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How To Calculate The Clergy Housing Allowance

by Monday, November 11, 2024
Picture of a calculator with blog post title: How To Calculate The Clergy Housing Allowance
Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga



The following is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance:

Calculating

By now you understand who is allowed to take a clergy housing allowance and the process by which you can do so. But here’s the big question everyone has: how do you know how much of a housing allowance to request?

First of all, there are limits to the amount of housing allowance that the IRS will allow you to claim. Your maximum allowed housing allowance is the least of:

  • the amount actually used to provide or rent a home;
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.);
  • the amount officially designated (in advance of payment) as a housing allowance; or
  • an amount that represents reasonable pay for your services.

That means that even if your mortgage payment is $2,000 a month, if you could only rent the home (furnished, with utilities) for $1,500 your housing allowance has to be the lesser amount. 

Remember that those services only include ministerial services. If you are a bi-vocational minister, you can only claim a housing allowance from your ministerial income. If your expenses can justify it, though, you could claim your entire ministerial income as a housing allowance and use your secular income for all of your other expenses. Also, it doesn’t matter how you are paid for your ministerial services. Whether it’s hourly or salary or by W-2 or 1099 does not affect the housing allowance.

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home and request the lesser amount. When calculating anticipated expenses, it is wise to include an extra 10% or so to cover things that come up unexpectedly, like a new crib or repairing termite damage. 

Some pastors regularly request the fair market rental value of their home even when it is higher than their anticipated expenses to ensure that they maximize the exclusion. The risk with this is that if your expenses are significantly lower, you will have to add the excess to your taxable income when you file your return and could end up owing a lot of taxes. 

Also, retirement account contribution limits are often tied to income. Claiming a higher housing allowance reduces your taxable income and could unnecessarily limit the amount you can save for retirement in a tax-advantaged account. Usually, by the time you realize your taxable income will be higher (because you didn’t use the whole allowance), it’s too late to put more into retirement. 

For families with children, the housing allowance can affect your child tax credit. Part of the child tax credit is refundable, which means the government will give you the money even if you don’t owe any taxes. However, the refundable portion is limited to a percentage of your income. If you erase too much income with the housing allowance, you could eliminate your refundable child tax credit and miss out on thousands of dollars. You’ll have to play with the numbers to find the right amount of housing allowance to claim to maximize all of the tax benefits available to you. 

When calculating your expenses, make sure to include any large purchases that you have planned for the year, such as a new refrigerator or deck. If you live in a parsonage or other church-provided housing, only calculate those expenses that you, yourself, pay for. You can’t claim an exemption for something that the church is paying for. That’s lying, and we all know who the father of lies is. For a worksheet or online calculator to determine your housing expenses, visit https://pastorswallet.com/free-resources/.

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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Two Things That Every Young Pastor Needs To Know About Finances

by Monday, September 30, 2024
Picture of a young pastor with blog post title: Two Things That Every Young Pastor Needs To Know About Finances

Because I specialize in working with pastors, I’m always on a quest to get inside pastors’ heads. In order to serve you effectively, I need to understand your world, your needs, your wants, and your struggles. I do this in many ways, such as discussions with my financial planning clients, emails I receive from my readers, and the comments in our Pastor’s Wallet Online Community.

I have noticed a common theme among the struggles that pastors face and the regrets that they have regarding their finances. There are two things that I hear over and over again that pastors wish they had known or paid attention to. So, young pastors, if you can only do two things, these are the ones you should do. Forget all my blog posts about maximizing the housing allowance and doing your taxes. These two things will be the foundation of your success in every other area of your financial life:

1. Stay Out Of Debt

As Proverbs 22:7 says, the borrower is slave to the lender. Jesus said in Matthew that you cannot serve two masters. Can you really do all that God has called you to when you are under obligation to your creditors? What if he calls you to something that doesn’t provide enough money to make your monthly payments? When you’re in debt, you’re working to serve your creditors. You gave them your word that you would.

And I don’t think God will free you from your creditors supernaturally just so you can do what he had planned for you. God believes in keeping his word and he expects us to do the same, even if it enslaves us. I think he is more concerned with your character and your keeping your word than the work that he has prepared for you. That can wait. He has all of eternity; he’s in no hurry.

I’m sorry to preach at you like that, but this is serious business. Debt can handicap you for a lifetime. Let’s say you put $2,000 on a credit card because you had to go to your best friend’s wedding. Or your computer died and you needed a new laptop to write your sermons. Or you finally got your own place and needed a couch. It could be anything, everyone seems to find a way to put $2,000 on a credit card.

Credit cards usually have a minimum payment of 2%-5%. Right now, the average interest rate for a new card is 23.18%, so we’ll use that with a 2% minimum payment for our calculations. If you pay $40 a month (2% of $2,000), do you know how long it will take you to pay off that little $2,000 credit card balance? One hundred seventy-seven months. That’s over 14 years! On top of that, you’ll end up paying over 3 ½ times as much with over $5,000 in interest. If you don’t believe me, have at it with this calculator.

Remember, that’s only a $2,000 credit card balance. Most people carry a lot more debt. How about $50,000 in student loans? Or an $18,000 debt on a car worth $8,000? Like I said, debt can handicap you for a lifetime. It’s really hard to get ahead when you start out so far behind.

2. Save For Retirement

And your goal is to get ahead. Get ahead of your monthly expenses so that you can put some aside for retirement, when you cannot work any longer. This is the second major area where pastors struggle and fail. 

Retirement saving is important for everyone, but no one more so than pastors who opt out of Social Security. At least I can depend on the government to give me a couple thousand dollars a month when I can’t work anymore. I won’t be living in extreme poverty even if I don’t save anything. But if you’ve opted out of Social Security? You don’t even have that to fall back on. 

What I see a lot is young people who put off saving for retirement because they think they will have plenty of time and money to take care of it later. After all, they are just starting out in their career, saving up to buy their first house, about to have a baby. They think that it will be easy to start saving once they get past that stage. 

But it isn’t. Kids eat more the bigger they get. And then they want to do soccer lessons. And then they break an arm. And then they want to go to summer camp. But you’re still a pastor, so you haven’t gotten a raise in ten years, in spite of inflation.

There is no easier time to start saving for retirement than when you are young. When you’re young and fresh out of college, at least you still think ramen is a full meal. Keep living like a college student so that you can avoid debt and start saving for retirement. 

Otherwise you’ll wake up one day in your mid fifties and realize that you have nothing saved for retirement. You’ve worked for decades and have nothing to show for it financially and you worry that you’ll never be able to retire, even if you get sick. That is depressing and overwhelming, which is why I’m telling you this now.

Avoid debt.

Save for retirement.

These are the big rocks of your financial life. The things that you should prioritize. Make sure to do these two things and everything else will fall into place around them. No financial trick like a tax-exempt housing allowance or extreme couponing is going to make much of a difference if you’re $50,000 in debt and have nothing saved for retirement.

Now is the time to take action to avoid future regrets. 

What do you think? What are one or two pieces of advice do you wish someone had given you when you were first starting out in the ministry? Let us know in the comments.

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A Pastor’s Guide to Navigating a Salary Conversation

by Monday, August 26, 2024
A Pastor’s Guide to Navigating a Salary Conversation by Ted Miller of Guardian Wealth Management

This is a guest blog post by Ted Miller of Guardian Wealth Management. Ted was a pastor for 25 years and now operates a 403(b)(9) retirement plan for churches. 

Salary discussions can be sensitive, particularly for pastors who must balance financial needs with spiritual and communal responsibilities. Engaging in these conversations with a church board requires a thoughtful and strategic approach to ensure that both parties feel heard and respected.

The very first concern is for a pastor to evaluate and address their own insecurities. Without pride it is good to recognize one’s strengths and without shame to clearly see one’s weaknesses. In this evaluation, I have found it to be very helpful to engage the help of a friend or trusted advisor. For many years I had another successful pastor that would come to my church and provide coaching for our staff and board. This friend would help all of us to dream bigger and would inevitably help the board to think about the need for a regular salary evaluation. In the spirit of confident humility, I offer these guidelines for an effective salary conversation.

1. Prepare Thoroughly

Before approaching the board, gather all necessary information to support your case. This includes:

  • Market Research: Understand the standard salary range for pastors in similar-sized churches or geographical areas. Resources like the National Association of Church Business Administration (NACBA) or similar organizations can provide valuable benchmarks.
  • Church Finances: Review the church’s financial status, including income, expenditures, and budget forecasts. Be prepared to discuss how your salary fits within the overall financial health of the church.
  • Personal Contributions: Reflect on your accomplishments and contributions. Document specific achievements, such as growth in membership, successful programs, or community outreach initiatives, to illustrate the impact of your work.

2. Choose the Right Time

Timing is crucial in salary discussions. Ideally, bring up the topic during the board’s budget planning sessions or during annual review periods. Avoid times of financial difficulty or when the board is focused on urgent issues.

3. Frame the Conversation Positively

Approach the discussion with a positive and collaborative mindset. Instead of framing it as a demand, present it as a mutual benefit. For example:

  • Express Appreciation: Start by acknowledging the board’s support and the church’s mission. Highlight your commitment to the church and its vision.
  • Share Your Perspective: Explain how your role has evolved and how it aligns with the church’s goals. Emphasize your dedication to the church’s growth and community impact.

4. Present a Well-Reasoned Case

When discussing salary, be clear and specific:

  • Justify Your Request: Use the information you’ve gathered to explain why an adjustment is warranted. Present comparisons with similar positions and demonstrate how your salary aligns with your responsibilities and contributions.
  • Be Transparent: Discuss the current financial situation openly. If the church is facing budget constraints, suggest a phased approach or alternative compensation options, such as additional benefits or professional development opportunities.

5. Listen and Engage

Engage in a two-way dialogue:

  • Seek Feedback: Invite board members to share their perspectives and concerns. Understanding their point of view can help you address any objections and find common ground.
  • Be Flexible: Be prepared to negotiate and consider alternative solutions. If the board cannot meet your salary request immediately, discuss potential future adjustments or other forms of compensation.

6. Follow Up

After the discussion, summarize the key points and any agreements reached in writing. This ensures clarity and provides a reference for future conversations. If a decision is deferred, request a timeline for when it will be revisited.

7. Maintain Professionalism

Regardless of the outcome, maintain professionalism and gratitude. Salary discussions can be challenging, but handling them with respect and understanding strengthens your relationship with the board and reinforces your commitment to the church’s mission.

Conclusion

Discussing salary with a church board requires preparation, clear communication, and empathy. By presenting a well-reasoned case, choosing the right time, and engaging in constructive dialogue, pastors can navigate these discussions effectively. The goal is to reach a mutually agreeable solution that supports both the pastor’s needs and the church’s well-being, fostering a positive and productive working relationship.

If I can be of service to you and/or your board, please feel free to connect at Ted.miller at guardianwm.com, or (214) 501-1400 (Office).

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Don’t Let Your Kids’ Activities Kill Your Budget This Fall

by Monday, August 5, 2024

Marketers are going crazy with their back-to-school ads right now and they all have one goal: to get you to spend more money on your kids. There’s nothing wrong with spending money on your kids, I do it on a regular basis, but I believe that our culture takes it to an extreme.

 

It’s amazing how much kids activities cost and how quickly they add up. With school starting again, parents have to prepare to be nickel and dimed to death. It’s not just the gymnastics classes you were already paying for over the summer, it’s the $25 snack fee, the fundraiser that you have to participate in, the dozens of brand new #2 pencils you have to buy, and the extra cost to be in the school band. What can you do to survive the back-to-school tidal wave?

 

Ask For A Discount

If you really cannot afford something, don’t be afraid to ask for a discount. Not only do schools offer free or reduced priced meals to families who meet the income requirements, but they can also help you with or waive all of the other little fees, like for snacks and yearbooks.

 

Sports and classes also offer discounts, especially if you have more than one child participating. If you have three kids who want to do karate, the dojo is more likely to let all three attend for the price of two than to lose you as a paying customer completely. Usually, deals and discounts are not advertised, so you’ll have to suck up your pride and ask. Just say, “Do you offer any scholarships or discounts?” The worst thing that can happen is that they say no.

 

Have Them Pay

If your son wants to play flag football and you can’t fit it into your budget, have him help out. Even if they aren’t old enough for a regular job, teens and tweens can earn money babysitting, doing yard work, teaching older people how to use their electronics, and the like.

 

I remember when my older brother wanted $100 basketball shoes growing up, my parents made him pay for half. I’m sure he valued them and took better care of them than he would have if they had just been given to him. Not only can it help your budget, but it will teach your teen to work and give him the opportunity to practice the adult skill of weighing opportunity costs and making decisions.

 

Create Teachable Moments

Money is a finite resource, and the sooner we teach that to our kids, the better off they will be. When my daughter wanted to do swimming, karate, gymnastics, and play soccer, I could have just told her no. But what would that teach her?

 

Instead of simply saying no, I explained that each activity costs a lot of money. We don’t have enough money to do everything. So, she needed to pick the one thing that she wanted to do most. It taught her that money is finite and also gave her the opportunity to practice making decisions for herself.

 

When my son was selling coupon books for a fundraiser, he wanted to sell enough to win a big prize. He was disappointed that I wouldn’t just buy 10, but I wanted him to get more than just a cheap toy from it. I explained that if he really wanted the prize, he could go door to door in the neighborhood to sell the coupon books. I would go with him, but he would have to ring the doorbell and do all of the talking. It was a great learning experience for him.

 

Maintain Your Priorities

It’s easy to get caught up in all of the “needs” that kids have. Especially, when all of the other kids have the same thing, are doing the same thing, or if your child is a persistent whiner. (Remember, the Bible promotes that!) However, it’s important to keep the big picture in mind and stand your ground.

 

Eating a family meal together is very important to me, for both nutritional and relational reasons. Even if my kids show talent, I’m not going to sign them up for activities during dinner time. I’m willing to move dinner a half hour earlier or later once a week, but feeding my kids granola bars in the car while we run from one activity to the next just isn’t going to cut it with me. Family dinners are more important to me than kids’ sports.

 

It works the same way with financial priorities. If missions giving or saving for college is a priority for you, don’t give it up so that your daughter can be on a traveling soccer team. If soccer is a priority, though, by all means, put her on the team! Just know your values and establish your priorities, and make everything else submit to them. Remember, the most common regrets that parents of grown kids have are about not spending enough quality time with their kids, not that their kids missed out on certain classes or activities.

 

While back-to-school is a time of mixed emotions, don’t let anxiety over your budget be one of them. These are my suggestions, how about you? Do you have any of your own? Let us learn from you too; please share in the comments your own wisdom and experiences. Thanks!

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3 Things You Need To Know Before Taking Out Student Loans

by Monday, July 22, 2024
Picture of college graduates throwing their caps in the air with blog post title: 3 Things You Need To Know Before Taking Out Student Loans

Even though to me it seems like summer is just getting started, some colleges are starting up again in only a month. This is the season when thousands of families are signing up for student loans. Personally, I don’t think loans are necessary to earn a college degree, but they definitely are the norm.

If you or your child are planning on attending college this fall and using loans to do so, you need to know what you’re getting into. Here are three very important things for you to understand before taking out student loans:


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Retirement Savings Options For Ministers

by Monday, June 24, 2024
Picture of a senior citizen couple walking arm in arm down a path with blog post title: Retirement Savings Options For Ministers

Whether or not you ever want to stop working, it is important to plan and prepare for retirement just in case your health or your spouse force you to slow down at some point. A lot of people say that their retirement plan is to simply not retire, but real life has shown us that that isn’t always an option.

Knowing that, it is irresponsible not to plan for being unable to work someday. The biggest part of a retirement plan is saving money now, while you are still working, so you will have something to live off of when you stop working. Just creating margin in your budget to be able to save for the future is the biggest battle. If you can start to actually save, then it’s all fairly easy after that.

While stock-piling cash in a can under your bed is better than what a lot of Americans are doing (which is nothing), there are smarter ways to save for retirement. There are ways that will allow your money to grow and earn interest and ways that your money can legally avoid taxation. Here are the top four ways for ministers and pastors to save for retirement.

Church-Sponsored 403(b)

Most denominations and some independent churches sponsor their own retirement plans. Most of these are 403(b) plans, though some are now starting to use 401(k)s. (You can read about the difference here.) Both kinds of plans are tax-advantaged, which is a big help when saving for retirement.

These plans are great because they allow you to set aside up to $23,000 (more if you’re over 50) before paying taxes on it (and you never have to pay Social Security and Medicare taxes on contributions!). That means you have more money to invest and start earning compound interest. Some even offer Roth options, where you invest after paying taxes but don’t have to pay taxes on the gains (this isn’t recommended if you’ll use the funds for housing because…).

One of the best things about saving for retirement in your church’s 403(b) is that it qualifies for the housing allowance in retirement. (There is debate over whether a 401(k) qualifies for the housing allowance in retirement.) That means withdrawals from your 403(b) can be tax-free in retirement if you use them for qualified housing expenses. You can read all about that here.

Traditional Or Roth IRA

If you don’t have access to a 403(b) or 401(k), your best option is likely to save in an IRA. Like with the church-sponsored plans, there are tax advantages to utilizing one. Traditional IRAs allow you to invest your money before paying taxes on it, which leaves you with more to invest. Roth IRAs allow you to pay taxes first and avoid paying taxes on any of the money that your account earns. You can learn more about the differences here.

You can’t put quite as much into an IRA, only $7,000 for 2024 (or $8,000 if you’re over age 50). However, they do hold some advantages over the workplace retirement plans. They offer more flexibility in investment options and you have more control over the account. However, if you plan on claiming a housing allowance in retirement, the 403(b) is often a better option even if the fees are higher.

Taxable Brokerage Account

If you don’t have access to a workplace retirement plan, saving $7,000 a year into an IRA may not be enough to prepare you for retirement. Once you’ve maxed out your IRA, you may need to start saving into a taxable brokerage account. 

As the name implies, you receive no tax benefits for saving in a taxable brokerage account. You have to pay taxes on your money before you put it in and you have to pay taxes on all of the gains that your account generates.

Even without tax advantages, a brokerage account is likely better than just saving in a traditional savings account. Savings accounts only pay interest, often not even enough to keep up with inflation. Brokerage accounts allow you to invest your money in the stock market, which means your money has a chance to grow and multiply. If you don’t have a lot of money to save for retirement, then having your accounts grow in this way is key to your ability to retire one day.

Health Savings Account

A health savings account (HSA) has the best tax advantages out of all of your options covered in this article (unless you claim a housing allowance from your 403(b), then they’re equal). However, I listed it last because it is probably available to fewer of my readers. You see, you have to have a qualifying high-deductible health insurance plan in order to be eligible to open an HSA. Check with your insurance provider, though, because if you are eligible, it’s more than worth it to open one.

An HSA is a savings account that is used for health care expenses. Why is it listed as a way to save for retirement? Because just about everyone has health care expenses in retirement, usually more than at any other time in their life. If you pay for your current health care needs out of your cash flow, an HSA can be an incredibly powerful retirement savings vehicle.

What makes an HSA so special is that it has double tax benefits. Like a traditional retirement account, you get to put your money into it before paying any taxes, so you have more to put in. Then it also has the benefits of a Roth account, where you get to take all of the money out tax-free when used for medical expenses. You don’t pay taxes when you put the money in or when you take it out. That’s why an HSA provides more tax savings than any other retirement account out there. And, you can invest it in the stock market just like any other retirement account. If you decide not to use the money for medical expenses, you can take it out after age 59 1/2 penalty-free, you’ll just have to pay income taxes as you would with a traditional IRA.

While you may not want to retire, it’s important to prepare just in case you are forced to. What I have listed here are not the only ways that you can save, you could invest in real estate or save cash in a can under your bed, but they are the easiest and most beneficial ways to save. 

Saving for retirement is always a good idea. Even if you don’t end up using all of your savings, you can always use it to bless your kids, your church, or your favorite missionary. And who wouldn’t want to do that?

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How The Clergy Housing Allowance Affects The FAFSA

by Monday, May 27, 2024
Picture of a young woman biting a pencil while looking at a computer with blog post title: How The Clergy Housing Allowance Affects the FAFSA

The Department of Education recently revamped the Free Application for Federal Student Aid (FAFSA) in order to make it easier to submit, and therefore, make student aid more accessible. They say, “The Better FAFSA is simplified, redesigned, and streamlined. It is faster and easier to fill out, with most students and families completing it in less than 15 minutes.”

With its rocky rollout, I’m not sure if their claims are true, but what matters is that the FAFSA is completely different, especially for pastors. As soon as it came out, I started getting people asking me, “Does the new FAFSA include the clergy housing allowance as income?”

What Is The FAFSA?

If you’re new to this, let me give you a little bit of background. The FAFSA is the form that college students use to apply for government student aid, such as grants, loans, or work study programs. In addition to federal aid, many states and colleges use the FAFSA to award student aid as well. The general rule is that if you want any help at all with school, fill out the FAFSA.

Since a lot of student aid is needs-based, the FAFSA collects financial information. The student has to provide information from their own personal tax returns. If under the age of 24, then the parents’ financial information must be included as well. That information is used to calculate the Student Aid Index (SAI), which was formerly known as the Expected Family Contribution (EFC). The SIA in turn affects how much aid a student can get.

Changes To The New FAFSA

This is the new FAFSA form. On the old FAFSA, there was a place to enter your taxable income and then later a place to enter untaxed income, which includes the housing allowance. If you look through the new form, you won’t see anywhere to add untaxed income. 

However, that wasn’t enough to convince me that the housing allowance isn’t included in the FAFSA anymore. You see, there is a new feature where the IRS automatically provides information to the Department of Education when you file the FAFSA. To know for sure if the housing allowance is included, you need to know what information the IRS provides. 

Does The Clergy Housing Allowance Count As Income For The FAFSA?

This article lists the information that the IRS is allowed to provide. Good news, nothing on this list includes the clergy housing allowance! That means the clergy housing allowance is not included as income on the FAFSA anymore.  


To be even more sure, I checked in with the pastors in the Pastor’s Wallet Facebook Community. Those who had submitted the FAFSA this year confirmed that it’s true. The housing allowance no longer counts towards income on the FAFSA. Now, not only do you get to save on income taxes with the housing allowance, but your kids are likely to be eligible for more student aid as well!

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Can You Use A HELOC To Extend Your Housing Allowance?

by Monday, April 29, 2024
Picture of a room with a ladder and paints with blog post title: Can You Use A HELOC To Extend Your Housing Allowance?

Lately, I’ve seen people recommend that pastors who have paid off their mortgages should take out home equity lines of credit (HELOCs) to extend their housing allowance. The idea is that without a mortgage you cannot claim as much in housing allowance so taking on new debt related to your home will allow you to increase your housing allowance and save on taxes.

That is not a good idea. First of all, depending on the interest rate on your HELOC, you may not save any money. Secondly, debt reduces your flexibility and adds greater risk to your financial situation.

HELOC Eligibility For Clergy Housing Allowance

Finally, and most importantly, debt is only eligible for the clergy housing allowance if it is used for eligible home expenses. Just because a HELOC is tied to your home equity does not mean it automatically qualifies for the housing allowance. As with a cash-out refinance, the debt payments are only eligible for the housing allowance in as much as the funds were used for the home. 

If you open a HELOC and use the money for a vacation, college, to pay off debt, or to invest, your HELOC payments are not eligible for the clergy housing allowance. If you use the money to pay for a new roof or build a deck or swimming pool, then it is eligible for the housing allowance.

Keeping Taxes In Their Rightful Place

One important principle in financial planning is to never let taxes take the lead on your decisions. Once you’ve made a decision, by all means, optimize for taxes and do tax planning. But never lead with taxes. For example, if you’re moving, instead of finding the lowest tax county in the lowest tax state and moving there, decide where you want to live based on your family, job, and lifestyle preferences and only then take taxes into consideration as you choose your house. 

There are more important things in life than just saving money on taxes, so you should optimize for your specific life before optimizing for taxes. Because of this, I would never recommend that someone take on debt just to save on taxes. If you have a goal in mind that requires a HELOC then it might make sense to take one on, but don’t do it just for tax savings. 

In summary, HELOC payments are only eligible for the minister’s housing allowance if the money was actually used for eligible home-related expenses. And don’t make decisions based on the tax consequences. Make your financial decisions based on what is best for you and your family and only then think about taxes.

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Are Government-Employed Chaplains Eligible For The Clergy Housing Allowance?

by Monday, April 8, 2024
Picture of a hospital ward with blog post title: Are Government-Employed Chaplains Eligible For The Clergy Housing Allowance?

Lately, I keep getting asked if chaplains at government-owned organizations are eligible for the housing allowance. As I stated in my book on the housing allowance, I was under the impression that government employees other than those in the armed forces are eligible for the housing allowance because on page 9 of IRS Publication 517 it says:



However, other sources make it appear that chaplains in government-owned hospitals are not eligible for the housing allowance. Honestly, I’m not really sure anymore. Since I’m not certain about it, in this post I’m going to share the different information sources that I have found. 

This is what I’ve got for you:

IRS Publication 517

I gave you a screenshot from IRS Publication 517 above. It can be confusing because the same publication also says this:


However, that section is talking about the payment of Social Security and Medicare taxes. After further reading, I believe this is unique to the payment of FICA vs. SECA and does not relate to the clergy housing allowance. 

This is the revenue ruling (71-258) that establishes that government-employed chaplains pay under FICA instead of SECA and this is an article that explains it in a way that you may actually understand. 

CPA Dennis Walsh

Here is a 2015 paper written by Dennis Walsh, a CPA. I don’t know anything about him or his qualifications beyond the fact that he is a CPA, but in reading his paper it sounds like he knows what he is talking about.


Walsh claims that chaplains employed by the federal government cannot claim a housing allowance based on IRS rulings, though he doesn’t provide enough information for me to reference those rulings:  



However, in the same paper, he also states the following:



He also explains that some state governments mandate a housing allowance for their chaplains and even has a list of the states and how they handle it.

CPA Paul Schloemer 

Here is another article written in 2009 by a CPA who is also a Ph.D. I had trouble coming to any definite conclusions based on this article, but he does cite several tax court cases where government-employed chaplains were awarded a housing allowance. Here’s an excerpt for you:



In his article, Schloemer also pointed out that whether a taxpayer is a “minister of the gospel” has also been added to the IRS’ no ruling list. I’ve mentioned it before when discussing the housing allowance in retirement, but the IRS has a list of things they won’t provide guidance on. You can read it here and, as I said, the housing allowance in retirement and whether someone is a minister for housing allowance purposes and numbers 10 and 11. 

Conclusion

I don’t know if this is really as confusing as it appears or if it’s just my long covid brain fog, but since I couldn’t come up with a clear answer I figured the best I could do for you would be to share these information sources. After going through the exercise of writing this all out, I’m still not sure if government chaplains can claim a housing allowance but now I also wonder if the IRS even knows.

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Should You Invest in a 403(b) with High Fees to Have a Housing Allowance in Retirement?

by Monday, March 18, 2024
Picture of a piggy bank with blog post title: Should You Invest in a 403(b) with High Fees to Have a Housing Allowance in Retirement?

Pastors who save into their church’s retirement plan are eligible to withdraw some of that money as a tax-free housing allowance in retirement. It’s a great benefit to have. Unfortunately, a lot of church retirement plans have investments with higher fees than are available in IRAs. Because of this, I have been asked multiple times if it is worth it. Does the ability to claim a housing allowance outweigh the cost of the higher fees?

As with everything in financial planning, the answer is that it depends. It depends on a lot of things, the primary one being your tax situation. Since the question involves calculations and doesn’t have an easy answer, I asked one of my amazing colleagues, Cal Treichler, to help me out. In addition to being a Certified Financial Planner, Certified Student Loan Planner, and PK, he’s also a spreadsheet whiz. In his free time, he created this spreadsheet that allows you to compare the housing allowance benefit with the benefit of lower investment fees:

Pastors-Wallet-403b-vs-IRA-Fee-ComparisonDownload



Housing Allowance vs. Investment Fees Comparison

Let me show you how it works. Let’s say you have $500,000 in your 403(b) and you’re trying to decide if you should keep it where it is in a target date retirement fund with 0.8% fees or roll it into an IRA and invest in a Vanguard target date retirement fund with 0.08% fees. Your combined federal and state income tax rate is 22% and you have $20,000 of eligible annual housing expenses. This is what it looks like:



As you can see, between the fees and the housing allowance tax benefit, with the 403(b) you end up with a $400 net benefit while with the IRA you end up with a $400 net cost. The green box is the better deal for you. Isn’t that cool how he even color-coded the results? 

Now let’s look at how things change if your 403(b) investment fee is 1%. 


Here, even with the benefit of the housing allowance, you’ll still end up $200 ahead by having your money in the IRA with the lower fees. Go ahead and download the spreadsheet and play with the numbers. The higher your housing allowance and tax rate, the more advantageous the 403(b) while the higher the 403(b) fees, the more advantageous the IRA. 

The Effects of Social Security Taxes

A client recently asked me that same question about 403(b) vs. IRA. However, he wasn’t referring to money he had already built up in his 403(b) but new retirement contributions. In his case, there is another factor to consider. This pastor did not opt out of Social Security, so he pays about 15% of his income in self-employment taxes. 

Self-employment taxes is just another name for Social Security and Medicare taxes. Everyone has to pay them except for pastors who have opted out. In most cases, any money that you save for retirement has already had Social Security and Medicare taxes taken out. That is true for anything you put into IRAs and also most employer-sponsored retirement plans, even pre-tax accounts. 

The one exception is pastors. Because of the way pastors pay Social Security and Medicare taxes as if they are self-employed, contributions to employer-sponsored plans happen before those taxes are calculated. This is unique to pastors and the only way they can avoid paying those taxes without opting out. 

So, for a pastor who is participating in Social Security, putting $1,000 into an IRA and $1,000 into a church 403(b) is not a fair comparison. While you can put $1,000 into your 403(b), after paying the 15% taxes you only have $850 left to put into the IRA. How does that affect the decision?

Here is a chart that compares your options. The initial investment is $1,000 less any taxes that you have to pay before the money can go into the account. SECA taxes are 15% and for income taxes, I’m assuming 12% federal and 6% state. For 403(b) investment fees, I chose 0.8%, which is the fee for the PCA’s target date retirement fund since I’ve had a couple of clients invested in that recently. The IRA fees are Vanguard’s fee for their version of the same target date retirement fund.

AccountInitial InvestmentCalculationInvestment FeeBalance After 20 Years with 7% GrowthTaxation of Withdrawals
Church 403(b)$1,000No taxes paid0.80%$3,455Tax-free for housing allowance, otherwise subject to income tax
Traditional IRA$85015% SECA taxes paid0.08%$3,393Subject to income tax
Roth IRA$67015% SECA + 12% Federal + 6% State income taxes 0.08%$2,675Tax-free


As you can see, in this particular situation it is still more advantageous to invest in the 403(b) even though the investment fees are 10 times higher. That won’t be the case every time, so you’ll have to calculate it with your own unique numbers to get your own answer.  

I hope this spreadsheet is helpful for you and also the tip about avoiding SECA taxes!

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