Amy, Author at The Pastor's Wallet

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How Do Pastors Opt Out Of Social Security?

by Amy Monday, August 3, 2020

You’ve heard that as a pastor you can opt out of Social Security. But how do you actually do it? Here is a step-by-step guide showing how pastors can opt out of Social Security and the accompanying self-employment taxes. It’s really very simple:

Step 1: Qualify

Not just anyone can opt out of Social Security. There are certain criteria that must be met in order to do so:

You must be ordained, commissioned, or licensed by a church.
Your church must be a tax-exempt religious organization.
You must oppose receiving public insurance because of your religious principles or be conscientiously opposed to it.

Step 2: File IRS Form 4361

Form 4361 is a simple, one-page form that includes your basic information, your church’s information and a statement stating your opposition that you must sign. You must file the form by the due date for the tax return for the second year in which you begin to receive ministerial income of $400 or more. For example, if you get licensed in 2015 and earn $10,000 as a pastor that year and the next, you must file the form by April 15, 2017 (or October 15, 2017, if you request an extension). This article explains the timing in more detail.

Step 3: Inform Your Church

You must inform the church that licensed, ordained, or commissioned you that you have a religious or conscientious opposition to the acceptance of public insurance. There is not a specific way that you have to inform them, but it would be a good idea to have it in writing and keep a copy of whatever you give them.

Step 4: Verify Your Grounds For Exemption

Once the IRS receives your Form 4361, they will mail you a statement that describes the grounds for receiving an exemption under section 1402(e) of the Internal Revenue Code. The statement must be signed, verifying that you have read it and seek exemption on the grounds listed on the statement. You must mail it back to the IRS within 90 days of receiving it in order to be approved.

Step 5: Receive Approved Copy Of Form 4361

If your exemption is approved, you will receive a copy of your Form 4361 marked “approved” for your permanent records. Make sure to keep your approved Form 4361 in a very safe place, like a safety deposit box or fireproof lock box. My church keeps all of the pastors’ forms for them in the church’s safe. Remember, though, it is your responsibility, not the church’s, to maintain a copy. I’ve heard from pastors who have reached retirement age and had trouble with the IRS because they couldn’t produce their copy.

Once you opt out of self-employment taxes you can’t just take the money and run. If you do that, you will surely regret it later, as I’ve heard from many pastors over the years. Social Security provides some essential safety nets, and once you’ve opted out it’s up to you to make sure you have them in place for yourself. Click here to read about what you need to do to make sure you’ve got your back covered. One last thing: Remember, the decision to opt out of Social Security is permanent, so don’t take it lightly.

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Could The Clergy Act Of 2020 Allow You To Opt Back Into Social Security?

by Amy Monday, July 27, 2020

I have heard from countless pastors who opted out of Social Security in their youth only to regret it 30 years later. By that time, the idea of retirement has become more of a reality and they realize that they have done nothing to prepare. Apparently, California Congressman Kevin McCarthy has heard the same. In February, McCarthy introduced a bill that would allow pastors who had opted out to opt back in. The bill, H.R. 5904, is also called the Clergy Act of 2020.

What Does The Clergy Act Of 2020 Say?

The bill, which you can read here, is short and simple. It’s stated goal is, “To allow a period in which members of the clergy may revoke their exemption from Social Security coverage, and for other purposes.” It has been 20 years since the last time Congress allowed pastors to opt back into Social Security.

H.R. 5904 creates a 2-year window starting January 1, 2021, in which clergy can apply to revoke their Social Security exemption. The deadline would be the due date (including extensions) for the tax return of the second taxable year after December 31, 2020. In other words, the due date for your 2022 tax return, which is April 17, 2023, unless you file for a 6-month extension or use a non-calendar tax year.

How Can The Clergy Act Of 2020 Become Law?

Right now, the bill is in the first stage of the legislative process. It was introduced to the Committee on Ways and Means, who will determine if it should be sent on to the entire House of Representatives. If approved by the House, it would then be sent to the Senate. After passing votes in both the House and the Senate, it would go to the President to sign into law.

It’s not quite as simple as it sounds, though. Many bills don’t make it out of committee. Even if the House passes it, the Senate has to pass the exact same version of the bill. If they want to make changes, then it gets sent back to the House for approval. It can be a long and difficult process, especially considering how well our politicians are all getting along these days. On the government’s bill tracking website, Skopos Labs only gives the bill a 2% chance of being enacted. But there’s still a chance.

Should I Opt Back Into Social Security?

No matter the percentage chance assigned, it is a good idea to consider what you would do if the bill is signed into law. Would you take advantage of the opportunity to reenter the Social Security system?

I’ve been asked for recommendations on this. First of all, the decision to opt out is supposed to be made based on firmly held religious convictions and matters of conscience. I do not know what you think and believe and neither can I tell you what to believe. You’ll have to work that out with God himself.

I can only give you tips on how to view it from an economic perspective. Now, the IRS makes it abundantly clear that you are not allowed to opt out for economic reasons. Of course, the proposed bill says nothing about opting back in for economic reasons.

Whether or not it makes sense to opt back in from an economic perspective depends on your personal situation. If you are 50-years-old and have nothing saved for retirement, you would likely be better off opting back in. Without savings, even just a small Social Security retirement benefit can be a game-changer for you. Remember also, that the Social Security program provides more than just retirement benefits.

If you are young and saving responsibly, you may be better off from a numbers perspective to stay out of Social Security. Devin at socialsecurityintelligence.com ran the numbers and found that it is very possible to end up with more if you stay outside of the system, though you take on additional risk.

The key words there are “saving responsibly.” If you are young and think you’ll start saving later, then you are a good candidate for opting back in. Because later never comes. Yes, you may get a pay raise when you become senior pastor, but by that time you’ll also have 3 kids that want gymnastics and soccer lessons and 3 meals a day and you will feel like you have less margin then than you do now.

If you’re unsure how the numbers work out in your situation, I would encourage you to hire a financial advisor to do a complete analysis for you. There are a lot of good advisors out there, but if you need a recommendation, email me because I work with a great one.

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Do Pastors Need Disability Insurance?

by Amy Monday, July 20, 2020

Today we are going to talk about insurance, which is a favorite topic of conversation for almost no one. In fact, on a recent road trip, my mom wanted to take a quick nap so I listened to a podcast about insurance to help put her to sleep. I’m sure many of you can relate.

Even though insurance isn’t a very exciting topic, it’s an important one. Especially disability insurance, which is what we are talking about today. If you own your home, you likely have homeowners insurance because your mortgage provider requires it and it’s just smart. If you have a car, you surely have it insured, because state law requires it. You’re probably on top of health insurance, even if you are using a medical sharing ministry. Disability insurance, however, is easy to overlook. It isn’t required by law and the people around you aren’t using it on a daily basis. But it’s very important.

The Purpose Of Disability Insurance

What does disability insurance do? It replaces some of your income if you become disabled and can’t work. It helps keep the lights on and some food on the table if you can’t support your family due to a disability. Insurance never replaces ALL of your income, because then you’d have no motivation to recover, but it makes a big difference in your family’s ability to weather a disability.

Does a pastor need disability insurance? It isn’t exactly a dangerous job like a test pilot or deep-sea fisherman. What are the chances that you’re going to get hurt so badly pastoring that you won’t be able to work? Pretty slim.

Common Causes Of Disabilities

Disability isn’t just about accidents, though. It is about sickness and mental health issues, too. In that light, pastors may be at even more risk than test pilots and deep-sea fishermen. A 2016 study found that the top 5 reasons for short-term disability claims are:

Pregnancy
Musculoskeletal disorders affecting the back and spine, knees, hips, shoulders, and other parts of the body
Digestive disorders, such as hernias and gastritis
Mental health issues including depression and anxiety
Injuries such as fractures, sprains, and strains of muscles and ligaments

The most common reasons for long-term disability claims are:

Musculoskeletal disorders
Cancer
Pregnancy
Mental health issues
Injuries (as described above)

As you can see, pastors face the same risks for most of these disabilities (except pregnancy for males, of course) as people in more physically dangerous occupations. And the risks are real.

Your Chances Of Becoming Disabled

What are your chances of becoming disabled? Greater than you think. The Social Security Administration did a study in 2017 that found that today’s 25-year-olds are more than 4 times as likely to become disabled for at least a year before retirement age (27.2%) than to die without a disability before retirement age (5.9%). For a 54-year-old, the chances are a little higher but the ratio is about the same. And yet everyone talks about life insurance instead of disability insurance.

On average, 5.6% of working Americans will experience a short-term disability of six months or less every year. Most of these disabilities are due to illness, injury, or pregnancy and almost none of these are job-related. Are you convinced of the importance yet? Remember, a 25-year-old has a 27% chance of becoming disabled. That’s more than one out of every four people.

Short-Term Disability Insurance

As I’ve hurled statistics at you, you’ve probably noticed the term “short-term” and “long-term” stuck in front of “disability” from time to time. Any disability that lasts 6 months or less is considered short-term and anything longer is considered long-term. Accordingly, there are insurance policies issued for short-term disabilities and long-term disabilities.

Since I’ve endeavored to impress upon you the risks of disability, you’ll probably be surprised when I say you may not need to own short-term disability insurance. Because of the short-term nature of these disabilities, you may be able to self-insure against them. What does that mean? You can afford a disability without insurance.

I have a 6-month emergency fund, so I would not personally buy short-term disability insurance. If I am disabled for less than 6 months, I have cash in the bank to cover all of my expenses. If I didn’t have that emergency fund, though, it would be wise for me to have short-term disability insurance.

Long-Term Disability Insurance

My emergency fund will only last 6 months, so it’s important for me to have long-term disability insurance. I could cover a 3-month sickness, but not a 3-year battle with cancer. That could bankrupt me.

In fact, studies have found that the leading cause of bankruptcy is medical bills and cancer patients are 2.65 times more likely to file bankruptcy than those without cancer. So, unless you are independently wealthy or have a spouse who can fully support your family financially, you need to look into long-term disability insurance.

Why Disability Insurance Is Especially Important For Pastors

Social Security provides disability benefits, though the majority of applications are denied. If you are approved for benefits, they aren’t very much. In fact, the average monthly Social Security disability payment is just below the poverty line. For one person. It gets farther and farther below the poverty line the bigger your family is.

Even though Social Security disability benefits aren’t impressive, they are at least something. It’s nice to have that to fall back on if you aren’t insured. Unless, of course, you’re a pastor who opted out of Social Security. Then you have nothing to fall back on. Ouch.

Therefore, even if you’re just a pastor who doesn’t do anything dangerous, you need to look into disability insurance. And if you opted out of Social Security, then you REALLY need to look into disability insurance.

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How Are Mutual Fund Loads Calculated?

by Amy Monday, July 13, 2020

Last month, we talked about the different kinds of fees that you may pay to own shares in a mutual fund. This month, we are going to go into a little more depth on loads, or sales charges. While they are listed plainly as percentages, calculating them is not nearly as easy as you would think.

How Are Mutual Funds Valued?

First, we need to review a few of the facts about mutual funds. I say review, but this is probably all new for most people. I’ll try to make it as clear as possible.

Mutual funds are actually investment companies. They are companies that buy investments to create a portfolio of stocks and bonds and things like that. Then they sell shares of that portfolio to people like you and me.

The shares of mutual funds are not traded on secondary markets like stocks and bonds. Rather, you purchase shares directly from the mutual fund company. Because there is not an active market for mutual fund shares, you cannot determine a price based on supply and demand the way you do for stocks. Instead, their price is based on the value of the assets in their portfolio. It is called the net asset value (NAV) and it is simply the net worth of the fund divided by the number of shares outstanding.

How To Calculate Mutual Fund Loads

A lot of mutual funds charge fees, or loads, when you purchase them. The load is not listed as a dollar amount but rather a percent. The percent does not apply to the NAV, though. This is where it gets confusing and a bit misleading.

The loading charge is stated as a percentage of the offer price, which is different than the actual value of the share. The offer price is calculated as the NAV divided by one minus the load. It’s easiest to show with an example.

NAV = $20

Load = 5.75%

Offer Price = $20 / (1-0.0575) = $21.22

Fee (Load) = 0.0575 x $21.22 = $1.22

The offer price is calculated so that what remains after the fee is paid is the NAV. Yet, that means that the actual fee paid is a higher percentage of the NAV than the stated load. With the above example, the $1.22 fee is actually 6.1% of the $20 NAV, which is higher than the stated load of 5.75%.

As you can see, the effective loading charge based on NAV is higher than the stated fee. This is important to remember because every dollar that you pay in fees is one dollar less than you get to invest for growth. Mutual fund fees can have a major effect on returns over the long-run, so we will look into that in more depth next month.

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

by Amy Monday, July 6, 2020

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 Amy Monday, June 29, 2020

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 Amy Monday, June 22, 2020

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 Amy Monday, June 15, 2020

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 Amy Monday, June 8, 2020

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 Amy Monday, June 1, 2020

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.