Interest rates are incredibly low right now. This is good news if you are applying for a mortgage. But it is terrible news if you are 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 how low that amount is, it would take a $2,500 balance a full year to earn $15 in interest.
But what if we told you that there is a savings account that can double your money instantly? This is your balance six times! For every dollar saved, will you receive $5 in matching money?
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 for a specific purpose. For example, you might open an IDA with the intent to buy your first home, buy a car, or cover college tuition. IDA can also be used to finance small business and small business development.
Individual development accounts are usually funded by a government program. Thereafter, program funding is managed through a non-profit organization. You can contact the non-profit organization to create an IDA, where you will receive a match on the money you save. Most IDAs will match your contributions in US dollars. However, some programs are more generous.
Oregon has one of the strongest IDA programs in the country. Through the Oregon IDA initiative, most accounts currently match participants’ 3:1 contributions. This means that for every dollar that participants save, they will receive three in matching money, quadrupling their monthly savings.
Holly McGuire, Director of Economic Opportunities at Neighborhood Partnerships In Portland, Oregon, he says the game rate is about to rise there. Most programs across the state currently move to a match rate of 5:1. This would be akin to immediately paying 500% interest after making a deposit into your savings account.
Who is Eligible for IDA Programs?
Most IDA programs are income-based, and are made available to low-income individuals. However, you should consider seeking an IDA even if you don’t necessarily think you are a low-income family.
For example, the IDA program in Oregon allows IDA participants to have incomes either 200% above the federal poverty level or 80% of the region’s median income. Two hundred percent of the federal poverty level for a family of four is currently $53,000. Eighty percent of the median area income for the same family in Multnomah County, Oregon is $77,350.
Since the median income in the area is the largest, families of four with an income of $77,350 per year or less will qualify.
You can expect to see most, if not all, IDA programs that require you to live within a set of specific geographic boundaries.
IDA programs may also include an asset test or resource limit. We’ll look at 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 saved in tax-advantaged retirement accounts don’t count.
Eligibility requirements for IDA programs can change from state to state or even from program to program. If you are not sure if you qualify for a local individual development account, ask. Income limits may be higher than you think.
Is there a maximum amount that I can save?
Yeah. The maximum amount you can save on an individual development account will vary from program to program.
IDA in Oregon allows your contributions and match to add up to $3,000 every 12 months. With the new 5:1 matching ratio, this means that IDA participants only need to save $600 each year to reach the program cap.
Uppercase, just like eligibility limits, will vary depending on where you live and the IDAs available to you.
Does IDA provide financial education?
IDA programs have always been linked 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 by local nonprofit organizations. Nonprofits will also help participants create a personal development plan, in which they will receive goal-specific training.
“Small business savers, for example, work with small business centers to develop a business plan,” McGuire says. “Home buyers will work with housing centers to learn the ins and outs of buying a home.”
You must complete both the course and plan your financial savings goals before disbursing your matching funds to your IDA. Your nonprofit can help you select a monthly savings plan so you can increase your matching money.
The financial literacy education requirement for participants is a characteristic of the program that will change based 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 has been federal funds earmarked for these programs nationwide through a program known as Assets for Independence (AFI).
“There were many programmes Because McGuire says. “It was cut under the Tax Cuts and Jobs Act. Just eliminated the AFI.”
As a result, she says, there aren’t many Oregon-sized programs left. However, this does not mean that you should give up on your search. Without federal funding, a select few programs have not disappeared as much as they have shrunk. It’s just that all contributions now come from non-federal funds due to a lack of federal grant money.
Add the fact that with the disappearance of the AFI, the information about the local IDA becomes more decentralized, which makes it difficult to direct you to a specific search tool. Your best bet may be to do a Google search locally, or contact your local United Way.
IDA programs at the state level
However, there are a few states that have active statewide programs or programs in place. Vermont, for example, has Matching savings a program. Although not quite as robust as the IDA initiative in Oregon, program participants can receive cash for dollars. McGuire says Massachusetts may have a similar program soon.
The future of individual development accounts
Will it be easier to find or access IDAs or matching fundraising programs in the future?
as it may be. There have been jitters about policy development at the federal level. According to McGuire, the program being run in Florida and Arizona is seen as a national model. Another policy that has been proposed nationally by advocates is Promise Accounts, which will operate much like the IDA before the AFI funding cuts.
“The reality is that wealth is built unfairly in our country,” McGuire says. Many accounts of poverty suggest that people are poor because they have done something wrong. But the main problem for the poor is not poor money management skills. The problem is that they don’t have enough money.”
“To solve the problem of poverty, we need to support people outside the structures that were built to keep wealth in the hands of a few,” she continues.
Individual Development Accounts do just that, while also supporting the growth of local small businesses. Hopefully, in the future, it will be restored to its full breadth before the TCJA.
Until then, look to see if someone is hiding in a neighborhood near you.
Brian Conroy, a Pittsburgh-based writer, is the founder of the Femme Frugality blog and author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.