Individual Development Accounts: A Stepping Stone to a Larger World

Many of us go through life always looking for that little extra push or edge that we need to get ourselves over the blocks that life throws at us.  Unfortunately though, life seems to have a weird knack for occasionally making those opportunities harder to find than we feel that they need to be.  This particularly applies to some of the truly hidden gems that have the potential to really help boost people through their lives and to their goals.  One of these diamonds in the rough is a program called an Individual Development Account (IDA).

The IDA is a program where you save a portion of your salary that is then matched, commonly at a 3-1 or 4-1 ratio, which you can then use to pay for a house, start a business, jump-start your retirement savings, or even pay for your education.  Some plans even offer an 8-1 match, but you have to do some shopping for those. (In regards to your education, some programs only pay for grad school, other programs like some in New Hampshire will help you pay for college as well).  The median college debt in the U.S. is about $12,800 according to a study by the Brookings Institute. Most plans allow you to save about $1000 during the course of a year, so if you register for a plan that gets you a 3-1 match on your money, you will have saved $4,000 and received $12,000 in those 3-1 matches over the four years you were in college that you can use to pay off your student loans, buy a house, or start a business.  Imagine that you wanted to save for a $16,000 down payment for a house, and you only had to use $4000 out of your own pocket with the other $12,000 coming from the government, and private donations; that is the economic equivalent of what you are looking at.  (In regards to the IDA programs offered in New Hampshire for example, you can’t use your IDA money to pay off previously racked up student loans, you can only use it to pay off future education bills, so you will have to check with your program as to what the rules are).

“Wait a second, there has to be some kind of catch here right?”  That is exactly the reaction I had, and there are a few that you should be aware of.  IDA programs will require you to attend some financial education classes that your IDA is geared to help you with.  Quite a few of them will require you to participate in your account for several months.  You will also have to give proof that you aren’t cheating the system, and are going to use your money to pay for what you say you are in order to access your account.  The other catch is that IDAs are primarily devoted to people who are moderate to low-income.  Thus you can only contribute if you make less than a certain percentage of the federal poverty level with the last program that I looked at limiting your ability to start an account only if you made less than 200% of the federal poverty level.  So a family of 4 in 2013 would have been able to set up an account only if they made $47,100 or less.  There are other restrictions, but with differing plans, you will have to contact the plan provider in the state that you are going to use to get all of the details as to what these entail.

One of the main priorities that most if not all people want are to be able to have control over their lives, to do the things that they want to do, without having to worry about paying their bills.  For some people this means being able to take a week off to watch their kid’s basketball tournament, and for others it means being able to participate more actively in the charitable or political activities for which they are passionate.   This program offers people who are moderate to low-income a chance to climb the ladder of life to a place where they can enjoy financial independence and the possibilities of being able to enjoy the activities that they wish to engage in.
If you are interested, and want to make further inquiries into an IDA program the best site to look at is this one right here: http://cfed.org/programs/idas/ida_basics/

Footnote:
Some of you may be wondering why I used the median student loan debt rather than the average student loan debt which is twice as high, and the reason for this is that, as the New York Federal Reserve notes, the average student loan debt is pulled up by a minority of people with high student loan balances that skew the average and paints a grimmer picture than what the economic reality actually is.  (For the record, I do agree that our student loan system is broken, but it is important to understand how the numbers are influenced).  The people who have these really high debts are typically older than what we normally associate with people in college, they are typically in their thirties, and as a result also tend to be those in graduate studies for medicine or law school.  Thus with their high future earning capacities they will be able to pay off their debts once they get into the workforce which is why you see their debt levels decline once they get into their forties.