DEFINITION of 'Individual Development Account - IDA'

An individual development account (IDA) is a bank savings account geared towards low-income individuals to assist in building assets to achieve financial stability and long-term self-sufficiency. An IDA is used for a predefined purpose, such as starting a business, paying for education or purchasing a home. Account savings are matched by private or public funds.

BREAKING DOWN 'Individual Development Account - IDA'

The individual development program provides financial literacy training that teaches participants how to set up a budget and a savings account, how to repair credit, and the basics of money management. IDAs enable financial institutions to increase program participants' savings rates and obtain financial stability by forming a relationship with a financial institution. Participants are less likely to use risky financial products such as payday loans or succumb to issues such as high credit card debt or foreclosure.

How IDAs Operate

The U.S. Treasury Department provides the majority of the IDA matching funds. Temporary Assistance for Needy Families (TANF) state programs, financial institutions, community organizations, churches, local and state governments, nonprofits, charities, and private donors also provide matching funds.

IDAs work in the same way as a 401(k) retirement account. The program participant deposits money in a savings account, and the funds are matched dollar for dollar up to a maximum of $8 to $1, depending on the guidelines of the specific program. Participants open an account with an approved financial institution and make recurring deposits over time up to a maximum of five years.

Program eligibility criteria vary by program. Participants must receive TANF payments and either be working or meet certain income requirements to open an IDA. Participants must meet additional criteria, such as credit and total assets.

Effects on Federal Benefits

TANF funds can be deposited into an IDA account and do not affect eligibility for federal social service programs. An individual's contributions, matching contributions and interest earned are not considered to be assets asset when determining eligibility or benefits for federal programs such as Electronic Benefit Transfer, Medicaid, Social Security and federal housing assistance programs. Therefore, benefits do not decrease. However, Supplemental Security Income (SSI) payments may decrease for workers without an IDA because the money earned is counted as income and is used to determine SSI eligibility and benefits.

History

IDAs were launched in 1990 as a way to reduce poverty. In the late 1990s, IDAs started to receive federal funding from the Assets for Independence Act (AFIA) and the TANF. In 1993, Iowa was the first state to institute a law to allocate matching funds for IDAs. Thirty-three states, including the District of Columbia and Puerto Rico, have laws or policies that govern the actions of IDAs. Since its inception, the initiative has resulted in over 6,400 small business launches and business development purchases, 9,400 new homeowners, and 7,200 educational expenses.

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