Individual Development Accounts (IDAs): Creative Savings Opportunities for Individuals and Families
Saving for such purposes as buying a first home, capitalizing or growing a small business, paying for a college education, or completing a job training program is nothing new for moderate- to high-income earners in America. However, for low- to moderate-income earners, and the newly employed who are just off welfare, saving money for future-oriented purposes can be a difficult and discouraging process that takes years to accomplish. For many low-income earners, the process is complicated by the fact that they are only one emergency away from wiping out their savings.
Individual Development Accounts* (IDAs) could make significant savings possible, in a reasonable amount of time, for thousands of low-income individuals and families. IDAs are matched savings accounts restricted to such high-return investments as homeownership and repair, small business capitalization, and education. An individual or family makes deposits in an IDA, which are matched by public and private sources, allowing savings to accumulate in a timely fashion. For the poor, who cannot take advantage of high-yield tax deduction vehicles, such as IRAs or 401(k) plans, IDAs could allow achievement of economic goals previously thought to be unattainable.
IDA programs have increased rapidly over the last few years. From humble beginnings at only a few locations five years ago, there are now more than 100 community groups across the United States either designing or running IDA programs, which operate as partnerships between financial institutions and local businesses, human services, foundations, colleges and churches. Millions of dollars in matching funds from public and private sources have been invested in this effort. IDA programs encourage future savings strategies by incorporating a financial literacy component, which may include topics from basic budgeting to investment options.
The Corporation for Enterprise Development, headquartered in Washington, D.C., launched the American Dream Demonstration (ADD) in September 1997 as an anti-poverty and economic independence model. ADD is the country's largest test of IDAs currently under way. With funding from various private and public investors, including nine foundations, ADD has 13 projects, including: Heart of America Services in Kansas City, Mo.; the Near Eastside Community Federal Credit Union in Indianapolis; the Women's Self Employment Project and Shorebank Neighborhood Institute in Chicago; and the Mountain Association for Community Economic Development in Booneville, Ky. The ADD demonstration will operate for four years with an additional two years of post-program evaluation. The Center for Social Development at Washington University in St. Louis is conducting the evaluation of ADD.
In addition to local IDA program activity, nine states have legislated IDA programs, including Iowa, Texas, Tennessee, Ohio, Indiana, Pennsylvania, Maryland, Maine and North Carolina. Three of these states have appropriated funds for matching dollars for IDAs. Six more states have legislation pending, and at least 25 states have included IDAs in their welfare reform plans. Bipartisan federal legislation, The Assets for Independence Act, which would create a $100 million national IDA demonstration, has been introduced in the Senate.
Missouri has legislation pending that would allow IDAs (called Family Development Accounts, or FDAs) to be established for individuals and families with incomes at 200 percent or less of the federal poverty level. Missouri's HB 1197 would set aside $4 million in tax credits annually for contributors to an IDA matching fund. Contributors would receive a 50 percent tax credit on all monies given for IDAs, up to $50,000 per year. This legislation has strong bipartisan support.
As mentioned above, Indiana and Tennessee have state IDA programs. Indiana has chosen 22 community-based sites to begin its program [for additional information, contact Kelly Wood at the Indiana Department of Commerce, (317) 232-0985]. Tennessee has established several IDA program sites [contact Michelle Flynn at (615) 248-3130]. Missouri community-based organizations have shown much interest in establishing IDA programs. Besides Heart of America in Kansas City, the Justine Petersen Housing and Reinvestment Corporation in St. Louis has recently begun FDAs with low-income participants in its housing program [contact Judy Notestine at (314) 664-5051].
Financial institutions are in a unique position to assist IDAs (see sidebar). Accounts must be established and serviced at a financial institution, and banks can help develop the financial literacy part of the IDA program. In addition, participating in IDA programs may help financial institutions meet their CRA obligations. Regulators recognize innovation in the area of community development and reinvestment, and IDA programs are in this category.