Non-Retirement Investment Accounts – How to Treat for Affordable Housing Purposes

Most operators of affordable multifamily rental housing know that when regular payments are made from retirement accounts, those payments count as income, and any amounts remaining in the account are not counted as assets. But what about non-retirement investment accounts? How should we treat money that is taken out of those accounts? Is it income, or do we continue to treat the account as an asset?

HUD requires that the full amount of periodic payments from annuities, insurance policies, retirement funds, pensions, and disability or death benefits be included in annual income (HUD Handbook 4350.3, 5-6.L.1). This same section refers us to 5-6.O (it’s actually 5-6.P) for information on the withdrawal of cash or assets from an investment.

5-6P states that “the withdrawal of cash or assets from an investment received as periodic payments should be counted as income. Lump-sum receipts from pension and retirement funds are counted as assets. If benefits are received through periodic payments, do not count any remaining amounts in the account as an asset.”

This is the extent of the HUD guidance on how to handle payments being made from investment accounts.

To determine what this means, we must look at the precise wording of the guidance.

Clearly, any regular (i.e., periodic) payments being made from retirement accounts are counted as income. Many investment accounts are retirement accounts, such as IRAs and 401k accounts. So, if regular payments are made from those accounts the payments are counted as income, and based on the 5-6.P guidance, the balance of the account is disregarded.

Another question that must be answered is – what is meant by “periodic?” The standard definition of “periodic” is something that is “occurring or recurring at regular intervals.” The term “regular” means “recurring, attending, or functioning at fixed, uniform, or normal intervals.”

One area of debate in the affordable housing world is whether the required minimum distribution (RMD) from retirement accounts should be counted as income. Based on HUD guidance and the meaning of the words used in that HUD guidance, the answer is clearly – yes. Is a payment that is made once each year a periodic payment? According to the accepted definition of periodic, the answer is – yes. Based on this, RMDs should be counted as income, and in keeping with HUD guidance, we should not count any remaining amounts in the account as an asset.

But what about investment accounts that are not retirement accounts? How should money withdrawn from those accounts be treated?

There are four basic types of investment accounts: (1) individual brokerage accounts; (2) IRAs {Roth or Traditional}; (3) 401k {and other Corporate Sponsored Accounts}; and (4) 529 College Savings Accounts.

Is an investment account the same as a savings account? No – there is a difference between saving and investing. Saving means putting away money for later use in a safe place, such as in a bank account. Investing means taking some risk and buying assets that will hopefully increase in value and provide the investor with more money than originally invested, over the long term. For this reason, money withdrawn from saving and checking accounts is never counted as income.

Clearly, retirement accounts can (and do) provide regular periodic payments. The RMD noted above is an example, but the payments may be monthly, quarterly, semi-annually, or based on any other schedule desired by the owner of the account. The key feature though is that periodic payments are being made from the account.

Why are payments made from a 529 account not counted as income? Because HUD regulation state that payments made for educational expenses are excluded from income. Therefore, disbursements from these accounts will not be considered income (with the limited exception relating to some Section 8 recipients, where amounts in excess of tuition and mandatory fees are counted as income).

So, that leaves us with brokerage accounts. Is money withdrawn from these accounts counted as income? The answer is no – such accounts are treated as assets, and the only income generated by these assets is the interest earned or the dividends paid. Brokerage accounts do not offer a plan of regular recurring payments. While withdrawals from such accounts may be taken at any time, the treatment of these withdrawals is spelled out in 24 CFR, §5.609 (b)(3), “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). A “withdrawal” differs from a “payment” in that it will generally not be periodic and is simply a removal of something that has been deposited. It is worth noting that there is no HUD guidance indicating that “withdrawals” from investment accounts are counted as income unless such withdrawals are made on a periodic basis. In fact, such guidance would directly contradict the Code of Federal Regulations – as noted above.

Managers of multifamily housing operated under various federal housing programs, such as Section 8, HOME, RD Section 515, and the LIHTC, should pay close attention to regular payments made from retirement accounts; such payments should be considered income. However, withdrawals made from other investment accounts generally will not be considered income.