How the SECURE 2.0 Act Impacts Retirement Account Withdrawals
Personal retirement accounts can be tricky to navigate when completing income certifications. They can be considered assets or income depending on if the resident has access to the retirement account funds and if distributions are regular and periodic or sporadic. Generally, when the regular distributions from retirement accounts begin, the accounts are no longer considered assets and the regular distributions from retirement accounts are considered income. For this reason, knowing when a person is required to begin taking minimum distributions is important to know for owners and managers.
When President Biden recently signed the $1.7 trillion omnibus federal spending package, he also signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 into law. This law revised existing rules on how and when certain retirement savers can withdraw money from their nest eggs. We’ll take a deeper look into how to treat funds in personal retirement accounts for certification purposes and go over the changes owners and managers should be aware of when determining the income of applicants or residents who fall into SECURE 2.0’s affected age categories.
SECURE 2.0’s RMD Provisions
Tax-advantaged retirement accounts such as 401(k) plans, 403(b) plans, governmental 457(b) plans, and IRAs carry required minimum distribution (RMD) rules. RMDs require people to pull money from such accounts after a certain age, even if they’re still working. It aims to raise income tax revenue and prevent savers from using their accounts as tax shelters.
Updated age requirements. Prior to SECURE 2.0, a senior saver was required to take RMDs from 401(k) accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) when he or she turned 72. The law allows the saver until April 1 of the following year to take the first RMD but all subsequent ones must be taken by Dec. 31 of each year.
Now, the SECURE 2.0 Act eventually pushes the age for starting RMDs to 75. With the new law, beginning in 2023, the age to start taking RMDs jumps from 72 to 73. And starting in 2033, it jumps up again to 75.
Reduced RMD tax penalties. There are steep penalties for failing to take an RMD, but the new law reduces the penalty across the board. Before the law’s passage, if an individual didn't take the RMD by the IRS deadline, the individual could be liable for a 50 percent penalty on insufficient or late RMD withdrawals. This was one of the heaviest penalties in the entire tax code. However, the IRS can waive penalties if savers can demonstrate the shortfall was “due to reasonable error and that reasonable steps are being taken” to remedy it, according to the agency.
The SECURE 2.0 Act reduces the penalty to 25 percent in all cases. In addition, the penalty drops down to 10 percent if the individual takes the necessary RMD by the end of the second year following the year it was due. So, for example, if an individual fails to take an RMD due in 2022, the penalty reduces to 10 percent if the necessary funds are withdrawn by Dec. 31, 2024. These penalty-reduction provisions apply this year.
Identifying Income & Assets from Retirement Accounts
Household members can open retirement accounts themselves with a bank or a brokerage firm, such as IRAs and Keogh accounts, or they may participate in 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.
However, if participants are younger than 59-and-a-half years old, federal law, with limited exceptions, requires them to pay a 10 percent penalty on withdrawals. And if participants are 59-and-a-half or older, they pay no penalty on withdrawals. How you consider money from these retirement accounts depends on the age of the household member and whether the member has made any withdrawals from the account.
Balances held in retirement accounts. According to the IRS’ Guide for Completing Form 8823, balances in IRAs, 401(k)s, Keogh plans and similar retirement savings accounts are considered assets if the money is accessible to the household. If your resident or applicant is currently employed and the individual can access funds without quitting or retiring (even with a penalty), then the retirement account is considered an asset to be included on the income certification. You would count the whole amount less any penalties or transaction costs [HUD Handbook 4350.3, Exhibit 5-2(A)(6)(a)].
For example, an applicant’s 401(k) account balance is $35,000. He can terminate his participation in the retirement plan without quitting his job, but if he did so, he would lose a part of his employer’s contribution and would pay a penalty fee. The total cash he could withdraw, $18,000, is the amount that is counted as an asset.
Sporadic withdrawals. If an individual is making occasional withdrawals from the account, you would determine the amount of the asset by using the average balance for the previous six months. Suppose an applicant 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. However, if she was younger than 59-and-a-half years old, most likely, you would deduct 10 percent from the average balance in the account over the past six months.
In addition, you don’t count these irregular withdrawals as income. For example, a resident who retired recently has an IRA account but isn’t receiving periodic payments from it because his pension is adequate for his routine expenses. However, he has withdrawn $2,000 for a trip with his children. The withdrawal is not a periodic payment and is not counted as income.
Periodic payments. If your applicant or resident is receiving periodic payments, these would be included in annual income. As a result, once periodic payments from retirement accounts are received, you would not count any remaining amounts in the account as an asset [HUD Handbook 4350.3, par. 5-7(G)(4)(d)].
However, in situations in which the individual receives from a retirement account both a one-time lump sum payment (considered an asset) and then subsequent periodic payments, you would count the lump-sum benefit as an asset and treat the periodic payment as income. In subsequent years, you would count only the periodic payment as income. And you would not count the remaining amount as an asset.
For example, upon retirement, an individual received a lump-sum payment of $15,000. She will also receive periodic payments of $350 a month. The lump-sum amount of $15,000 is generally treated as an asset. In this instance, however, she spent $5,000 of the lump sum on a trip following her retirement. The remaining $10,000 she placed in her mutual fund with other savings. The entire mutual fund will be counted as an asset. The owner has verified that she is now not able to withdraw the balance from her retirement funds. Therefore, the owner will count the $350 monthly payments as annual income and will not list the retirement account as an asset.