Eligible for An Individual Development Account? IDAs Match Funds for Low-Income Households

Think padding your savings account is impossible? Not true. IDAs are one option for modest earners that may make your dream of having a financial cushion a reality.

If you're like most Americans, the phrase "IDAs" doesn't resonate much, but if you live in a low-income household and are looking to change your financial future these three letters will sound sweeter than Santa Claus' sleigh bells. IDAs, or Individual Development Accounts, are matched savings accounts – and they offer free money to any individual who's ready to be a serious saver.

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11 Things You May Not Know About Your IRA

The most important part of your individual retirement account (IRA) is the fact that it is "individual". You can customize when you make deposits, take withdrawals and pay taxes on distributions. You can even control what happens to it after you die. Want to take advantage of all that your IRA has to offer? Read on for some little-known features that will help you get the most out of your contributions.

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11 Things You May Not Know About Your IRA

1. You can contribute to more than one IRA.

It is possible to end up with more than one IRA for a number of reasons. For example:

· You had an existing Roth account and then rolled an old 401(k) into a Traditional IRA.

· Your adjusted gross income (AGI) rose to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a Traditional IRA.

· You inherited an IRA from a loved one, but you already had one of your own.

· You maintained your Roth account and opened a Traditional IRA to take advantage of tax deductions.

Contribute to as many IRAs as you want, but the total deposited in all IRAs is limited to the annual maximum amount. For example, the annual maximum contribution for 2008 is $5,000. So, if Bob deposits $2,000 into his Traditional IRA, he can also contribute $3,000 to his Roth account during the same year.

11 Things You May Not Know About Your IRA

2. All IRA contributions must be made in cash.
This limitation may be irritating if you're rolling over an account and you don't want to liquidate the assets. Cash contributions force a new basis for investments inside the account. The basis of the IRA is important because when you take a distribution from a Traditional IRA, you pay taxes on the gains and income from your investments, but not on the basis.

11 Things You May Not Know About Your IRA

3. IRA losses may be tax deductible.
One of the main advantages of an IRA account is the ability to defer taxes on gains and investment income. But you can't use losses inside the IRA to offset gains. This is because the IRS gives you a reprieve after you liquidate the account: If the total distributions from your IRA are less than your basis in the account, you can deduct the loss after all assets are distributed from the account.

11 Things You May Not Know About Your IRA

4. You control your required minimum distributions.
Traditional IRA owners must begin taking distributions by April 1 of the year after they turn 70.5 years old. The minimum amount distributed is based on the balance of the account on December 31 of the previous year and the owner's life expectancy. For each year thereafter, the required minimum distribution (RMD) must be withdrawn.

If you have multiple Traditional IRAs, you don't have to take RMDs from all of them. You can combine the total balances from the end of the previous year to calculate your total RMD and actually take the distribution from one account or a combination of accounts. For example, you may prefer to liquidate the investments in one account over the investments in another account.

11 Things You May Not Know About Your IRA

5. All beneficiaries are not created equal.
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through probate. This is because spousal beneficiaries can claim inherited IRAs as their own. This flexibility allows the spouse to control new contributions and distributions.

Non-spousal beneficiaries cannot treat inherited IRAs as their own. They can't add to them and they must completely liquidate the account within five years of the death of the owner. Keep this in mind if you plan to leave IRA assets to your children or grandchildren.

11 Things You May Not Know About Your IRA

6. A basis is needed for IRA transfers, but not rollovers.
It is common for individuals to move accounts from one financial institution to another. If you just decide to maintain the same type of IRA account with a different company, that's considered a "transfer". All assets are moved "in kind" (as they are), without liquidating anything. In this case, it's your responsibility to retain the original basis on the account; the receiving institution will request a copy of a statement proving the basis.

You need to have an accurate basis amount for Traditional IRAs, because distribution amounts above the basis are taxable. IRA assets above the basis can be rolled into other types of retirement accounts, but the basis must be maintained in the IRA, or it will be considered a taxable distribution.

A rollover involves moving your money from one type of retirement account to another. For a rollover, you must liquidate the previous holdings to move cash into the IRA, so the basis becomes irrelevant.

11 Things You May Not Know About Your IRA

7. You can deduct IRA fees from your taxes.
Financial services firms may charge annual fees on top of transaction fees for the purchase or sale of investments. You may be able to deduct these fees using 1040 Schedule A.

11 Things You May Not Know About Your IRA

8. Your annuity can act like an IRA.
Your annuity can operate under the same rules as an IRA. The benefit is that annuity policies were designed to provide retirement income for life. Some annuities also offer optional features not available in regular IRAs. The downside is that annuity premiums, which contain insurance payments, can be higher than other investments.

11 Things You May Not Know About Your IRA

9. IRAs are non-fiduciary accounts.
Brokerage accounts allow you to give your financial advisor written authorization to make investing decisions and routine transactions without notifying you first. Often, a flat fee is charged for managing the account. This type of fiduciary activity is not allowed for IRAs.

11 Things You May Not Know About Your IRA

The program's goal is simple: Individual Development Accounts help cash poor families attain a piece of the American dream – i.e. home ownership or financing a college education – by contributing money into this savings account each time you do. The matching ratio can be anywhere from 1:1 to 1:3. Most of the programs are sponsored by the government and private investors, but run by non-profit organizations. Like any good thing, there is a stipulation – but even the penalty has perks. Participants have to take financial education classes while contributing to their IDAs. The goal is to help all families have access to the tools and resources typically only privy to the middle class and above.

Is an Individual Development Account right for you? Here are three things you should know about IDAs:

1. IDAs are not offered at every bank. You will have to do research to find a bank or credit union that offers this special program. Check out www.cfed.org to find a location in your state.
2. The money from an Individual Development Account can be used for home purchases, home repairs, starting a business or for smaller goals such as buying a computer.
3. You can participate in an IDA program for several months or years. The goals for saving in an IDA are attached to timelines based on your objective.

Overall, IDAs are a great way to finance the life you envision for yourself one dollar at a time. As many people have been down-sized economically because of the recession, more people may be eligible for an Individual Development Account than they realize. Do your research at www.cfed.org to find out if an IDA is right for you. Your tomorrow is up to you.

Have you used the dollar-matching power of the IDA before to reach your savings goals? If so, please share your experiences with the Individual Development Account program below.

A trained life coach, S. Tia Brown has spent the last 10 years following her passion for journalism as an editor, writer and TV correspondent. Brown has worked for CNN, E!, MSNBC, the New York Daily News, Essence and Black Enterprise. Most recently she served as senior editor for In Touch Weekly magazine. Check out her advice column Do Better, Be Better at www.tiabrown.com.