Savings Plan Can Bring American Dream a Step Closer
Lawrence Iriate ran out of financial aid a semester short of college graduation. But the Newark, Calif., artist had an ace in the hole--an Individual Development Account, which is a matched savings account for the working poor.
Iriate had set aside $500 in that account. A nonprofit group matched his savings $2 for $1. The resulting $1,500 was just what Iriate needed to help him become the first member of his family to graduate from college.
Now Iriate’s wife, Michelle, is using an IDA to save for a computer that she’ll use for school and that may help the couple start a Web-based graphic arts business.
If a bipartisan coalition of lawmakers has its way, these savings accounts will become more common. President Bush and Sen. Joseph Lieberman (D-Conn.) and Sen. Rick Santorum (R-Pa.) recently proposed a bill aimed at boosting charitable giving. A portion of the bill sets aside $1.7 billion in federal funds for Individual Development Accounts. That could increase awareness of the accounts and make them more well-known and widely available.
What are IDAs? Who can use them and where can they be found? Here’s a guide.
Question: What’s an Individual Development Account?
Answer: It’s a matched savings account offered only to people with limited incomes. The accounts are offered through nonprofit groups--many of them community-based organizations--that match individual savings if the money is used for specific goals. Those goals include paying postsecondary education expenses, buying a home or starting a small business.
Typically, participating individuals will state their goal--both in dollar amount and the intended purpose for the savings--before opening an account. The nonprofit group will handle paperwork, provide financial education and send regular statements showing the value of the participant’s savings and the value of the match.
Q: Can participants withdraw their money at any time?
A: They can take out the money they’ve saved, but the matching contributions are available only after the savings goal has been achieved. Even then, the participant does not get the money directly; the program will send a check for the matching contribution to the provider of the good or service that the participant designates.
For instance, if the participant’s goal is to buy a home, the matching contributions would be put into an escrow account that would be tapped when the participant closes on a house. If the participant is saving for school, matching contributions would be sent to the school.
Q: How much are the matching contributions?
A: That depends on the program. Some match 50 cents for each $1 the participant saves; others match up to $7 for each $1 saved.
The most common match is $2 for each $1 saved, according to the Corporation for Enterprise Development, a Washington-based group that promotes the programs.
Q: Who qualifies for this program?
A: Some of the qualifications are determined by the nonprofit groups that sponsor IDA programs. About 400 IDA initiatives are operating through nonprofit groups nationwide, and there are IDA programs in all but two states--North Dakota and Wyoming, said Sandi Smith, senior program manager at the Corporation for Enterprise Development.
A study conducted last year by the Center for Social Development found that the average age of enrollees in the IDA program was 36, but some participants were as young as 13 or as old as 72. About 21% live in households with incomes below 50% of the federal poverty line.
Although the programs allow accounts to be used for home purchases, education and to develop a small business, about half also allow matching funds to be tapped for job training or home repair.
Q: How would the proposed legislation affect the IDA program?
A: The proposed Charity Aid, Recovery and Empowerment Act would provide federal funding for IDA accounts opened from 2003 through 2007. It also would create federal guidelines for who could qualify for the program and what types of savings goals IDA accounts could fund.
For instance, the bill would restrict eligibility to partcipants 18 to 60 years old. To qualify, single applicants could earn no more than $20,000 a year; heads of household, no more than $30,000; and married couples, no more than $40,000.
The accounts could be used for postsecondary education or vocational training, first-time home-buyer costs or to start or expand a small business.
Participant savings would be matched on a $1 for $1 basis with federal dollars, up to $500 a year. Additional matching amounts could come from sources such as states and private foundations.
Q: How likely is this bill to pass?
A: That’s hard to say. The bill appeared to be on a fast track when it was introduced in February but it has stalled, partly because some legislative leaders want to craft their own version. Promoters of the IDA program have substantial support in Congress and are working to ensure that the proposal is passed. However, nothing is certain.
Q: What happens if the bill isn’t passed?
A: IDA programs would continue as they are now--public-private partnerships funded by a patchwork of federal, state, foundation and private money, said Smith.
Q: Where can I find a program?
A: Go to www.idanetwork.org on the Web. There’s a section that describes the various initiatives and where to locate them.
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Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com /perfin.
