Interest rates are incredibly low right now. This is good news when you apply for a mortgage. But if you’re looking for a high-yield savings account, it’s terrible news.
According to the FDIC, the average interest rate on savings accounts is 0.06%. To give you an idea of how low this is, a $ 2,500 balance would take a full year to earn $ 15 in interest.
But what if we told you there was a savings account that could instantly quadruple your money? That’s your account balance times six! For every dollar saved, would you receive $ 5 in matching credits?
It may sound too good to be true, but it isn’t.
What are individual development accounts?
An individual development account is a savings account with a specific, defined purpose. For example, you can open an IDA to buy your first home, buy a vehicle, or pay tuition fees. IDAs can also be used to fund small business and micro business development.
Individual development accounts are usually funded through a government program. Funding for the program is then administered through a non-profit organization. You are reaching out to the nonprofit to set up an IDA that will give you a match on the money saved. Most IDAs settle your contributions dollar for dollar. However, some programs are even more generous.
Oregon has one of the most robust IDA programs in the country. Through the Oregon IDA Initiative, most accounts are currently equal to participants’ contributions 3: 1. This means that for every dollar that participants save, participants will receive three matching funds, quadrupling their monthly savings.
Holly McGuire, Director of Economic Opportunities at Neighborhood partnerships in Portland, Oregon, says the hit rate will continue to rise there. Most programs across the state are currently converting to a 5: 1 match rate. This equates to an instant payment of 500% interest after you deposit 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 looking for an IDA even if you don’t necessarily refer to yourself as a low-income household.
For example, Oregon’s IDA program allows IDA participants to earn either 200% of the state poverty line or 80% of the median income for the region. Two hundred percent of the federal poverty line for a family of four is currently $ 53,000. Eighty percent of the median income of the same family in Oregon’s Multnomah County is $ 77,350.
Because the region’s median income is the larger number, families of four with incomes of $ 77,350 / year or less will qualify.
You can expect most, if not all, IDA programs to see that you live within certain geographic boundaries.
Restrictions on Property
IDA programs can also include asset testing or resource constraints. We’ll look again at Oregon as an example. For this IDA program, your net worth must be US $ 20,000 or less. But the value of your first home and the first $ 60,000 you saved in tax-privileged retirement accounts don’t count.
Eligibility requirements for IDA programs can vary from state to state or even from program to program. If you’re not sure if you qualify for your local custom development account, ask. Income limits can be higher than you think.
Is there a limit to how much I can save?
Yes. The upper limit on how much you can save in an individual development account varies from program to program.
Oregon’s IDA program allows your contributions and game to be up to $ 3,000 every 12 months. With the new 5: 1 play ratio, this means IDA attendees only need to save $ 600 each year to hit the program maximum.
The upper limits, as well as the eligibility limits, vary depending on where you live and which IDA accounts are available to you.
Do IDAs Offer Financial Education?
IDA programs are almost always associated with financial literacy. In some cases, this free financial literacy training is even a requirement.
Oregon requires completion of a financial education course run by local nonprofits. Nonprofits also help participants create a personal development plan in which they receive goal-specific coaching.
“For example, micro savers work with small business centers to develop a business plan,” says McGuire. “Home buyers would work with housing centers to learn more about home buying.”
Both the course and the planning of your money saving goals must be completed before your matching funds can be paid out to your IDA. Your nonprofit can help you create a monthly savings plan so you can maximize your pooled funds.
The financial literacy training requirements for participants are one of the features of the program, which can change depending on where you live.
How do I find an IDA program near me?
Before 2017, it was relatively easy to find a custom development account. Federal funding for these programs has been made available across the country through a program called Assets for Independence (AFI).
“There were a lot of programs because from AFI, ”says McGuire. “It was cut under the Tax Cuts and Jobs Act. Just eliminated AFI. “
As a result, she says there aren’t many programs the size of Oregon left. However, that doesn’t mean that you should give up your search. Without the federal funds, a few selected programs have not even disappeared, but rather shrunk. It’s just that all contributions are now coming from non-federal funds because of a lack of federal funding.
Add that with the disappearance of AFI, information about local IDAs became more decentralized, making it difficult to direct you to a specific search tool. Your best bet is to do a hyper-local Google search or contact your local United Way.
Nationwide IDA programs
However, there are some states with active, state-wide programs or programs in the works. Vermont, for example, has one Adjusted savings Program. While not quite as robust as Oregon’s IDA initiative, program participants can receive dollar-for-dollar match funds. McGuire says Massachusetts could soon have a similar program.
The future of individual development accounts
Will individual funding accounts or matching funds savings programs be easier to find or accessible in the future?
You could be. At the federal level, there were rumors about policy developments. The program running in Florida and Arizona is considered a national model, according to McGuire. Another policy proposed by advocates nationally is Promise Accounts, which would function similarly to IDAs before the AFI funding cuts.
“The reality is that wealth in our country is unfairly structured,” says McGuire. “Many narratives about poverty suggest that people are poor because they did something wrong. But the main problem poor people have is not poor money management skills. The problem is that they don’t have enough money. “
“To solve poverty,” she continues, “we need to support people from within the structures that were built to keep wealth in the hands of a few.”
Custom development accounts do just that, while also helping local small business grow. Hopefully in the future they will be restored to their full breadth before the TCJA.
Until then, see if anyone is hiding in a neighborhood near you.
Pittsburgh-based author Brynne Conroy is the founder of the Femme Frugality blog and author of The Feminist Financial Handbook. She writes regularly for The Penny Hoarder.
This article originally appeared on www.thepennyhoarder.com