Assets For Independence:
First Interim Report to Congress FY1999
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Overview Of Individual Development Accounts |
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| Purposes Of The Individual Development Accounts | |||
Individual Development Accounts (IDAs) are matched savings accounts administered for the dedicated purpose of assisting low and moderate income individuals and families to invest in acquiring assets such as homeownership, small business, and post-secondary education. IDAs are a tool to ensure that low-income individuals and families may participate in this emerging asset-based framework. IDAs are innovative in their focus on acquisition. Instead of focusing on income and consumption, these accounts focus on attaining appreciable assets that, in turn, may improve the economic stability of families and individuals. IDAs are similar to other asset based initiatives such as 401(k)s, 403(b)s, IRAs, and Roth IRAs.
Under Sec. 404(5) of the AFI statute, an IDA is defined, in part, as “…a trust created or organized… exclusively for the purpose of paying the qualified expenses of an eligible individual, or enabling the eligible individual to make an emergency withdrawal,” subject to certain requirements outlined in Sec. 404(5). Account holders in IDA projects commit to make regular deposits of their earned income into an IDA according to program guidelines. These deposits leverage both public and private investments through matching funds that are restricted to asset purchases. In addition to the matching funds, account holders receive education and training to improve financial literacy in IDA projects to prepare them for developing and maintaining assets. IDAs allow families and individuals to participate more fully in their economic future.
IDAs have emerged in an era of welfare reform and a focus on personal responsibility. Most anti-poverty programs provide individuals and families with a safety net through income support. However, these programs rarely, if ever, assist low-income individuals to acquire appreciable assets. This stands in contrast to the asset policies built into the tax code that tend to benefit those with higher incomes, such as the home mortgage interest deduction, tax breaks for retirement savings, and preferential capital gains treatment. IDAs seek to provide low-income families and individuals with the benefits of building long-term, productive assets.
Since 1993, IDAs have grown from a few small programs to more than 300 initiatives nationwide. Several national non-profit agencies and foundations have launched privately-funded regional or national IDA initiatives that are designed to serve particular populations (e.g., Native Americans) or to be administered by particular types of agencies (e.g., affordable housing organizations). In addition to this expanding private IDA activity, the public sector’s involvement has been growing rapidly. On the national level, apart from the AFI demonstration, DHHS’s Office of Refugee Resettlement administers an IDA program for refugee populations. On the state level, almost all states have taken some form of policy action to promote IDA activity. More than half of the states have included IDAs in their state Temporary Assistance to Needy Families (TANF) plans (as allowed by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996) and the majority of the state legislatures have passed some form of IDA legislation.
Purposes Of The Individual Development Accounts
Under the AFI Act, IDA holders may set up their accounts for three purposes: (a) the purchase of a home, (b) obtaining a post-secondary education, or (c) starting or expanding a small business. Under some circumstances, accounts may be transferred from an eligible individual to another eligible individual if the new account holder uses it for one of the three enumerated purposes.
The distribution of the different types of IDA accounts reflects the estimates of the AFI grantees as expressed in their original proposals[1]. About 65 percent of the accounts were expected to be home purchase accounts, 15 percent were to be post-secondary education accounts, and 20 percent were to be small business accounts.
In the first year, by far the most popular of the options was the purchase of a home. Approximately 60 percent of the accounts that were opened had the purchase of a home as their purpose. Of the remaining accounts, about 18 percent were set up for the purpose of paying for post-secondary education, and 22 percent for starting or expanding a small business (see Figure 1 below).
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Notes
1. Less than half of the projects provided an actual estimate of the expected distribution of the types of IDAs in their proposal. [Return to Text]
