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How Do Financial Advisors Get Paid? (& Are They Worth It?)

by Monday, July 6, 2020
Picture of a financial advisor standing in front of a city scape with blog post title: How Do Financial Advisors Get Paid? (& Are They Worth It?)

As of 2018, there were about 352,000 personal financial advisors in the US. “Financial Advisor” is not a regulated term, so it covers a broad range of services and business models. This article will look at the different ways that financial advisors get paid and answer the burning question, Are they actually worth it?

Commissions

Many financial advisors are salesmen who earn their keep through commissions on the products that they sell. Some will tout their services as “free” because you do not have to pay them anything directly. However, theirs is a business and not a ministry, so it is not free. You are paying them for their services, the money just goes to the financial product company first. 

The problem with this model is that it creates a lot of conflicts of interest. You want the financial product that is best for you and the advisor wants to earn money to feed his family. Unfortunately, those two goals do not always line up perfectly. Advisors are often incentivized to sell certain products based on the commissions they receive instead of how well they meet the needs of the client. On top of that, you usually have no idea exactly how much you are paying the advisor, which doesn’t sit well with me.

Are these advisors worth the commissions they get paid? Some are and some aren’t. Some commissioned advisors merely compare your information to their chart of the three or four financial products that their company sells and tell you to buy the best match. You could do that yourself online without paying such a high commission. And doing it independently, you would have more options resulting in something that is a better fit for you. That advisor is not worth it.

Some advisors are highly knowledgeable and will take the time to sit down with you and get to know your personal needs and goals. They will then research the different options and find one that meets your own unique needs, regardless of whether they could get a higher commission with a different product. This is the kind of advisor that is worth the commission.

Asset Management (AUM) Fees

Over the past 20 years, charging a fee based on assets under management (AUM) has become very popular among financial advisors who don’t want the conflicts of interest inherent in the commissioned sales model. The way it works is that you invest your money with the advisor and they take out a regular fee from the account calculated as a percentage of the account. Probably the most common AUM fee is 1%, which means that if you have $250,000 invested with an advisor, you would be paying them $2,500 a year. 

This model better aligns the interests of the advisor and client because as the client’s wealth grows, so does the advisor’s fee. It is not without conflicts of interest, though. What happens if a client is trying to decide between paying down their mortgage and investing more money? The advisor only benefits from one of the two options but it might not be the best option for the client.

The other problem with this model is that it restricts an advisor’s services to only those who have already accumulated a significant amount of wealth. Many of these advisors have asset minimums, such as requiring at least $500,000 to work with them. It’s not because they are greedy, it’s because they need to keep their business profitable. Advisors must receive a minimum amount of money to make the work of opening and managing an account worth the effort.

Are these advisors worth their fees? Some are and some aren’t. Some advisors transfer your accounts into their management, start collecting their fee, and you never hear from them again. You have no idea what your money is invested in, how it is performing, or if the investment strategy aligns with your goals. These advisors are not worth their fees. But then there are some that meet with you twice a year to review your financial situation and goals. They reach out to you when the market drops to make sure you are okay and regularly monitor and rebalance your accounts to ensure you are on track. These advisors are worth their fees.

Hourly Fees

Some financial advisors don’t want to work on commission but want to be able to work with people who have not accumulated wealth yet, so they work for hourly fees. Fees can range anywhere from $100 to $400 an hour depending on the advisor and the complexity of your needs. The nice thing about hourly fees is that it’s very clear what you are paying and what you are getting for it. There are no surprises and you only have to pay when you actually need help. 

Some advisors shy away from this model, though, because it can discourage people from seeking help when it would benefit them the most. To understand this better, think of a person that doesn’t have health insurance. They get a bad stomach ache but don’t want to pay to see a doctor if it is just indigestion. It continues until their appendix bursts and they end up in the ER. It would have been a lot easier and less painful if they had an ongoing relationship with a doctor that could have caught the problem and prevented the ER visit. People do the same thing with finances. It’s easy to wait until things get really bad to seek help when you could have prevented the problem by seeking help sooner.

Are these advisors worth their fees? Some are and some aren’t. If they give good advice and solve your problem, then they are. If not, then they aren’t.

Flat Fees

The final way that advisors get paid is through flat fees. This could include a flat fee for a one-time engagement or a flat fee for ongoing services. It is different than hourly fees because the advisor doesn’t track hours in order to bill you, they quote you a fee upfront and that is what you pay regardless of how long it takes the advisor. Flat fees for ongoing services are similar to the AUM fee model because you have an ongoing relationship but it is different in that the fees are not dependent upon stock market performance and you don’t have to have investable assets to work with the advisor. 

Like with hourly fees, paying a flat fee cuts down on conflicts of interest. Flat fees are also nice because you know exactly what the engagement will cost upfront and you don’t have to be as worried about the clock as you would be with hourly fees. It can be harder to find an advisor that charges this way, but they are out there and it is a growing movement.

Are they worth their fees? Some are and some aren’t. These advisors can have the same failings as AUM advisors who neglect you and hourly advisors who don’t know what they are talking about. And they can also be absolutely wonderful and help you achieve your goals in a way that you never could have done on your own. 

Are Financial Advisors Worth Their Cost?

As you’ve probably caught on, the answer is that some are and some aren’t. A good financial advisor is worth more than his or her weight in gold. A bad financial advisor is like a bad dentist. You can end up in much worse condition after working with them than you had been in before the encounter. 


Personally, I believe that everyone can benefit from working with a good financial advisor. I know that one and a half hours with a financial advisor drastically changed my life for the better. But I also hear stories about the situations that people end up in after working with a bad advisor and I don’t blame people for avoiding them. Next month, I’ll give you some tips on how to find the good ones.

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Q & A: Reader Questions About 2019 Clergy Taxes

by Monday, June 29, 2020
Picture of someone writing a letter with a cup of coffee with blog post title: Q & A: Reader Questions About 2019 Clergy Taxes

Tax Deductible Expenses

Q: Are my vestments tax deductible? 

A: Since the passage of the 2017 Tax Cuts & Jobs Act, unreimbursed business expenses are no longer tax-deductible. That would include your vestments. The only way to avoid paying taxes on those expenses would be for your church to set up an accountable reimbursement plan according to IRS rules.

Correcting Tax Errors

Q: I have been a pastor since 2010. I use TaxAct to file my taxes and only became aware this year that I am supposed to be paying self-employment tax. For the first time this year, TaxAct asked if I was clergy (I don’t think we’d been asked that in the past) and then asked if I had ever filed Form 4361. For my pastoral role, I don’t believe I’ve ever paid self-employment tax though I have never filled out form 4361. Am I in error? Do you know what steps I need to take to correct my errors?

A: When you first become a pastor, you have about 2 years in which you can submit a Form 4361 to the IRS and get it approved to opt out of Social Security and Medicare taxes. It sounds like you didn’t do this, in which case all of your pastoral income is subject to those taxes. Churches are not allowed to withhold or pay payroll taxes for pastors, so you have to pay them as if self-employed, with Schedule SE. It sounds like TaxAct was not set up to understand clergy taxes until this year. I’m sorry about that.

You should look at your old tax returns to see if Schedule SE was filed. If not, you likely did not pay those taxes. Also, set up an account at ssa.gov so that you can review the earnings history that the Social Security Administration (SSA) has for you. It will show any earnings that you paid Social Security taxes on. If you haven’t paid them, then it will show 0 for all of those years since 2010. 

To go back and pay those taxes and get credit for that income with the SSA, you would need to file amended tax returns for all of those years and pay the taxes owed. There may be a statute of limitations where the IRS cannot go back and collect those, though if you do not pay them you won’t get credit for them with the SSA. I recommend that you consult a tax preparer who is familiar with clergy tax issues. Make sure they understand clergy issues because many tax preparers are just as clueless as TaxAct was and get pastors into trouble. At the end of this article, there is a list of tax preparers that my readers have recommended.

Documenting Pastoral Income

Q: What is the best way for a pastor of a small church to document his income from the church when he/she does not receive a w-2 or 1099?

A: There is no specified way that you have to document your income if you don’t receive a W-2 or 1099. Personally, I would use a spreadsheet and record the date it was received, who it was received from, the amount of income, and what it was received for. The goal is for you to have good enough records to file your tax returns accurately.

Tax Deductions For Pastors

Q: I pastor a very small (10-15) church and receive no salary. Are there any deductions I can take or special reductions? I receive Social Security and work part-time.

A: Volunteer work is not tax-deductible the way that cash donations are. The only deduction I can think of that you may be eligible for would be mileage for driving you do for your church. This article explains how to calculate and claim a tax deduction for volunteer mileage. 

Donations To Pastors

Q: Do pastors have to pay taxes on donations outside their ministerial income? The money is not reported on a W-2 and not due to services. It is just donations from people that want to give to the pastor.

A: If the donation would be given regardless of whether or not the person was a pastor, then they are not taxable. However, if the donation is due to the fact that the person is a pastor, then it would be considered taxable income, even if it is not tied to a specific service. The article in that link goes into more detail. This article describes a recent court case that provides more detail on what the IRS looks at to determine if a gift is taxable. 

Do you have a question? Feel free to ask!

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How A Cash-Out Mortgage Refinance Affects A Pastor’s Housing Allowance

by Monday, June 22, 2020
Picture of a wooden house with stacks of coins and blog post title: How A Cash-Out Mortgage Refinance Affects A Pastor’s Housing Allowance

When the Federal Reserve slashed interest rates to near zero in response to the coronavirus crisis, everyone decided that it was a perfect time to refinance their mortgage. There were so many refinance requests that lenders had to artificially raise rates in order to lessen demand and give them a chance to keep up. Rates bounced around quite a bit but have spent the rest of the year near historic lows.

Because of this, a lot of people have refinanced their mortgages this year. If this is news to you, you should really look into refinancing because with a lower interest rate you could save thousands of dollars over the life of your loan. 

What Is A Cash-Out Mortgage Refinance?

A choice you have to make when refinancing is how much you want your new mortgage to be for. One option is to borrow the same amount as you currently owe and just enjoy the benefits of a lower interest rate. 

The second option is to take advantage of any equity you have in your home and take out a bigger mortgage. Borrowing more than your original mortgage balance allows you to pocket some cash in the process. That’s called a cash-out refinance because you are essentially taking cash out of your home’s equity.

How Does Cashing Out Equity Affect Your Housing Allowance?

Doing a cash-out refinance can affect your mortgage’s eligibility for the housing allowance. Usually, mortgage and interest payments are eligible for federal income tax exemption through the clergy housing allowance. They are eligible because you are using that money to provide a home.

The big question with a cash-out refinance is What are you doing with the cash? If you use it to remodel your bathroom or build a deck, then you are still using the money to provide a home. As such, your entire mortgage payment still qualifies for the ministerial housing allowance.

What if you use the money for something non-home related? What if you use it to pay down debt or send a child to college? This is when it gets complicated. If part of your mortgage is paying for non-housing expenses, then part of it is not eligible for the pastor’s housing allowance.

How To Calculate Housing Eligibility For A Cash-Out Refinance

Luckily, mortgage payments are not an all-or-nothing deal. Using some money for non-housing things doesn’t disqualify your entire mortgage payment from the ministerial housing allowance. Just a portion of it. You can claim a pro-rata portion of your payments as qualified expenses for the housing allowance. 

Let’s say you owe $180k mortgage and your house is worth $250k. You decide to refinance and borrow $200k so that you can pay off your student loans. Your new loan is broken down into $180k of housing costs and $20k in student loan costs. Only 90% of the mortgage was used for housing costs, so only 90% of your mortgage payment is eligible for the clergy housing allowance.

If your principal and interest payment is $1,000 a month, then only $900 of that qualifies for the housing allowance. Most of us don’t only make principal and interest payments, though. My monthly mortgage payment also includes escrow money for property taxes and homeowners insurance. 

For this example, let’s say you’re like me and your monthly payment is $1,400, with the extra $400 covering insurance and taxes. Does that mean that you can only claim $1,260 for the housing allowance (90% of $1,400)? 

Nope! Your property taxes and homeowners insurance are 100% eligible for the housing allowance even if your mortgage principal and interest payments are not. For accurate calculations, you have to break down your monthly payment into the portion that is used 100% for housing expenses (insurance and taxes) and the portion that is only partly used for housing expenses (mortgage principal and interest). 

In this example, only $900 of the principal and interest payment is eligible for the housing allowance while the entire $400 for taxes and insurance is. So, $1,300 of the $1,400 monthly payment counts towards the housing allowance. If you just do 90% of the whole payment, you’ll be selling yourself short and paying some unnecessary taxes.

How The IRS Verifies Accuracy

After explaining this to a friend, he asked me what happens if you just claim it all. What happens if you take cash out of your mortgage for non-housing expenses but continue to include 100% of your payment as a housing allowance?

In most cases, nothing. The IRS does not check up on you and verify the accuracy of your housing allowance. That is until you get audited. If you cheat on your housing allowance, they may uncover it in an audit. 

But just because the IRS isn’t watching you doesn’t mean that God isn’t. It isn’t necessarily a matter of whether or not you’ll get caught, it’s a matter of character. You get to decide for yourself how you want to proceed.

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How Do Mutual Fund Fees Work?

by Monday, June 15, 2020
Picture of a hand coming out of a computer with a hundred dollar bill with blog post title: How Do Mutual Fund Fees Work?

Are you invested in mutual funds? If so, you’re in good company. Over 46% of American households own mutual funds.

But do you know how much your mutual fund costs? That’s a much harder question. I’m sure 46% of Americans don’t know that one!

One of the key components of good stewardship is knowing where your money is going. That’s why having a budget is so important. Most things we spend our money on have a price tag, but mutual funds are a little bit more complex. Here is a breakdown of mutual fund fees, so that you have a better idea of what you’re spending on your investments and why.

Loads

Front-end loads are commissions or sales charges that you pay when you purchase shares of the mutual fund. If you buy an “A Share” mutual fund, that means you will be paying a commission, or front-end load. 

A “B Share” mutual fund has a back-end load. That means that if you sell the shares within a certain timeframe, you will have to pay a deferred sales charge or surrender charge. While you always have to pay a front-end load, you can avoid paying a back-end load if you hold the shares long enough.

Loads can be anywhere from 0% to 6%. Zero percent funds are also called no-load mutual funds because there is no commission or sales charge when you buy or sell the fund. But that doesn’t mean they are free. This article explains how loads are calculated.

Management & Operating Expenses

Mutual funds also have ongoing fees that cover management and operating expenses. They are listed as a percentage of the account value and the fees are taken from the account on an annual basis.

The management fee compensates those who are managing the fund. That is why actively managed funds are usually more expensive than index funds. The operating expenses include things like record keeping, transaction costs, director’s fees, and legal and auditing expenses. All mutual funds have those expenses, even index funds. 

12b-1 Fee 

It may be hard to imagine, but there once was a time when people were not familiar with mutual funds. Back when the Securities and Exchange Commission (SEC) wanted to help get the word out about mutual funds, they allowed fund managers to use some of the fund’s assets to pay for marketing and advertising expenses. These are called 12b-1 fees and are rather unnecessary in today’s world. Yet they still exist. And they are typically found in “C Share” mutual funds and are charged on an annual basis. 

Short-Term Trading Fees

Mutual funds are not checking accounts and their managers do not want you to treat them as such. They want you to put your money in and leave it there for an extended period of time. In order to encourage that, some mutual funds have short-term trading fees. These are basically extra fees that you have to pay if you withdraw your money within 30-90 days of investing it. Investing should be a long-term game, and if you treat it that way then you won’t have to worry about short-term trading fees.

Fee Schedule Example

Here is an example of a real life mutual fund fee schedule. It’s a screenshot of what they have listed on their website.

In the top right-hand corner, you can see that it is for A shares. As such, it lists sales charges that decrease the more money you invest. Next, it lists the ongoing expenses. There are management fees, 12b-1 fees, and “other expenses.” These are combined to create the expense ratio, which is the percentage of your account that you will pay on an annual basis. You will notice that even though these are A shares they still have a 0.25% 12b-1 fee. When I chose C shares in the top right corner the sales charges disappeared and the 12b-1 fee jumped up to 1%.

As you can see, there are a number of fees that you may end up paying when you invest in mutual funds. Make sure you are aware of all of the fees involved as you make your investment decisions. Also, compare fees among like funds. You would be surprised how the fees can vary by fund company for essentially the same investment, especially with index funds. Click here to learn more about the powerful way that fees affect your overall returns.

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What Social Security Spousal Benefits Can A Pastor Who Has Opted Out Receive?

by Monday, June 8, 2020
Picture of an elderly couple on a bench kissing with blog post title: What Social Security Spousal Benefits Can A Pastor Who Has Opted Out Receive?

While pastors have the unique opportunity to opt out of the Social Security system, that doesn’t mean that they cannot participate at all. If your spouse has earned enough Social Security credits to be eligible for benefits, then you are eligible for some benefits as well. These are the spousal benefits that you can receive:

Medicare Benefits

Many people wrongly believe that opting out of Social Security means that you can no longer participate in Medicare. Everyone age 65 or older who is a US citizen or permanent resident and has lived in the US for at least 5 years is eligible for Medicare (and some other people, too). The difference that opting out makes is whether or not you have to pay for Part A, which is hospital insurance.

If you opt out with Form 4361, then you have to pay premiums for Part A while everyone else gets it for free. Unless your spouse is eligible for benefits. You can get premium-free Part A as a spousal benefit if you are at least 65-years-old and your spouse is at least 62-years-old. If your eligible spouse is only 60 when you turn 65 and sign up for Medicare, then you will have to pay Part A premiums for a couple of years until your spouse turns 62. 

Retirement Benefits

You can also receive retirement benefits based on your spouse’s record if he or she is also collecting retirement benefits. To be eligible for spousal retirement benefits, you must be at least age 62 or caring for a qualifying child. To qualify, a child must be under age 16 or receiving Social Security disability benefits. 

Social Security retirement benefits change based on when you start collecting them. The base benefit for spouses of eligible workers is half of the benefit the worker is eligible for at full retirement age. The benefit is reduced if taken before full retirement age (using the same schedule as eligible workers). For spousal benefits, they can be reduced to as little as 32.5% of the worker’s full retirement age benefit. Here is a calculator that illustrates the effects of claiming early benefits. 

While workers can increase their benefits by waiting until after their full retirement age to collect them, that option is not available for spouses. No matter how long you wait, the most you can get is half of the benefit that your spouse is eligible for at full retirement age. At least while your spouse is alive.

Survivor Benefits

If your spouse passes away, you can still receive Social Security benefits based on their work record. Widows and widowers are eligible for a one-time lump sum payment of $255. Luckily, you are also eligible to receive their retirement benefits, since $255 won’t get you very far these days. 

You can receive your spouse’s full retirement benefit at your full retirement age or can receive a reduced benefit as early as age 60. You can receive benefits as early as age 50 if you are disabled and the disability started before or within seven years of your spouse’s death. If you are not remarried and are taking care of your deceased spouse’s qualifying child (under 16 or disabled), then you can receive benefits at any age. Remarriage will not affect these benefits if you remarry after age 60 (or 50 if you are disabled). 

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-34 + 36 = -10? How To Make Sense Of Stock Market Returns

by Monday, June 1, 2020
-34+36=-10 How To Make Sense Of Stock Market Returns

If you’ve been paying any attention to the news (and I don’t blame you if you haven’t), you’re probably aware that the stock market has been very active lately. Active like a volcano. You see headlines like “Stocks Lose 34% in One Month” and “Stocks Jump 2%.” What does it all mean, though? Do you really understand what they’re talking about?

What Do We Mean By The Stock Market?

First of all, what is the stock market? Stocks are portions of ownership in publicly traded companies. They can be bought and sold on exchanges, or markets. When people talk about the stock market, they are usually referring to the valuation of stocks. When they talk about the market going up or down, they mean that overall stock prices are going up and down. 

If that’s as clear as mud, read my more in-depth explanation of the stock market here. For the sake of this article, you just need to understand that the stock market refers to all stocks all over the world, which is really hard to measure. There are so many publicly traded companies in the US alone that just measuring the US stock market is a challenge.

To overcome this challenge, it is common to use a stock index, or fixed group of stocks, as a proxy to represent the stock market as a whole. One of the most popular ones is the S&P 500, which is made up of the largest 500 or so companies in the US. We can look at the S&P 500’s behavior and infer how the rest of the US stocks are doing.

What The Stock Market Has Done In 2020

Here is a graph of what the S&P 500 has done so far this year:


Looks like a bumpy roller coaster ride, doesn’t it? That’s exactly how it felt for many investors. The S&P 500 reached a new record high on February 19, 2020. And then came the free fall. In a little over a month, between February 19 and March 23, the S&P 500 lost 34% of its value. That’s the big jagged drop that you see. 

Since then, stocks have staged a remarkable comeback, rising in value by 36% as of May 27. That’s the date I will use for all of these calculations because I’m being good this week and not waiting until the last minute to write this!

What All The Numbers Mean

If stocks dropped 34% and then rose again by 36%, why isn’t the right side of the graph higher than the left side? 

The percentages don’t add up because they are based on different numbers. On February 19, the S&P 500 reached a high of 3,386.15 points. Then it lost 1,148.75 points and bottomed out at 2,237.40. To calculate the percentage of value it lost, divide the loss by the starting point:

1,148.75 / 3,386.15 = 34%

After bottoming out at 2,237.40, the S&P 500 has since gone up by 798.73 points to 3,036.13. This growth is reported as a percentage of where it is growing from. So, to calculate the growth, you divide the gain by the starting point:

798.73 / 2,237.40 = 36%

As you can see, the percentages don’t add up because they are based on different numbers. Overall, the S&P 500 is still down 10% from where it was on February 19. Hence the equation in the title of this article: -34 + 36 = -10. The stock market dropped 34%, recovered 36%, but is still down by 10%. All because of how the numbers are calculated. 

So, as you see news headlines throwing out percentages for stock market returns, don’t think you can use basic arithmetic to make sense of it all. You have to look a little bit deeper to really understand what they are talking about. 

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Q&A: Reader Questions About Social Security & Opting Out

by Monday, May 25, 2020
Picture of a man on a computer with a pad of paper and pen with blog post title: Q&A: Reader Questions About Social Security & Opting Out

Q: I’m having an accountant do my taxes who I believe hasn’t done taxes for pastors before. This is my first year in full-time ministry. My accountant is under the impression from Form 4361 that I have to be in ministry for 2 years before I can file for tax exemption. My understanding is that I just need to file this form within 2 years of claiming exemption. Can you help clarify?

A: You are correct. You can file Form 4361 the day you become a licensed minister if you want to. After 2 years, you have missed your opportunity and will be a part of the Social Security system permanently. Until you have an approved Form 4361 from the IRS you will have to pay Social Security taxes, but they can be refunded once you have an approved exemption.

Q: My husband is on staff at a local church as a licensed minister. He has been on staff for less than 2 years. Prior to that, he was in corporate America for 35 years. I understand that he is now considered self-employed. Please tell me the pros and cons of opting out of Social Security taxes. If he opts out, can he still draw Social Security and Medicare at retirement age since he has paid in for 35 years? We were told that Social Security is calculated on the 10 highest earnings years of employment. Is this true? I have a Form 4361 to fill out and send in to the IRS. I would like information prior to submitting that request. I am getting conflicting information from our CPA and staff lawyer. 

A: Your husband is considered self-employed only for Social Security & Medicare (payroll) taxes. If he receives a W-2 from his church, then for income tax reasons he is still treated as an employee. (Confusing, I know.)

As for opting out of Social Security, that will not affect his eligibility for benefits that he has already earned. Social Security benefits are calculated based on 35 years’ worth of earnings. The minimum you need to have worked is 10 years, but they take numbers from 35 years to calculate your average earnings. 

If he opts out, then he will not have to pay any payroll taxes on his pastoral income. When filing taxes, he would just calculate income taxes from his W-2 as he has been doing all of these years. If he doesn’t opt out, then he will have to pay 15.3% of his income in payroll taxes. When filing his tax return, he will have to fill out Schedule SE to calculate those taxes. The church is not allowed to pay payroll taxes for him.

Q: I am a retired teacher of 31 years. I retired in 2010, and am currently collecting Social Security. I entered the ministry as a pastor in 2010 and currently am pastoring. My accountant said I should not pay self-employment because I have enough paid in. I am a bit nervous. Can I lose what I currently am collecting, Medicare, etc. by filing 4361?

A: Opting out of Social Security will not affect the benefits that you are currently eligible for. However, you are only allowed to opt out of Social Security for religious reasons or matters of conscience. The IRS spells it out very clearly that you are not allowed to opt out for economic reasons. Also, if you have been pastoring since 2010 then you are no longer eligible to opt out. You only have about 2 years after you enter the ministry to elect that option.

Q: I am applying for spousal benefits from my deceased wife’s Social Security. I have a small $8,000 401(a) where I work as a chaplain who opted out with Form 4361. The Social Security rep is telling me I may be subject to WEP/GPO reduction if my 401(a) is a pension.

A: The Social Security Administration’s Operations Manual clearly states that “A monthly periodic payment to a minister based on service as a minister is not considered a pension for purposes of WEP.” You can refer the SS rep to this webpage. 

Q: I filed a Form 4361 after seminary. I worked as a sole proprietor in secular work for 20 years.  Now (last 7 years) I am working for a non-profit religious organization and they have been making payments to Social Security. How do I know if these payments will be credited to my Social Security benefits or not? If I have the organization stop these how do I know the effect on my future benefits?

A: The best thing for you to do is to set up an account at ssa.gov where you can see your earnings history. That way, you will know the amount of income for each year that the Social Security Administration (SSA) is using to calculate your benefits. You can see if the payments your organization has been making are being credited.

The SSA calculates benefits based on your highest 35 years’ earnings. If you have less than 35 years, they just use zeroes for the extra years up to 35. So, fewer years of work or lower pay will result in lower benefits.

If you are working as a “minister of the gospel” for your current organization, then they are not supposed to be paying Social Security for you. The definition of “minister of the gospel” is the same for Social Security and the housing allowance, so you can learn more about that here. 

Q: We have a pastor that was cut from salary to hourly wages. With now paying hourly wages, is the church responsible to pay half of the Social Security and Medicare taxes?

A: As long as the pastor is still functioning as a pastor, she is still responsible for paying her own payroll taxes regardless of the hours that she works. It is not the church’s responsibility.

Q: I am an ordained minister and I am a real estate agent. The income I receive as a minister is very little and the income I receive from the real estate work is better. I have 3 questions:

1. Do I file Form 4361 and WAIT for an approval response from the IRS before I can file my regular taxes?

2. If I get the 4361 approved, does that mean I can include this form every time I file my real estate taxes and then not pay taxes? Then I would not have to pay taxes from my real estate earnings.

3. Later on in future years, I understand that once the 4361 is approved we can file form 2031 to revoke the renouncing of receiving public insurance (Social Security). How difficult is obtaining the 2031 approval?

A: Here are the answers to your questions:

1. Go ahead and file your taxes as usual. Once your Form 4361 is approved, you can request a refund of any Social Security taxes that you have paid for your ministerial services up to that point. Because of the coronavirus, this year’s tax filing deadline has been extended to July 15, so you can wait up until then if you would prefer to wait.

2. Form 4361 only applies to your ministerial earnings. Your real estate income is subject to Social Security and taxed as usual. 

3. Filing Form 2031 to opt back into Social Security is not currently an option. Several times over the past 50 years Congress has enacted a special rule where ministers had a one-time opportunity to opt back into Social Security with that form, the last time being in 2002. As such, I would not count on that option being available in the future.

Do you have a question? Feel free to ask!

Also, some of these questions should really show you the importance of working with financial professionals who understand clergy issues!

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How To Get A Free Copy Of Your Credit Report & What To Do With It

by Monday, May 11, 2020
Picture of a pocket with credit cards in it with blog post title: How To Get A Free Copy Of Your Credit Report & What To Do With It

Thanks to COVID-19 and the containment efforts, our country and most of the world are in a financial crisis. In times like these, you need to be even more alert to guard your financial life. You don’t only have to guard your income and spending, but your records and good standing. Financial crises elicit scammers and fraudulent activity just as the scent of blood draws sharks. One of your best preventive tools in this fight is your credit report. 

What Is A Credit Report?

Your credit report is a historical record of how you have borrowed and repaid debts. It contains personal identifying information such as your Social Security number, birth date, current and former addresses, and employers. The information regarding debt that it reports include:

  • Address and telephone number for the creditor
  • Basic account information (the date it was opened and the type of account it is)
  • If the account is open or closed
  • The monthly payment
  • The credit limit
  • The latest activity on the account
  • The current balance
  • Any amounts past due 
  • Account status; whether current, 30 days past due, 60 days past due, or 90 days past due
  • Collection activity; such as whether it has gone to collections or involves a repossession or charge off

Your credit report also contains certain public record information, such as court judgments (and sometimes even just lawsuits) against you, garnishments, tax liens, foreclosures, and bankruptcies. If you have submitted any statements to the credit bureaus regarding your report or credit history and any unresolved disputes, they should be included as well. 

How Do I Get A Free Credit Report?

There are multiple credit reporting agencies and each one creates their own version of your credit report. The three major reporting agencies, or credit bureaus, are Equifax, TransUnion, and Experian. Most people or organizations that access credit reports do so through one of those three. As such, when requesting a copy of your credit report you want to make sure you get all three versions from the three different agencies.

Federal law dictates that every person is entitled to a free copy of their credit report once a year. They even created a website through which to access them, Annualcreditreport.com. There are a number of websites that try to imitate the official site but then charge you for your report. If you don’t want to pay for copies of your credit report you must use the site linked above. When you use that site, you only have to make your request once. It will send the information to all three credit bureaus so that you will receive all three reports.

Because of the increase in fraudulent activity brought on by the COVID-19 crisis, Equifax, Experian, and TransUnion have banded together to offer free weekly credit reports until April 2021. You no longer have to wait a year or pay. You can access them through the exact same website. On the site, you will notice a gray bar at the top of the site explaining the offer with a big red button to request your free credit reports.

What Should I Do With My Credit Report?

Once you get copies of your credit report, it’s time to review them. First, double-check that all of the personal information is accurate, including Social Security number, employers, and addresses. If you find any inaccuracies, it could be fraud or it could be an accidental mix-up with another person. I taught a financial class at my church and one of the members was amazed to find that there was another man in the same city with his exact name. All of that man’s debts appeared on my class member’s credit report.

After checking the personal information, go through and make sure you are familiar with every single account listed. You may find fraudulent activity or you may just find an old account that you forgot about that needs to be paid off or closed. If you do find anything that appears to be incorrect anywhere on the report, contact both the credit reporting company that issued the report and the business that issued the account. Here is a list of the most common errors found on a credit report.

Your credit report can also be used to gather information about your debts in order to come up with a plan to pay them off. I recommend using Dave Ramsey’s debt snowball method to eliminate debt. Paying off debt is not only a wise move, but it also helps you to build your credit and raise your credit score. 

Where Is My Credit Score?

Speaking of that, you might notice something that is not on your credit report: your credit score. That is because different companies and agencies use different formulas to calculate your credit score. The information in your credit report is what is used to calculate the score, but everyone does it differently and arrives at a different credit score. The law requires that you are provided with a free copy of your credit report but not your credit score. Because of this, you will not find a credit score on your free credit report and it is not an error. 

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How Can You Benefit From The COVID-19 Crisis?

by Monday, May 4, 2020
Picture of a father blowing bubbles with his daughter with blog post title: How Can You Benefit From The COVID-19 Crisis?

When is the last time you saw anything positive on the news? Even social media seems to have devolved into a giant whining match between the “stay home and live” and “live free or die” camps. We’re not going to get into that today. We’re going to take the Pollyanna approach. What good has come of this coronavirus crisis?

For me personally, I enjoy having my husband home an extra day each week. I’m really enjoying that my son’s karate has gone virtual so I no longer have to pack up the kids and sit on a wooden bench through every practice. Not having to rush the kids in the morning to make the bus has been really nice. I’m glad that I was already working and doing school virtually so I didn’t have any disruptions with that. And I’m also thankful that people will no longer think it strange that I do everything from home.

What about you? How have you benefited as a result of our current situation? If nothing comes to mind, take some time to think through these ways that you may be able to benefit:

Investments Are On Sale

Another way to say “the stock market is down 33%” is “buy 2 get 1 free sale on stocks.” While it would be nice for investments to always go up in value, they don’t. Having stock prices go down is actually a good thing for people with a long investing time horizon, because they get more for their money. 

Let’s look at an example with Disney stock. (This is not an investment recommendation, I only chose this stock because most people recognize the company.) If you had invested $1,000 in Disney stock on January 2, 2020, it would have bought you 6.75 shares of stock. If you had invested that same $1,000 on March 23, you would have gotten 11.66 shares of stock. That’s almost twice as much for the same amount of money. 

Now, pretend that 5 years from now everything is back to normal and Disney stock is selling for $200 a share. If you had bought on January 2, your investment is now worth $1,350 for a 35% increase. That’s pretty good, huh?

But wait until you see how the March 23 investment has done. That $1,000 investment is now worth $2,332. That is a 133% return! See what I mean by this being a good thing? 

It’s important to note, though, that there is no guarantee that stock prices will go up, and even if they do it can sometimes take a long time. Make sure any investments you make are appropriate for your own personal risk tolerance and time horizon.  

There Is Room To Trim Costs

One nice thing about being stuck at home is that you’re not spending money going out. This is especially relevant for pastors, who spend so much time meeting with people over food or coffee. A Zoom meeting with a cup of coffee from your kitchen probably costs a tenth of what it would at Starbucks. And that’s not even considering the cost of gas to get there and the wear and tear on your car.

Sitting at home isn’t the only way that this current situation can help your budget. A lot of companies are favorably disposed to providing discounts right now as they try to maintain their customer base. Now is the time to call around and see what kind of costs you can trim. If you have credit card debt, call and ask for a lower interest rate. Contact your internet provider and ask for a better deal. (This is something you should do regardless of the economic environment. Ours just offered us twice the speed for half the cost.) Take advantage of this time to trim your costs and free up more financial margin for your family.

Government Aid Is Available

There is a certain benefit to having the entire country go through difficult times simultaneously instead of doing it as an individual. The government pays attention. Normally, you have to wait a week to collect unemployment benefits after you lose a job. Then, the benefits are only half of your pay and run out after a certain amount of time. And self-employed people, independent contractors, and part-time workers are not eligible. 

Thanks to the CARES Act, that has all changed. Unemployment benefits are available to more people and at higher levels. Because this is a national crisis and not just a personal one, there is more government aid available and more options for assistance for those who need it.

Interest Rates Are Low

The Federal Reserve acted quickly and seriously when they saw what coronavirus would do to the economy and they slashed interest rates to near zero. This brought on such a wave of mortgage refinancing that lenders had to raise rates just to slow demand. They have recovered from the onslaught, though, and mortgage rates dropped to their lowest level last week since they began tracking it in 1971.

Homeowners aren’t the only ones who can benefit from low interest rates. Anyone with debt can. Student loans can be refinanced, auto loans can be refinanced, just about any debt can.

Family Time Is Up

While interest rates are down, family time is up. Personally, I haven’t been home alone since March 13. Not that I’m keeping track or anything. 

While constant contact with family in close quarters can be challenging, it is also a blessing. Now is a great time to strengthen family relationships, resolve issues, and spend quality time together. Whether you like it or not. It may be hard at times, but these are days that you should cherish because they are fleeting. 

Your Lifestyle Is On The Table For Reevaluation

Speaking of family time being fleeting, did you know that you have control over that? Now is the time for you to lay everything on the table for a reassessment. God has hit pause on our lives to give us a chance to reevaluate whether or not they are the lives we really want or should have.

Maybe there was something that you thought was essential in your life that you haven’t even missed. Or maybe there is something that you took for granted and are now pining for. Be intentional about the life you choose when we come out of this. This is the perfect time to take a step back and look at the life you were living and the direction you were going and ask yourself, “Is this what I really want for me and my family?” It may be a confirmation of the choices you’ve made or a wake-up call to make some changes.

People Are Looking For Answers

You’re not the only one who is taking this time to look at your life with new eyes. People all around the globe have been jolted awake to the reality of their lack of control and mortality. When we come face-to-face with our human limitations, we yearn for a limitless God. Let’s introduce everyone to Him. 

While many are mourning the loss of in-person church services, this may actually be a benefit in this regard. There are a lot of people out there who are simply afraid to go to church. I had a friend say once that she thought she would be struck by lightning if she did. And others are a little bit interested but simply too lazy to get there. The allure of online church is that it’s anonymous and you don’t have to put any effort into how you look or getting there. The closure of our church buildings has actually removed many of the barriers that keep those who need God from finding him. Let’s take advantage of that.


While I miss seeing friends, live worship services, and uninterrupted time to work, not everything is bad. There is a silver lining to the storm clouds that are raining on our nation and world. I’ve listed some of the benefits here but I know there are more. What other benefits have you seen during this time? Share with us in the comments!

If you liked this article, check out my book Redeeming the Coronavirus Crisis: How to Emerge from the COVID-19 Lockdown Smarter, Healthier, Happier, and Poised to Conquer Your World.

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Can You Use IRS Form 2031 To Opt Back Into Social Security?

by Monday, April 20, 2020
Picture of IRS Form 2031 with blog post title: Can You Use IRS Form 2031 To Opt Back Into Social Security?

Someone wrote to me recently with some questions about Form 4361 that is used by clergy to opt out of Social Security. One of the questions was, how hard is it to get Form 2031 approved to revoke Form 4361 and opt back into Social Security? That is a very important question, so today we are going to address it. 

What Is IRS Form 2031?

Let me start by explaining these forms. Form 4361 is what pastors use to opt out of participating in the Social Security system. Click on that sentence to learn more about it. 

IRS Form 2031 is used to revoke Form 4361 and opt back into Social Security. It is an irrevocable election that makes you liable for self-employment tax and includes your ministerial earnings in Social Security and Medicare coverage. 

Can You Use IRS Form 2031 Right Now?

I have heard from a number of pastors that opted out of Social Security when they were young and regretted it later on. I’ve heard from others who said that they now realize that they didn’t really have grounds to opt out and didn’t fully understand what they were proclaiming.

Does that mean that they can reverse their decision and opt back in with Form 2031? 

No. At least not right now.

You see, Form 2031 has only been used on special occasions when Congress gave pastors a short window of time to opt back in. In 1978 and again in 1986 this option was made available. It was only a one-time opportunity and the election had to be made by the deadline of the tax return for the year after the law was passed. 

The last opportunity to revoke exemption with Form 2031 was at the turn of the century. The Ticket to Work and Work Incentives Improvement Act of 1999 gave ministers a 2-year window in which they could change their minds about opting out of Social Security. The last deadline to opt back into Social Security was October 15, 2002. Suffice it to say, you’re too late now.

What Are Your Other Options?

Basically, you can’t opt back into Social Security with Form 2031 and there’s no guarantee that the opportunity to do so will ever appear again during your lifetime. What can you do, then?

First, if you really want to get back into the system, you can try to get the IRS to revoke your exemption. They have nullified a minister’s exemption because he did it solely for economic reasons, which is illegal. I don’t know anyone who has tried this, so let me know if you do.

If you don’t want to go to such extreme measures, put your own safety net in place. Provide for yourself that which the Social Security and Medicare system would have provided for you. Purchase life and disability insurance. Save for retirement, including Medicare Part A costs. This article explains what you need to do to make up for opting out of Social Security.

Finally, share your wisdom and experience with others. Let new pastors learn from your mistakes so that they don’t have to make the same ones. Just remember, though, that what is right for you isn’t necessarily right for everyone else. Opting out of Social Security is a personal decision and there isn’t one right or wrong answer.

If you would like to share your experience with opting out of Social Security, go ahead and do so in the comments! 

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