How to Calculate Income and Assets from Pensions and Retirement Accounts
When you calculate a household's annual income, you may encounter a household member who has money in a pension fund or retirement account. It's important to know how to treat this money. But HUD rules on what to do can get confusing.
How you treat money from pension funds differs from how you treat money from retirement accounts, such as 401(k)s and individual retirement accounts (IRAs). We'll help you sort out the rules on both so you can properly calculate household income and assets.
Some household members participate in pension funds that will pay them money once they retire. These funds may be operated by an employer, such as a private company or government entity, or by another company hired by the employer to oversee the fund for a group of employees. The employer will make contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement.
How you count the money in those pension funds depends on a variety of factors, including whether the money is paid in a lump sum or periodically, whether the household member is retired or still working, and whether the household member has the right to withdraw money from the fund. Here are six rules you should follow when deciding whether to count this money as income or assets.
Rule #1: Count periodic payments as income. If a household member gets payments at regular intervals—say, monthly—count these periodic payments as income [Handbook 4350.3, par. 5-6 (L)(1)]. But if a household member gets a single lump-sum payment from a pension fund, don't count it as income.
Rule #2: Count lump-sum payments as assets. At retirement or termination of employment, any lump-sum amount a member elects to receive is counted as an asset [Handbook 4350.3, par. 5-7 (3)(4)(c)(2)]. However, a lump-sum payment is counted as an asset only as long as the family continues to possess it. If the family uses the money for something that's not an asset (such as a car, vacation, or education), the sum is not counted as an asset.
If the family deposits all or part of the lump-sum payment into a bank account or uses it to buy items that qualify as assets under HUD rules (such as stocks, bonds, or personal investment property), count this amount as an asset [Handbook 4350.3, par. 5-7 (G)(3)(b)].
Example: When John Poe retired, his company's pension fund paid him a lump-sum amount of $10,000. He spent $2,000 on a vacation, bought $1,000 in stock, and deposited $7,000 in his savings account. Don't count any of the $10,000 as income. But do count the $1,000 in stock and $7,000 he deposited in savings as assets.
PRACTICAL POINTER: Sometimes a household gets more than one periodic payment at a time because of a processing delay. This deferred periodic payment may look like a lump-sum payment, but it's not. Count the entire amount of the delayed periodic payments as income, not assets [HUD Handbook 4350.3, par. 5-6 (Q)(3)].
Rule #3: Count amounts employed household member may withdraw as assets. Some household members who are still employed have a “vested interest” in all or some of their pension funds—meaning that the money “belongs” to them and will eventually be paid out to them after they retire.
Sometimes these household members have the right to withdraw some or all of their vested interest in these funds. If this situation arises, you must include as an asset any amount a household member can withdraw from the fund while she's still employed. However, amounts that would be accessible only if the person retired or left the company first are not counted. Be sure to deduct any early withdrawal penalty she would have to pay if she made the withdrawal [Handbook 4350.3, par. 5-7 (G)(4)(c)(2)].
Example: Jane Doe is still employed. Her company's pension fund permits her to withdraw her share of the fund, $5,000, before she retires or leaves the company, subject to a $500 early withdrawal penalty. Count $4,500 ($5,000 - $500) as an asset for Doe.
Rule #4: Don't count retiree's remaining vested interest in fund. If a household member has retired, any portion of the fund that hasn't yet been paid to her is neither income nor an asset [Handbook 4350.3, par. 5-7 (G)(4)(a)].
Example: Jean Roe is retired. Her vested interest in her company's pension fund is $20,000. To date, she has gotten $5,000 in periodic payments from the fund. Count that $5,000 as income. Don't count the remaining $15,000 of her vested interest as income or an asset until it's paid to her.
Rule #5: Don't reduce payment by amount employee contributed to fund. Participants in pension plans may have contributed money to the pension fund while they were working. Don't reduce a household member's pension payments by any amounts that the household member has contributed. Count the full amount of the pension payments [Handbook 4350.3, exh. 5-2].
Example: Joan Coe contributed $10,000 to her company's pension fund. After she retired, she started getting monthly payments of $300. Count all the monthly payments as income—don't wait until she's gotten $10,000 from the pension fund before you start counting the payments as income.
If the household member is still employed, you must include the member's contributions to the pension fund in the household's income—even if the contributions are deducted from a paycheck [Handbook 4350.3, exh. 5-1].
Example: Jim Snoe's weekly gross salary is $300. Each week his employer deducts $20 from his paycheck and deposits it into Jim's pension fund. Include all of the $300 salary as income. Don't deduct the $20 contribution.
Rule #6: Don't count federal government or uniformed services pension funds paid to former spouse. Sometimes an applicant or a resident may be a retired federal government or uniformed services employee receiving a pension. If this applicant or resident is divorced or separated, a state court may have determined in a divorce, annulment of marriage, or legal separation proceeding that the pension is a marital asset, and the court may have instructed the Office of Personnel Management (OPM) to pay a portion of the retiree's pension to the former spouse. In this case, that portion to be paid directly to the former spouse is not counted as income for the applicant or resident.
However, where the resident or applicant is the former spouse of a retired federal government or uniformed services employee, any amounts received pursuant to a court-ordered settlement in connection with a divorce, annulment of marriage, or legal separation are counted as income for the applicant or resident [Handbook 4350.3, par. 5-7 (G)(5)].
Example: Susan Solo is a retired federal government employee receiving a retirement pension. She's also the recipient of Section 8 housing assistance and involved in a divorce proceeding. In settling the assets of the marriage between Mrs. Solo and her former husband, the court ordered that one half of her pension be paid directly to her former husband in the amount of $20,000. As a result, that portion of the pension paid to her former husband no longer belongs to Mrs. Solo and is not counted as income.
These are accounts household members open themselves with a bank or a brokerage firm, such as IRAs and Keogh accounts, or retirement plans through the household members' employers, such as 401(k)s or 403(b)s.
In most cases, household members retain access to the money in these accounts—meaning the household member may withdraw money from the account at any time. But if participants are younger than 59½ years old, federal law, with limited exceptions, requires them to pay a 10 percent penalty on withdrawals, says retirement plan administrator and qualified pension analyst Jeffrey Klampert. If participants are 59½ or older, they pay no penalty on withdrawals. How you count money from these retirement accounts depends on the age of the household member and whether he made any withdrawals from the account. Follow these three rules:
Rule #1: Count as household assets. Because household members can withdraw money from these accounts, you must treat them as assets. To calculate the asset value, you must consider:
Whether the member is old enough to avoid a withdrawal penalty (that is, whether the member is 59½ or older); and
Whether the member made withdrawals during the past six months.
> If household member is 59½ or older. These household members can make withdrawals without a penalty, says Klampert.
If the household member has made no withdrawals in the past six months, the asset value is simply the current account balance.
If the household member has made withdrawals in the past six months, the asset value is the account's average six-month balance [Handbook 4350.3, exh. 5-2(A)(5)].
Example: Jane Smith is 65. She has withdrawn $1,000 from her IRA account during the past six months. The average account balance for the past six months is $11,700. Because there's no withdrawal penalty, the asset value is $11,700.
> If household member is younger than 59½ years old. These household members must pay a 10 percent withdrawal penalty. So you must deduct the 10 percent withdrawal penalty to calculate the value of the account.
If the household member has made no withdrawals from the account in the past six months, merely deduct 10 percent from the current account balance to find the asset value.
If the household member has made withdrawals in the past six months, deduct 10 percent from the average balance in the account over the past six months.
Example: John Smith is 37. He hasn't withdrawn any money from his Keogh account during the past six months. The current account balance is $3,000. If he were to withdraw all the money from the account, the penalty would be $300 ($3,000 x 10 percent). So the asset value is $2,700 ($3,000 - $300).
Rule #2: Count contributions as income. A household member may contribute to his retirement account by depositing money into the account himself or by payroll deductions. As with pension funds, include these contributions in household income [Handbook 4350.3, exh. 5-1].
Example: Jim Poe's weekly gross salary is $350. Each week he deposits $25 into an IRA account. Include all of the $350 salary as income. Don't deduct the $25 weekly contribution.
Rule #3: Don't count withdrawals as income. Even though you must count the amount the household member contributes to the account as income, don't count the amount she withdraws from the account as income. Withdrawals from retirement savings accounts such as IRAs and 401(k) accounts that are not periodic payments are not counted in annual income [Handbook 4350.3, par. 5-6(L)(2)].
Example: Jane Roe withdraws $200 from her IRA each month. Don't count that money as part of her household income.
Jeffrey Klampert: Retirement Plan Administrator, Danziger and Markhoff LLP, 123 Main St., White Plains, NY 10601; www.dmlawyers.com.
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