Definition and Examples of Individual Development Accounts
An individual development account (IDA) is a unique savings account designed to help lower-income customers reach financial independence. IDAs provide savers with regular interest payments plus matched contributions for each dollar they deposit. They also teach participants how to set savings goals while giving them a basic financial education that will help them build future wealth.
- Alternate name: matched savings program
- Acronym: IDA
For example, suppose you currently rent an apartment and have little money in the bank. In that case, you might open an individual development account to save money for a down payment toward a house and gain a better understanding of how to manage your money. Or, if you dream of starting a business, an IDA can help you prepare for those costs and provide financial education. The goal is that you will learn to handle daily banking and budgeting tasks, as well as make profitable decisions once you've saved enough.
How Individual Development Accounts Work
You might open an individual development account to save for the purchase of a first home, to start a business, or to advance your education. Some IDA programs might allow you to save for other things, such as home repairs or retirement.
The per-dollar matches come from various places, including private companies, government agencies, or local charities. In most cases, individual or business donors receive a tax deduction for contributing to IDA programs.
Typically, while saving in an IDA, you'll also need to participate in the account's financial education program. Through an IDA program, you'll learn about budgeting, saving, banking, and more. After successfully participating in an IDA program, you should have the funds to reach your financial goal and the expertise needed to make informed financial decisions that help you build long-term financial independence.
IDA Funds Matching
When you get an IDA, you will open an account at a bank or credit union affiliated with the sponsoring organization and then commit to regularly depositing funds until you meet your savings goal. Most programs offer a dollar-to-dollar match, meaning you'll receive $1 in matching funds for every $1 you deposit. Match rates may be more or less, depending on the program.
An IDA program can last up to five years. As soon as you reach your savings goal, you can withdraw money from the account, but you must first get approval from your IDA program sponsor. If you do not complete the program or use the money for another purpose, you risk losing the matched portion of the funds.
Requirements for an Individual Development Account
There are more than 250 IDA programs in the U.S., and each one has its own requirements to qualify. To open an IDA, you typically need to meet the following criteria:
- Earn less than 200% of the federal poverty level
- Have a paying job
- Not have more than $10,000 worth of assets, excluding one home and one car
- Take free financial literacy courses
You can typically open an IDA through local community organizations that partner with credit unions and banks for the program. For example, state websites often offer a search tool to find available IDA programs and learn more about the requirements and application process. You can also find IDA programs directly through sponsoring organizations' websites.
There are also rules on how often and how much you need to deposit, as well as how long you need to save. For example, you may need to deposit a minimum amount to open the IDA, commit to monthly or quarterly deposits, and keep your account open for a minimum of six months.
Pros and Cons of an Individual Development Account
Can help you achieve a savings goal quickly
Access to financial training
Matched funds aren't taxable
Limits on what you can use funds for
No guarantee of goal success
Strict requirements to qualify
- Can help you achieve a savings goal quickly: Donated funds usually match every dollar you deposit, which means you'll reach your spending goal twice as fast as you would in a regular savings account with no matching contributions. The matching contributions may also be motivation to deposit more money whenever you can.
- Access to financial training: Whether it's managing your bank account or organizing bill payments, you'll learn key skills from the mandatory financial education of an IDA. These courses may help boost your long-term financial success.
- Matched funds aren't taxable: Matched deposits are technically considered a gift rather than income. Because of this, you don't have to worry about paying taxes on them.
- Limits on what you can use funds for: You'll need the IDA sponsor's approval to withdraw funds from the account. If you do so before completing the program or you want to use the money for something aside from the intended goal, you risk losing the matched funds.
- No guarantee of goal success: While an IDA can help you save money for a goal, it doesn't guarantee eventual success. For example, if you're saving for a home, there is no guarantee you'll qualify for any additional financing that's needed.
- Strict requirements to qualify: Since there are often strict income and asset limits to meet, you may not qualify for an IDA program even if you'd potentially benefit from it. Some asset purchases also don't qualify; it depends on the program you choose.
Alternatives to an Individual Development Account
If you don't meet the requirements for an IDA or want a more flexible type of account, you can consider other options. While the below options both don't offer matching contributions or free financial literacy courses, you can earn interest with both.
Certificates of Deposit
Certificates of deposits (CDs) are similar to IDAs in that they only stay open for a certain time period, often limited to a number of months or years. Because of this, they work well for saving toward a specific goal. With a CD, though, you usually only make one deposit when first opening the account. You also don't receive matched funds.
If you choose to withdraw the deposited money early, you may face penalties and have to pay a fee.
Regular Savings Accounts
Regular savings accounts offer more flexibility than CDs since you don't have to worry about early withdrawal penalties. In some cases, though, you may face fees for exceeding the limit on the number of withdrawals made in a month. You can deposit money as often as you'd like and may find banks that offer bonuses for opening a savings account, which could enhance the interest you earn.
However, as of June 2022, the average interest rate for a savings account is 0.08%, which may not help you grow your savings very fast. If this type of account is right for you, consider a high-yield savings account.
- Individual development accounts (IDAs) encourage lower-income individuals to save toward purchasing a major asset with both financial education and contribution matching.
- The most common reasons to apply for an IDA are to save for buying a home, starting a business, or advancing your education.
- Designed to help people who struggle to build wealth, IDA programs are available through a variety of nonprofit organizations that partner with financial institutions to administer the account.
- While requirements vary, IDA participants have to meet strict income and asset standards, as well as follow the rules of the program, to benefit from the donated matched funds.