Handling Income from Investment Accounts

As most operators of housing under HUD, Rural Development, and the Low-Income Housing Tax Credit Programs know, there is a considerable difference of opinion in our industry regarding the handling of investment accounts from which regular distributions are taken. This difference is the result of conflicting information – or at the very least – a lack of clarity, in HUD Handbook 4350.3, Change 3, which is the basic guidance on income determination for all these programs. After much back and forth with HUD, and a full analysis of all related regulation, I have an opinion on what we should be doing, and a recommendation for my clients as to how they should approach the issue. Before going into either of those though, let me explain the various contradictions.

• Exhibit 5-2 of HUD Handbook 4350.3 states that the references are current as of the date of publication (which for this exhibit was June 2007). It states that readers should refer to the latest edition of the Code of Federal Regulations (24 CFR Part 5.603), which I will get into later. This exhibit states that assets include individual retirement accounts, 401k accounts and Keogh accounts, when there is access to the funds. If occasional withdrawals are made, the distributions should not be counted and the account should be valued using a six-month average balance (similar to a checking account). For example, a person has a $30,000 Keogh account and, at age 70, begins withdrawing $2,000 annually. Per the example provided by HUD, this should be counted as an asset and the $2,000 should not be counted as income (this appears to contradict Chapter Five of 4350.3, which I will get to shortly).
  • Under Retirement & Pension Funds, Exhibit 5-2 states that if employed, only the amounts that can be withdrawn without quitting or retiring should be included as an asset. If retired, terminated, or if funds are withdrawn,
    • Periodic receipts are counted as income; and
    • Lump sum receipts are treated as assets.
  • If benefits will be received through periodic payments, they should be counted as income, and any remaining amounts in the account should not be counted as an asset.
  • If a lump sum is received, followed by periodic payments, count the lump sum as an asset and treat the periodic payments as income. In following years, count the periodic payments as income and do not count any remaining amount as an asset. (Note – if the lump sum represents a delayed periodic payment, it is income).
  • The following example is provided by HUD: A person retires, receiving a lump sum payment and then getting regular payments. The lump sum (to the extent not spent) is an asset. The person is now not able to withdraw the balance (this part of the example seems to indicate that the lack of access is the reason it is no longer an asset, which reflects the actual CFR). The regular payment is income and the pension is not listed as an asset.
  • Under what assets do not include, Exhibit 5-2 lists assets that are not accessible to the applicant and provide no income to the applicant (again, a key appears to be accessibility).
• Handbook 4350.3, Chapter 5, Section 5-6.L
  • The full amount of periodic payments from annuities, insurance policies, retirement funds, pensions, and disability or death benefits is included in annual income. (This paragraph references subparagraph “O” for information on the withdrawal of cash or assets from an investment, but it should actually be subparagraph “P”).
  • Subparagraph P states that withdrawal of cash or assets from an investment are treated as follows:
    • If received as periodic payments, count as income;
    • Lump sum receipts are treated as assets; and
    • If the payments are periodic, remaining amounts in the account are not treated as assets. (It is the unequivocal nature of this statement that has caused so much uncertainty in the industry. From this statement, one would assume that even if the applicant had access to the account, it would not be counted as an asset, since HUD provided no exception to the statement).
  • However, Section 5-4, C states that annual income includes amounts derived from assets to which any member of the family has access.

The ultimate guidance to be relied on is the Code of Federal Regulations (CFR). The CFR is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the federal government, and is sometimes referred to as “administrative law.” Such law takes priority over other guidance that may be issued by federal agencies, such as handbooks, and in the event of conflict, the CFR prevails. The only authority that supersedes the CFR is the enabling statute or statutory authority.

The requirements for the determination of income for HUD programs is contained at 24 C.F.R. §5.609. Specific to the issue at hand is §5.609(b)(3), which states that any withdrawal of cash or assets from an investment will be included in income, except to the extent the withdrawal is reimbursement of cash or assets invested by the family (emphasis added). Based on this wording, if a household can demonstrate that it has not yet withdrawn the amount it invested in an investment account, none of the withdrawals should be counted as income.

While the HUD Handbook 4350.3 is certainly not clear on this issue, and may well contradict the CFR, HUD does seem to be taking an information position that is in concert with the CFR. In the “General Income and Rent Determination Frequently Asked Questions” section of the HUD website, as of March 17, 2013, the issue was addressed by question #12, as follows:

12. Question: If a tenant puts $10,000 in an IRA, and 10 years later the IRA was worth $15,000 and that tenant began withdrawing monthly amounts from the IRA, are the amounts withdrawn considered income?

Answer: The withdrawal of cash or assets from an investment that is received as periodic payments should be counted as income, unless the family can document and the PHA verifies that amounts withdrawn are reimbursement of amounts invested. When a family is making a withdrawal from an account in which it has made an investment (e.g. annuity, IRA, etc.), the withdrawals will count as income only after the amount invested has been totally paid out. This interpretation is consistent with the 24 CFR 5.609(b)(3).

From a policy perspective, counting the regular distributions from investment accounts as income makes sense. If someone withdraws $20,000 or more per year from an IRA, it is not unreasonable to expect that they will pay rent based on that income. However, that is not what the CFR requires, and until a change is published in the Federal Register, I can find no authority for HUD to alter the methodology for determining income from investment accounts.

As to how managers and owners should proceed relative to this rule, my advice is to follow the guidance of your Contract Administrator (for Section 8 properties), Rural Housing Service representative (for Section 515 properties) and State HFA (for LIHTC properties). In the meantime, we will continue to seek more formal guidance from HUD than an example in the FAQ section of their website.