People over 50 are eligible to make extra contributions to their 403(b) plans. However, some plans even let younger people make extra contributions. Here is everything you need to know regarding eligibility, limits, etc. for making extra contributions to your 403(b).
There are 3 foundational things that you can start developing in your children from an early age that will help make college less of a burden on your budget.
The following is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance:
The IRS says it’s still possible to claim a housing allowance even after you retire and stop receiving a paycheck. Unfortunately, there is no clear law or hard and fast rules about this. There is little guidance and not a lot of certainty, so what we do know is cobbled together from various Revenue Rulings issued by the IRS.
Even in retirement, the rules that the housing allowance must be provided as payment for ministerial services and designated in advance by a qualifying organization still apply. Based on the information available to us, this is how those two requirements work themselves out in retirement:
The allowance must be provided in payment for services that are ordinarily the duties of a minister of the gospel. According to the IRS, the housing allowance of a retired minister counts because it is paid as compensation for past services.
Contributions you make to a church retirement plan, usually a 403(b)(9), as a pastor are a part of your pastoral income. So, when you take them out in retirement they are still considered eligible pastoral income. Any pension your church or denomination pays you is something that you earned through your ministerial work and part of your compensation as well. Also, if you use part of your church pension to purchase a commercial annuity, those annuity payments generally qualify for the housing allowance as well, since they were bought with your ministerial income.
You cannot take a housing allowance from an IRA in retirement, even if you used your pastoral compensation to fund it. Neither can you claim a housing allowance from your Social Security benefits, even if you paid into the system as a pastor. I know this is confusing, but that’s just the way the IRS is. Trying to make sense of most tax law is like trying to make sense of a 3-year-old girl. You can learn to live with them but you’ll never actually understand them.
The housing allowance must be officially designated in advance by the employing church or other qualified organization. The IRS has ruled that the board of a national denominational pension fund is qualified to make a housing allowance designation for a pastor. They determined that the pension fund met the requirements of being an “employing church” and the fund trustees were acting on behalf of local churches. Revenue Ruling 63-156 also allows for an independent or nondenominational church to designate a housing allowance for their retired clergy.
The same ruling addressed pastors with non-church employers as well. Basically, if their income while working was eligible for the housing allowance, then their pension or retirement savings from that same employment should also be eligible during retirement. If that employer was able to designate an allowance for them during their working years, then they can do the same during retirement. However, the IRS has ruled inconsistently on this matter, so there is a risk that they would disallow a housing allowance taken from a non-church employer.
As during your working years, the housing allowance still must be officially designated in advance. If you anticipate level housing expenses in retirement, it is a good idea to make your request “until further notice” so that you don’t have to worry about resubmitting your housing allowance every year. For some denominations, the annual conference is responsible for passing the designation resolution for retired or disabled clergy, which is then published in the conference journal. It is not uncommon for them to designate 100% of income as housing allowance.
Another thing that doesn’t change in retirement is the fact that only current year expenses qualify for the housing allowance. This is important for retirees because many senior living facilities either require or offer the option for residents to buy-in or pre-pay with a large one-time payment.
Even if you pay 15-years’ worth of rent at once, you can only claim one years’ worth of rent for your housing allowance. And, if you pre-pay like that, you cannot amortize the payment over 15 years and try to claim a portion of it in subsequent years. We know this because one pastor tried to and the IRS wouldn’t let him. They limited his housing allowance to only the utilities, maintenance and insurance that he paid during that tax year. So, by prepaying housing expenses in retirement (or any time), you essentially forfeit your ability to claim a housing allowance for those expenses that cover more than one year.
One threat to your ability to take a housing allowance in retirement is rolling the money out of the church plan. The common advice among financial advisors when you leave a job, whether to retire or otherwise, is to roll the funds in your employer-sponsored retirement plan into an IRA. This is because IRAs are self-managed and offer more investment options and sometimes lower fees (and some advisors get paid a percentage of them, too).
If you’re a pastor, DON’T DO IT!
That’s right, DON’T DO IT!!!
No matter what your advisor says, keep the money in your church’s retirement plan. At least enough to cover your housing expenses for the rest of your life. If you roll your money out of your church plan and into an IRA in retirement, it will no longer be eligible for the housing allowance. Also, if you roll the money from your church plan into a secular 401(k) or 403(b) it will become ineligible for the housing allowance.
The only chance you might have to reverse such a mistake would be to start working as a pastor again for a church that offers a qualified retirement plan. Then you might have the option to roll your IRA or other retirement account back into the church’s plan. Once the money is back in a church plan, it may again be eligible for a housing allowance. However, there’s no guarantee that the IRS would allow that.
So, I’m going to stick with my initial advice: DON’T DO IT!
Yes.
There you have it, shortest blog post ever.
But in all seriousness, this is an important matter that can make a huge difference during your retirement. If you didn’t take saving for retirement seriously during your early years, even just receiving a little help from the Social Security Administration could make a big impact your monthly income in retirement.
Sounds great. So how does it work? Well, there are two ways:
Additional principal payments are qualified expenses for the clergy housing allowance, but they are subject to limitations.
This is it, the announcement you’ve all been waiting for! I have created a virtual space for Pastor’s Wallet readers to connect, learn, and receive support. I know you’re probably thinking, “It’s about time!” but, hey, I’ve got a lot on my plate.
The Pastor’s Wallet Community will be hosted on Facebook. I know some of you aren’t on Facebook and I completely understand. I actually avoided it for a long time as well, until I accepted the fact that I would never be invited to another social event if I weren’t. (That was before people realized they could text invitations.)
If I were techy and had a lot of time, I might do something else. I might use a different platform. But I’m not, so you get Facebook. If you aren’t on Facebook right now, you have two choices. You can set up an account just to join the Pastor’s Wallet group (which may very well be worthwhile) or you can miss out, though I’m sure you’ll still be able to live a very fruitful and fulfilling life. I’m fine with whichever you choose.
Why am I doing this and why now?
I think the Pastor’s Wallet community would really benefit from a user-friendly place to communicate with each other. For example, take a look at the comment thread on the article How Do Pastors Opt Out Of Social Security? Poor Titan, Brian, Steve, and Tay keep having to comment on the article to hear about each others’ experience and try to get a handle on the timing for the IRS’ approval of Form 4361. Wouldn’t it have been easier to post the question in a Facebook group and get input from the whole community in one easy-to-navigate place? I think so.
Also, I’m not the only professional who knows anything about clergy finances. I know it’s hard to believe, but it’s true. If you take a look at the comments on the article Can Pastors Opt Back Into Social Security?, you’ll see that in January Beverly Worth was really on top of answering people’s questions. She has been writing about minister’s taxation since before I was born and was able to provide quality answers to my readers’ questions while I was probably at the kitchen table teaching my kids math.
I am not the only one with answers. I have never been a pastor, I have never claimed Social Security benefits, and I have never used TurboTax to file my own return. There are some things where you guys are better qualified to answer questions than I am. I believe that you will all be better served by having one place where you can learn from each others’ experiences and also have access to the knowledge and experience of multiple professionals.
How do you join this amazing community flowing with wisdom and expertise? Click here and request admittance. Or Request admittance here:
When you ask to join, you will have to answer two questions. The first is if you are in ministry, a financial professional, or something else. If you are a pastor’s spouse you are in ministry, even if you don’t get paid anything. If you are in HR at a church or the principal of a Christian school, that counts as ministry too. Don’t sell yourself short. Ministry goes way beyond the pulpit. The second question just asks for a short description of your ministry or business.
I don’t ask these because it is an ultra-selective community. Anyone who behaves themselves can join and participate. I ask because I like to know a little more about you. You matter and I am interested in who you are.
What do I mean by “anyone who behaves themselves?” There are rules that you must follow. Only three of them, though I may add to them if problems crop up. These are the rules for the Pastor’s Wallet Community:
I highly recommend posting any questions you have to the Pastor’s Wallet Online Community instead of emailing me directly. I will still be available by email, but you’ll likely get more information from the Pastor’s Wallet Online Community and you’ll also help others that have the same question.
At least starting out, I’m going to approve all of the posts for quality control. So, if you post something and it doesn’t automatically appear, you didn’t do anything wrong. Check back in a day or two and it should be there. I will only check in daily to approve posts so it will not be immediate, but it will still be faster than email.
Thank you for your faithful support of Pastor’s Wallet and I look forward to getting to know you better in the Pastor’s Wallet Online Community!
Pastors are dual-status taxpayers who pay Social Security and Medicare taxes as if self-employed. But do you really have to pay the full 15.3% or is there a waiver available for clergy?
If you are a church employee, you may have to file Schedule SE (even though you’re not self-employed) and pay double payroll taxes. This is why.
Does the way you pay your taxes affect your ability to claim a housing allowance? What determines if you can claim a housing allowance or have to pay self-employment taxes? Do you have to pay taxes on the housing allowance?
Here at Pastor’s Wallet, we talk a lot about the clergy housing allowance because it’s such a unique benefit for pastors. In fact, I even wrote a book on the topic, as you can see from the above graphic. Today, we are going to talk about how the housing allowance affects Social Security benefits.
You see, your housing allowance is considered compensation for your ministerial services. However, there are a lot of different programs that use compensation numbers and only about half of them count the housing allowance in their calculations. What about Social Security?
The housing allowance affects different aspects of Social Security retirement benefits in different ways. Let’s take a look at our two main concerns regarding compensation and Social Security; benefit accumulation and taxability of benefits.
As you’ve read in other posts on this blog, Social Security benefits are awarded based on a worker’s earnings history. They look at your top 35 years’ worth of earnings and add in zeroes if you have less than 35 years of work history. Those earnings that they use to calculate benefits DO include your housing allowance.
Both the cash housing allowance and the parsonage allowance count as income when calculating Social Security retirement benefits. Even if you only get paid $20,000 per year, if you also live for free in a parsonage that is worth $20,000 a year, your Social Security earnings report will show that you had $40,000 of income.
How does the Social Security Administration know how much your parsonage is worth? You tell them on Schedule SE. All pastors are required to pay Social Security and Medicare taxes as if they were self-employed. That means, instead of having an employer withhold and pay those taxes through the FICA system, you have to calculate them on Schedule SE along with your regular tax return and pay them that way. Thus, your housing allowance is included and affects your Social Security retirement benefits. To see what the Social Security Administration has on file as your personal earnings history, set up an account with them at ssa.gov.
While you’re working and earning money, your income affects the size of the Social Security retirement benefit you will be eligible for in the future. Then, once you start collecting your benefit, your income affects whether or not that benefit is taxed.
Yes, you may have to pay taxes on your Social Security retirement benefits. The percentage of your benefits that are taxed depends on your income and there are three different tiers. For 2021, a single person’s Social Security benefits are not taxed if their provisional income is under $25,000 (it is $32,000 for a married couple). For single tax filers earning between $25,000 and $34,000 or married couples earning between $32,000 and $44,000, up to 50% of benefits may be taxable. Above those limits, up to 85% of your Social Security benefits can be subject to income taxes.
This will affect you if you or your spouse start to collect Social Security benefits while you are still working. The big question for pastors is, does your housing allowance count as income? Will your housing allowance make more of your Social Security benefits taxable?
It’s your lucky day, the answer is no. The income used to calculate the taxability of Social Security benefits is called “provisional income.” When calculating provisional income, you pull your income numbers from the front of Form 1040 and Schedule 1 and the housing allowance does not appear on either of those. All that to say, your cash housing allowance or parsonage allowance should not increase the taxability of your benefits.
If you’re trying to figure out your taxes and Social Security benefits, I recommend working with a professional who understands the ins and outs of clergy tax issues. Most tax professionals do not understand these issues, so make sure to find one who does.
How can you determine if a tax professional understands clergy taxes? Ask these two questions:
If they don’t answer these two questions correctly, look elsewhere. Chances are, you will know more than they do (because you read this blog, of course!). In case you’re wondering, here are the answers to the questions:
For a list of reader-recommended (I have not worked with them personally) tax preparers, check out the end of this article. I myself do not prepare tax returns.
