Income Certifications: Personal Retirement Accounts from Top to Bottom

Published by Nicole Crites, CPA on Wednesday, May 3, 2017

Personal retirement accounts are the chameleons of the income certification world. They can be income, assets, assets and income or neither, depending on if the tenant has access to the retirement account and if distributions are periodic or sporadic (see “Annuities Can Be Assets and Income,” November 2016 Novogradac Journal of Tax Credits). Improper classification of personal retirement accounts can affect a tenant’s income and eligibility to rent a low-income housing tax credit (LIHTC) unit. If a tenant has declared on the rental application that he or she has a personal retirement account, what’s your next step? This discussion focuses on correctly classifying and calculating retirement accounts using examples that highlight gray areas not explicitly addressed in the Occupancy Requirements of Subsidized Multifamily Housing Programs HUD Handbook (HUD Handbook 4350.3) or the Internal Revenue Service’s Guide for Completing Form 8823.

Regular Periodic Payments: Income

If the tenant receives regular periodic payments from a personal retirement account and does not have access to the retirement account, the only amount included on the tenant income certification is income in the amount of the annualized regular payments. If this is the case, the personal retirement account would not be considered an asset (even unwithdrawn amounts) and should not appear on the asset portion of the tenant income certification. 

Required Documentation: Income

Verify with the appropriate third party how much is distributed to the tenant and how often the tenant receives the distributions and include the annualized amount as income on the tenant income certification if distributions are regular and periodic.

Example

Tenant A has a personal retirement account with a cash value of $15,000 and receives disbursements of $200 a month. Tenant A would then have annual income of $2,400 ($200 x 12 months) from the personal retirement account, and no related asset listed. 

Example

Tenant B has a personal retirement account with a cash value of $15,000 and receives $2,400 once a year from this account. Tenant B would then have an asset of $15,000, because once a year is not frequent enough to be considered regular and periodic (as demonstrated in the example under Exhibit 5-2(5) in the HUD Handbook 4350.3) and no amounts should be listed under the gross annual income portion of the Tenant Income Certification. Income from this asset will need to be considered and calculated.

No Regular Periodic Payments: Asset

If the tenant has access to the retirement account and makes withdrawals but they are not regular and periodic or if the tenant is not receiving any of the funds in the personal retirement account, the account is an asset and withdrawals are not income.

Required documentation: Asset

Household has More than $5,000 in Assets

If the sum of all household assets is more than $5,000, third-party documentation needs to be obtained to support the value of the asset. Request the required information from the tenant to submit an asset verification to the institution that holds the retirement account. Important pieces of information to request are one of the following:

  • Current balance
  • Balance currently available for withdrawal by the tenant 
  • Income expected to be earned over the next year. If expected income is not available, then historical income can be used as an estimate of expected future income.

Household has $5,000 or Less in Assets

If the household’s total assets are $5,000 or less, then no third-party verification is required and include the cash value of the retirement account (definition of cash value discussed later) on the Under $5,000 Asset Certification on the appropriate line, list the expected income from the account in the current year, and add that asset and income to the income from assets section on the first page of the Tenant Income Certification. See IRS Rev. Proc. 94-65.

Income Calculation: Asset 

Whether or not the household’s total assets are more or less than $5,000, on the first page of the Tenant Income Certification, the personal retirement account should be listed at its cash value. If the tenant decided that same day to liquidate the retirement account, the cash value is equal to the total amount the tenant would receive in cash. This means the cash value of the asset should not include any portions not vested and should be reduced by any required withdrawal or termination fees. If the tenant does not have access to any part of the personal retirement account until retirement or until some vestment period is over, then the account and any related income does not need to be listed on the Income Certification. 
 
Next, determine the anticipated income from the personal retirement account for the next 12 months, either by inquiring of the tenant for instances where the household’s assets are less than $5,000, or by calculation performed based on the asset verification, estimating future earnings or annualizing past earnings if future earnings are not available. The income you include as income from this asset is the total amount of income the asset is expected to generate, even on portions that are not available for withdrawal and not included in the cash value in the asset. A common pitfall is to use the net asset value (the value after being reduced for fees) as opposed to the gross value of the asset when calculating anticipated income. The entire asset value should be used when calculating anticipated income. However, if the household’s assets are more than $5,000 but the retirement account is not anticipated to earn any income, income must be imputed by multiplying the assets cash value (not the total value) by the current passbook rate. 

Journal May 2017 PC flowchart
Click to enlarge

Examples

Tenant C has a personal retirement account valued at $25,000 that is 60 percent vested. If Tenant C chose to liquidate the account, Tenant C would receive $15,000 in cash value. The bank confirmed that the account is estimated to earn 10 percent over the coming year. On the Tenant Income Certification, the Income from Assets section would include a $15,000 personal retirement account asset and $2,500 ($25,000 x 10 percent) in income from this asset. 

Tenant D has a personal retirement account valued at $25,000 that is 60 percent vested. If Tenant D chose to liquidate the account, Tenant D would receive $15,000 in cash value. The bank did not confirm or estimate prior year earnings or future year earnings and the tenant does not expect the account to earn income this year. On the Tenant Income Certification, the Income from Assets section would include a $15,000 personal retirement account asset and $9 ($15,000 x .06 percent) in income from this asset. 

Tenant E has a personal retirement account valued at $2,500. The tenant claims not to have access to any part of this account and is unable to withdraw any funds until retirement. This account does not need to be verified with the bank, listed on the Tenant Income Certification or the Under $5,000 Asset Certification. 

Tenant F has a personal retirement account valued at $6,500. The tenant says he or she would be able to liquidate the account and receive $2,000 and provides you with a statement to support the cash value. You do not need to confirm the asset with a third party (as long as all household assets in total are less than $5,000). The tenant anticipates the account will earn 10 percent over the coming year. On the Tenant Income Certification, the Income from Assets section would include a $2,000 personal retirement account asset and $650 ($6,500 x 10 percent) in income from this asset. 

Conclusion

Personal retirement accounts can be tricky waters to navigate when completing income certifications. As always, our advice is to be conservative and consistent and to check with your state agency.