Individual Development Accounts

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Individual Development Accounts

• Asset Building as a Poverty Reduction Strategy

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What is an IDA?

• Matched savings accounts to help low income
  families save and build assets
• The match creates and incentive for people to
  save and deposit money into the account on a
  regular basis to save for a large investment such
  as education or buying a home
• Match dollars for IDA accounts are provided from
  both private and federal funds

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• While a paycheck helps to buy things like food
  and clothing and pay the bills each month, an
  asset provides financial security for the future.
• CFED WWW.CFED.ORG

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How an IDA Works

• Usually sponsored by a local non-profit in
  partnership with a financial institution
• The bank or credit union handles all transactions
  to and from the IDA like a regular savings
  account
• Provided with a monthly report of the savings
  match interest that has accumulated
• Can be as short as a year or as long as five

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• Participants can withdraw money once they have
  reached their savings goal, or risk loosing the
  matched funds
• IDA eligibility can include
• INCOME -max income levels determined by
  percentage of poverty guidelines or area median
  income
• EARNINGS- require that all or most of the
  savings come from earnings such as paycheck, but
  welfare, disability and social security count
  too
• NET WORTH- assets such as car, home, or savings
  over 5,000 can disqualify you
• CREDIT HISTORY- credit card and loan debt can
  make it hard to save and a bad credit history
  can disqualify you for an IDA
• An IDA may require a certain amount of money be
  deposited each month and how much total money can
  be saved

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Other forms of IDAs

• THE SEED INIATIVE
• Saving for Education, Entrepreneurship, and
  Down Payment
• Long-term saving accounts established at birth
  for a lifetime for every child in America and
  held to at least age 18
• Seeded with an initial amount of 1,000 and then
  built upon by family, friends, and the account
  holder
• Augmented by public and private sources
• Restricted uses of education/training, starting a
  small business, buying a home, or financing
  retirement
• 1,000 invested for 18 years at a 6 rate of
  return yields almost 3,000. Add 100 per year
  and it jumps to 5,000. If you added 50 a month
  to the base, the total would be almost 22,000

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The Effects

• At the present, little is known about the
  potential of SEED Accounts
• WHAT WE DO KNOW
• People, even poor people, can and will save with
  the right support and structure
• Growing assets change behavior, economic and
  social opportunity
• Conventional IDAs dont engage most youth
• Age appropriate education tied to accounts may
  yield enormous benefits

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• Antipoverty measures have focused almost
  exclusively on providing the poor with regular
  income supportAt the same time, welfare policy
  discouraged savings, imposing limits on how much
  money a welfare recipient could hold in a bank
  without forfeiting benefits. It is no surprise,
  then, that the question of whether poor people
  can save has rarely been asked or answered.
• Owning Up p. 153

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A Brief History of Structural Savings Programs in
America

• The American Government has helped millions to
  save over the years to acquire assets and gain
  economic independence
• THE HOMESTEAD ACT
• THE MONTGOMERY GI BILL
• 401(k)s
• THE HOME MORTGAGE INTEREST DEDUCTION

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IDAs 1989- the Present

• Michael Sherraden partnered with the CFED to
  bring ideas about IDAs into the mainstream
  (1980s)
• The first IDA hearings were held by the Select
  Committee on Hunger and introduce IDA legislation
  to the U.S. House (1991)
• The first IDA legislation was adopted in Iowa and
  the first IDA initiatives were enacted by
  community-based agencies (1993)
• The Joyce Foundation funded 3 IDA pilot programs
  in Illinois, Indiana, and Wisconsin
• IDAs were offered as a state option as part of
  the national welfare reform (1996)
• CFED and CSD launched the American Dream
  Demonstration
• (1997)

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The American Dream Demonstration 1997- 2002

• THE FIRST LARGESCALE TEST OF IDAs
• COMPREHENSIVE EVALUATION ON THE EFICACY OF IDAs
• EIGHT RESEARCH METHODS
• 1) Implementation Assessment
• 2) Participant Case Studies
• 3) Cross-Sectional Survey
• 4) Monitoring
• 5) In-depth Interviews
• 6) Cost Analysis
• 7) Experimental Impact Evaluation
• 8) Assessment of Community Effects

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What the ADD Found

• Given the right incentives and support, even very
  poor people will begin to save and acquire assets
• IDAs can be effectively administered by a wide
  range of community agencies and financial
  institutions
• The clear implications of state, local, and
  federal economic policy
• Any economic policy that seeks to promote asset
  building through home ownership, etc. should
  include low-income citizens by offering IDA
  incentives and access

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Since the ADD

• By 1998, the bipartisan support of IDAs led to
  the authorization of the Assets for Independence
  Act
• Updated version of Sherradens 1991 bill
• Authorized 125 Million in federal funds over 5
  years for the creation of 30,000-40,000 new IDAs
• In 1999 the U.S. Dept. of Health determined that
  IDA participation does not count as TANF
  assistance and does not count towards the 5 year
  limit
• In 2000, presidential candidate George W. Bush
  includes IDAs as part of his New Prosperity
  Agenda

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Legislation Since 1999

• 1999 Savings for Working Families Act (S. 2023)
• 2000 SWF Act expanded and reintroduced with
  Community Renewal and New Markets Act of 2000 (S.
  2779/ H.R. 4106)
• 2002 The Charity Aide, Recovery and Empowerment
  Act (CARE) is introduced and includes the IDA tax
  credit
• 2004 The America Saving for Personal Investment,
  Retirement, and Education (ASPIRE) Act
  Introduced, aka KIDS Accounts
• 2005 ASPIRE, CARE, and SWFA are reintroduced

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ASPIRE

• Establishes an investment savings account and to
  receive a matching federal contribution for any
  U.S. Citizen born after December 31, 2006 whose
  modified adjusted gross income is below the
  applicable national median adjusted gross income
• Treated the same as a
• Roth IRA
• Secretary of Treasury would
• develop programs to
• promote financial literacy
• of KIDS Account holders
• As of 4/21/05, referred to
• House Committee on Ways
• and Means

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Savings for Working Families Act of 2005

• Allows low-income individuals between 18 and 61
  to establish tax exempt IDAs
• Pay for qualified expenses such as education,
  first-time home buying, and business
  capitalization or expansion
• Tax free IDA withdrawals for qualified expenses
• Completion of financial education course before
  withdrawal
• Grants tax credits to financial institutions,
  non-profits, and Indian tribes who sponsor and
  administer IDAs
• IDAs cannot be used for determining eligibility
  of federal assistance

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The Benefits

• Greater Economic Stability
• Higher Property Values
• Lower rates of divorce
• Decreased risk that poverty will be transmitted
  to the next generation
• Better health, higher self esteem
• Better planning for the future
• Improved perceived social status
• Fewer arrests
• Avoidance of unplanned pregnancies

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Do IDA Accounts Work?