In my last blog we explored Achieving a Better Life Experience (ABLE) Accounts, now let’s explore Individual Development Accounts and how you might benefit from this type of asset building savings program.
What are IDAs?
IDAs are special accounts that allow members of low-income groups (including persons with disabilities) to save for specific goals such as home ownership, small business ownership, or post-secondary education, while also receiving matching funds and financial counseling.
IDA eligibility guidelines:
- Income – Most IDA programs specify a maximum household income level for applicants. Maximum income levels are most often a percentage of the federal poverty guidelines (usually between 100% and 200%) or the area median income (usually between 65% and 85%).
- Earnings – Many IDA programs also require that all or part of savings come from earned income. A paycheck or the earned income tax credit refund is the most common source of earned income. Unemployment checks are also an allowable source in some IDA programs. Most IDAs do not consider as earnings any money a person receives as a gift.
- Net Worth – Some IDA programs also look at the household assets in addition to household income when they determine IDA eligibility.
- Credit History – For most IDA programs, poor credit history is typically a barrier to the enrollment that applicants must address before they are able to establish an IDA. Debt from credit cards and loans makes it difficult to save. A program sponsor may ask you to visit a credit-counseling center or pay off your loans before you open an IDA.
Why is my money matched?
Your money is matched to encourage and help you to save enough to buy an asset, such as a house or business. While your paycheck helps you to buy food and clothing and pay your bills each month, an asset provides financial security for the future. If you begin to earn less money or lose your job, having an asset will make it easier for you to continue to pay your bills and meet household needs.
Where do the match dollars come from?
These matched dollars come from many different places, such as government agencies, private companies, churches, or local charities. Any individual, organization or business can contribute matched 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 the community.
How Do IDAs work?
- IDAs are usually offered through programs that involve partnerships between local nonprofit organizations and financial institutions. The bank or credit union handles all transactions to and from the IDA, just as they do with other types of savings accounts. Each month, IDA participants receive a report telling them how much money (individual savings + match + interest) is accumulating in their IDA.
- An IDA participant will identify a specific asset that they would like to acquire and work with the IDA program to develop a savings plan that will make it feasible to reach the goal and ultimately purchase the asset. The individual then begins to deposit a certain amount of earned income on a regular basis, typically monthly, into an IDA account based on that plan. Some programs require a minimum dollar amount each month or every few months in order to stay in the program.
- Participants of IDAs are eligible to receive matching funds if they use their savings to purchase an eligible asset. The match rate is the amount that the IDA program contributes for each dollar that a participant saves. The rate varies greatly across IDA programs and can range anywhere from $1 to $8 of match for every $1 of earnings saved.
- An IDA program can be as short as one year or as long as five years. It may disperse money to IDA participant as soon as they have reached their savings goal, and as long as they have approval from the IDA program sponsor. Some IDA participants choose one big savings goal, such as a home, but others save for a number of smaller, related goals, such as textbooks and college tuition.
How to Enroll in an IDA Program?
The state Office of Trade and Economic Development (OTED) administers the IDA program. You can contact your state Temporary Assistance for Needy Families (TANF) agency for IDA programs in your area. OTED contracts with local nonprofit agencies to enroll participants in the IDA program, monitor account activity and provide training and other supports services while you are enrolled.
Do I have to use my IDA savings to buy a house, pay for education or job training, or start a small business?
These are the most common uses for IDA savings, but each program is different. Some IDA programs allow participants to save for home repairs, computers, automobiles, or retirement in addition to the three uses above. Other programs have just one purpose, such as to help people start their own businesses.
Important things to keep in mind about IDAs:
- SSI Resource Limit – IDAs that are set up as a Demonstrated Project IDA do not count toward the SSI resource limit and the IDA matching deposits are excluded from income and earnings a beneficiary deposits into his/her IDA account, which is deducted from wages in determining countable income. IDAs funded through other means are not given the same exemptions and may count toward the SSI resource limit unless it is set up in such a way that it does not meet the definition of resource. Social Security may count the IDA matching funds as income to the beneficiary, depending on how the funds are dispersed. It is important to research and weigh which IDA program is best to use.
- Program match rate – Is determined based on the program length and the amount of match funds raised by the sponsoring organization. In general, programs that have a shorter savings period usually have higher match rates. Be sure to consider whether the savings period and match rate together will enable you to save enough money to purchase your desired asset.
- Is there a limit to how much money I can save in my IDA? Some programs will only match up to a certain dollar amount on an annual basis or during the course of the program. In most cases you can deposit as much as you like in your account, but deposits over a certain dollar amount will not be matched.
We at Mission Possible are here to answer questions and provide information and referrals to help guide you on your path to financial independence.
Stay tuned for next month’s blog revealing what Social Security considers an acceptable asset management for individuals receiving SSI disability on the path to achieving financial well-being.
Till next time,