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New program helps the poor leverage meager pay to fulfill dreams

Hundreds of groups offer so-called Individual Development Accounts, matched savings accounts that help low-income people save for a house, business or college.

November 28, 2012|Kathy M. Kristof | Personal Finance
  • Andre Soto of Lincoln Heights enrolled in a matched savings program through the San Franscisco nonprofit Earn to help put his son Isiah through college. Earn will give them $3 for every $1 they save.
Andre Soto of Lincoln Heights enrolled in a matched savings program through… (Kirk McCoy, Los Angeles…)

When Andre Soto heard about a new program that could turn $500 of college savings into $2,000 almost overnight, the Lincoln Heights father of two assumed it was a Ponzi scheme.

"There are so many scams going on, and this was clearly too good to be true," he said.

But the account he stumbled across, called Triple Boost, is no Ponzi scheme. It's part of an anti-poverty program offered by San Francisco nonprofit Earn.

Launched in 2001, Earn is one of hundreds of purveyors of so-called Individual Development Accounts, which are matched savings accounts aimed at helping low-income Americans build economic stability through savings.

The accounts, which typically double or triple a participant's contributions, are offered to help save for specific long-term goals, such as buying a house, starting a business or paying for college.

They're an undeniably great deal, but also hard to find. Although hundreds of organizations offer them, each program can have different participation requirements and restrictions.

Some aim to help a specific ethnic group, while others focus on a geographic area, for example. In addition, savers must meet income requirements, which also can vary based on the program, the number of people in the participant's household, and the type of savings goal, such as saving for college or to launch a business. It's up to the individual to call around to find a program that suits his or her personal profile and savings goals.

A nonprofit called the Corporation for Enterprise Development, which is online at cfed.org, can help with the search. By clicking on the "program directory" on its home page, consumers can search all the program sponsors in their state.

The catch is that most sponsors require potential participants to call to inquire about the details of their programs. Only a handful spell out the parameters of their programs online.

Earn's Triple Boost program is one of the exceptions.

Earn allows potential participants to fill out an eight-question online questionnaire to determine whether they're eligible. Eligibility is based on the saver's income, assets, household size and the age of the child for whom the money is being saved, said Tatiana Siegenthaler, Earn's financial services manager.

Specifically, participants cannot have household assets exceeding $20,000 and must earn less than 50% of the average household income in Los Angeles for their family size. With just one eligible dependent, for example, the saver cannot earn more than $34,200; with two children, the maximum income is $38,450; with a household of four, the maximum income limit is $42,700.

In addition, the child for whom you're saving must be age 10 to 18. As a result, Soto can enroll in the program to fund his 17-year-old son's education but has to wait a year before starting an account for his 9-year-old daughter.

Participants have access to their savings at all times, Siegenthaler said. But if they withdraw any of the savings before they reach their goal, they lose the matching funds, are booted from the program and cannot return.

"We encourage people to have a separate emergency fund so that they don't have to tap the account," she said.

Parents must sign a legal agreement promising to use the money solely for eligible college expenses. Soto considers that a plus. The problem with living paycheck to paycheck is that mini-emergencies — such as a car problem — happen regularly, he said. Thus, whenever he has tried to save in the past, he's drained the account for something else.

"It's not my son's fault that I can't balance my budget. With this, only he has access to this money, and it can only be spent on education," Soto said. "He's a good kid. He tries hard and is really smart. He's doing his part. I need to do my part."

Assuming parents and children meet all the requirements, the way the program works is simple: Savers set up an account with Earn and deposit money, often through direct deposit from a checking account, in an amount that will allow them to meet their $500 savings goal over a set period of time that cannot exceed 24 months.

Once the savings goal is reached, Earn matches the savings on a $3 to $1 basis, turning that $500 account into a $2,000 nest egg.

Once the account is matched, savers have two choices. They can get a debit card to pay for the child's immediate college expenses. Or, if the child doesn't have an immediate need for the money, the savings can be deposited in a so-called 529 plan, a tax-favored plan for college savings.

To be sure, $2,000 in savings won't be enough to pay for everything. But Soto hopes that it will help secure his son the college degree that Soto was never able to afford.

"We are hoping through grants and scholarships and this savings, we will be able to swing it," he said. "I know it's not enough, but it will help."

business@latimes.com

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