Interest rates are incredibly low right now. That’s good news if you’re applying for a mortgage. But it’s terrible news if you’re looking for a high-yield savings account.
According to the FDIC, the average interest rate on savings accounts is 0.06%. To give you an idea of just how low this is, a $2,500 balance would take an entire year to earn $15 in interest.
But what if we told you there was a savings account that could immediately sextuple your money? That’s your balance times six! For every dollar saved, you’d receive $5 in matching funds?
It might sound too good to be true, but it isn’t.
What are Individual Development Accounts?
An individual development account is a savings account with a specific, set purpose. For example, you might open an IDA with the intent of purchasing your first home, purchasing a vehicle or covering college tuition. IDAs can also be used to fund small businesses and micro enterprise development.
Individual development accounts are typically funded by a government program. Then, the funding for the program is administered through a non-profit organization. You contact the non-profit to set up an IDA, where you’ll receive a match on the money you save. Most IDAs will match your contributions dollar for dollar. However, some programs are even more generous.
Oregon has one of the most robust IDA programs in the country. Through the Oregon IDA Initiative, most accounts currently match participants’ contributions 3:1. That means for every dollar participants save, they’ll receive three in matching funds, quadrupling their monthly savings.
Holly McGuire, director of economic opportunity at Neighborhood Partnerships in Portland, Oregon, says that the match rate is about to get even higher there. Most programs across the state are currently transitioning to a 5:1 match rate. This would be akin to being immediately paid 500% interest after you put a deposit in your savings account.
Who is eligible for IDA programs?
Most IDA programs are income-based, being made available to low-income individuals. However, you should consider looking for an IDA even if you don’t necessarily think of yourself as a low-income household.
For example, Oregon’s IDA program allows IDA participants’ income to be the higher of either 200% of the federal poverty level or 80% of the area median income. Two hundred percent of the federal poverty level for a family of four is currently $53,000. Eighty percent of the area median income for the same family in Oregon’s Multnomah County is $77,350.
Because the area median income is the larger number, families of four with an income of $77,350/year or less would qualify.
You can expect to see most, if not all, IDA programs require you to live within a set of specific geographic boundaries.
Limits on Assets
IDA programs may also include an asset test or resource limit. We’ll look to Oregon as an example again. Under this IDA program, your net worth must be $20,000 or less. But the value of your first home and the first $60,000 you have saved in tax-advantaged retirement accounts don’t count.
The eligibility requirements for IDA programs can change from state to state or even program to program. If you’re not sure if you qualify for your local individual development account, ask. The income limits may be higher than you’d think.
Is There a Cap on How Much I Can Save?
Yes. The cap on how much you can save in an individual development account will vary from program to program.
Oregon’s IDA program allows for your contributions and the match to add up to $3,000 every 12 months. With the new 5:1 match ratio, that means IDA participants only need to save $600 every year to reach the program max.
Caps, just like eligibility limits, will vary depending on where you live and which IDA accounts are available to you.
Do IDAs Provide Financial Education?
IDA programs almost always come attached to financial education. In fact, in some cases, this free financial literacy training will be a requirement.
Oregon requires completion of a financial education course administered through local nonprofit organizations. Nonprofit organizations will also help participants create a personal development plan, where they’ll receive goal-specific coaching.
“Microenterprise savers, for example, work with small business centers to develop a business plan,” says McGuire. “Home buyers would work with housing centers to learn about the ins and outs of home buying.”
Both the course and the planning for your money savings goals need to be completed before your matching funds can be disbursed to your IDA. Your nonprofit can help you figure out a monthly savings plan so you can maximize your matched funds.
Financial literacy education requirements for participants are one of the program characteristics that will change from depending on where you live.
How Do I Find an IDA Program Near Me?
Prior to 2017, it was relatively easy to find an individual development account. There were federal funds set aside for these programs nationwide via a program known as Assets for Independence (AFI).
“Many programs existed because of AFI,” says McGuire. “It got cut under the Tax Cuts and Jobs Act. Just eliminated AFI.”
She says that as a result, there are not many programs left of Oregon’s size. However, that doesn’t mean you should abandon your search. Without the federal funding, a select few programs haven’t disappeared so much as shrunk. It’s just that all the contributions now come from non-federal funds due to the lack of federal grant money.
Add the fact that when AFI disappeared, information about local IDAs became more decentralized, making it hard to point you to one particular search tool. Your best bet may be to do a hyperlocal Google search, or reach out to your local United Way.
Statewide IDA Programs
However, there are a few states with active, statewide programs or programs in the works. Vermont, for example, has a Matched Savings program. Though it isn’t quite as robust as Oregon’s IDA Initiative, program participants can receive dollar-for-dollar matched funds. McGuire says that Massachusetts may have a similar program soon.
Arizona and Florida have a type of IDA program specifically for participants saving for higher education.
The Future of Individual Development Accounts
Will individual development accounts or matching-funds savings programs be any easier to find or access in the future?
They might be. There have been rumblings of policy development at the federal level. The program running in Florida and Arizona is being considered as a national model, according to McGuire. Another policy that has been proposed nationally by advocates is Promise Accounts, which would operate much the same as IDAs prior to the AFI funding cuts.
“The reality is that wealth is structured inequitably in our country,” says McGuire. “A lot of narratives about poverty suggest people are poor because they did something wrong. But the main problem that poor people have isn’t poor money management skills. The problem is that they don’t have enough money.”
“To solve poverty,” she continues, “we need to support people out of the structures that are built to keep wealth in the hands of a few.”
Individual development accounts do just that, while also supporting the growth of local small businesses. Hopefully, in the future, they’ll be restored to their full breadth prior to the TCJA.
Until then, look to see if there’s one hiding in a neighborhood near you.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to Codetic.