling them how much money is accumulating in their IDA, which is a sum of their individual savings, matched dollars and interest. Individual and matching deposits are never co-mingled; all matching dollars are kept in a separate, parallel account. When the IDA account holder has accumulated enough savings and matching funds to purchase the asset and has completed a required financial education course, payments from the IDA are made directly to the asset provider to complete the asset purchase. IDAs reward the monthly savings of working poor families who are trying to: Additionally, some IDA programs allow participants to save for home repairs, computers, automobiles, or retirement. Home ownership is generally representative of stability and financial advancement since it is an important means of saving and asset accumulation. In the United States especially home ownership can be a leading step towards attaining the American Dream. IDAs can help participants achieve their goal of homeownership by encouraging savings and providing matched funds to overcome the lack of income and liquid wealth needed to make a down payment or pay housing closing costs. Even if the savings from an IDA do not result in a full purchase amount, a recent study shows that the probability of a household owning a home increases by 41% by just having $1000 in liquid wealth, which is a feasible goal under an IDA program. Access to post secondary education can positively impact one's economic status as well as critical thinking abilities. For low income families education can provide a route out of poverty and towards social mobility. Savings from IDAs can make the goal of post secondary education attainable. This is specially significant for low-income single mothers for whom earning a post secondary education can break the cycle of inter generational poverty and whose opportunities in gaining such an education might be marginalized by federal legislation like The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. For such women and several low income communities, IDAs provide a means of investing in a more prosperous future. data show that for every 1 percentage point increase inthe rate of entrepreneurship in a state, there is a 2 percent decline in the poverty rate.Entrepreneurship is another step towards reducing poverty where IDAs can play a helpful role. According to Stephen Slivinski, a senior economist at the Goldwater Institute, data across the United States shows that between 2001 and 2007 1% increase in the rate of entrepreneurship in a state led to up to 2% decline in the rate of poverty. Small business start up and expansion also have a demonstrated record of success in assisting individuals such as welfare recipients, people with disabilities, immigrants and refugees as well as ex-offenders returning to their families and communities. Matched savings from IDAs can provide the seed capital and/or funding for further expansion for such established businesses and aid in poverty alleviation.