How to Handle Residents’ CDs When Calculating Income
You probably know that each time you certify or recertify a household at your site, you need to determine the cash value of the household’s assets and the income those assets are expected to generate over the next year. It may be the case that increasingly more applicants and households are putting money into certificate of deposits (CDs). CDs are paying more generously now than they have in recent years. And in light of recent Federal Reserve interest rate hikes and the potential for additional ones, CD rates could rise even more.
CDs are a type of account in which the CD owner lends a fixed amount of money to a financial institution such as a bank for a set period of time. In exchange, the CD owner gets interest. If a resident cashes in a CD before maturity, before the end of the set time, the financial institution holding the CD will typically charge an early-withdrawal penalty. CDs sold from brokerages operate a little differently. If you come across one of these, you’ll have to ask the household member how it works.
According to the HUD Handbook, CDs are assets, so you must determine and verify a CD’s cash value and the income it will generate [HUD Handbook 4350.3, Exhibit 5-2]. If you don’t know the rules for CDs, you could end up miscalculating household income. We’ll go over the rules for calculating a CD’s cash value and income.
Determining Cash Value
Some managers may think the cash value of a CD retains its original deposit value until the CD matures. But this isn’t what HUD Handbook says. HUD defines an asset’s “cash value” as its market value less reasonable expenses that would have to be incurred to turn the asset into cash [HUD Handbook 4350.3, par. 5-7(C)]. To determine the cash value of a CD, take the following steps:
Step #1: Determine CD’s current market value. This is equal to the original investment, plus any interest the CD has earned to date.
Example: A year ago, Jane deposited $1,000 in a CD that pays 3 percent annual interest. The current market value of her CD is $1,030 ($1000 x 3% = $30 annual interest; $1,000 + $30).
Step #2: Deduct costs of selling or converting to cash. Deduct the costs that the household member would incur if he sold or converted the CD to cash at the time of the certification or recertification (for example, an early withdrawal penalty). You must do this whether or not the resident actually converts the CD to cash.
Example: John has a two-year $1,000 CD paying 5 percent annual interest. At recertification, he has owned the CD for one year. The penalty for early withdrawal is one month’s interest, or $4.17 (1/12th of the $50 in interest he has earned). The cash value of the CD is $1,045.83 ($1,050 current market value - $4.17 withdrawal penalty).
Calculating Income from CD
Annual income includes any money that the household assets are expected to generate in the year following certification or recertification. The amount of CD income you include in the household’s assets depends on the total amount of assets the household has.
Assets less than or equal to $5,000. If a household’s assets have a total cash value of $5,000 or less, HUD rules say you should include in the income the actual income that the household’s assets are expected to earn over the next recertification year [HUD Handbook 4350.3, par. 5-7(E)]. So, for a CD, you would include the actual amount the CD is expected to earn. To determine that amount, you normally would multiply the market value of the CD by the annual interest rate, and then adjust the amount accordingly if the CD was held for less than a year.
Example: Jane has a CD valued at $1,000, generating 5 percent annual interest. The CD is expected to generate $50 of interest over the upcoming year. So include the $50 in the household income.
Assets of more than $5,000. If the household’s assets have a total cash value of more than $5,000, HUD rules say you should include in the household’s income the greater of:
- The actual income that all of the household’s assets, including CDs, are expected to earn in the next 12 months; or
- The imputed income from all of the household’s assets, including CDs [HUD Handbook 4350.3, par. 5-7(F)].
Imputing income means that you treat assets as though they’ve generated income even if they haven’t. According to HUD rules, you determine imputed income by multiplying the total cash value of the household’s assets by 0.06 percent (the current HUD passbook savings rate; HUD Notice H 2014-15).