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How Pastors Can Avoid Paying Social Security Taxes Without Opting Out

by Monday, October 11, 2021
Picture of a woman smiling with blog post title: How Pastors Can Avoid Paying Social Security Taxes Without Opting Out

You didn’t opt out of Social Security because it doesn’t violate your conscience. But that doesn’t mean you like paying the tax. There are probably a lot of things you would rather do with that money. Do you have any other options?

Yes, you do. There is a legal way for you to avoid paying Social Security and Medicare taxes without opting out. And not only does it save you on taxes, but it’s really good for your future self as well. How do you do it? Make pre-tax contributions to your church’s retirement plan.

Pastors Pay Payroll Taxes Under SECA

Let me explain how that works. First, I have to remind you that pastors pay payroll taxes as if they were self-employed, under SECA. Confused? Read this article. 

Because you pay as if self-employed, your payroll taxes do not come out of your salary automatically as they do for other employees. You calculate your payroll taxes when you file your income tax return each spring. To do so, you take your taxable wages reported on your W-2 and add them to your housing allowance and pay taxes on the total. 

How Pre-Tax Retirement Contributions Work

Now we need to look at how retirement contributions work. When you make contributions to an employer’s retirement plan, your employer withholds the money before they pay you (and then sends it to your retirement account). The money never passes through your hands. 

If they are pre-tax (not Roth) contributions, then they never show up in your taxable income, either. That’s why they’re called pre-tax because they are taken out before your income is calculated for income tax purposes. You pay your income taxes on that money when you withdraw it from the account in retirement.

Most employees still have Social Security and Medicare taxes taken out of the money that they contribute to their employer’s retirement plan. But not pastors. Because your church can’t withhold those taxes for you, you pay them on your own. You calculate those taxes based on what is reported as taxable income to you. 

Lucky you, your retirement contributions don’t show up as taxable income. So you don’t have to pay Social Security and Medicare taxes on any of your pre-tax contributions to your church’s retirement account. And you don’t pay the taxes when you take the money out in retirement, either, you only have to pay income taxes. (Don’t worry, the IRS knows about this loophole and they are okay with it.) 

How It Works In Real Life

In case you weren’t able to follow all of that, let me give you an example (ignoring any housing allowance for simplicity’s sake). Let’s say you earn $60,000 and you make pre-tax contributions to your church’s 403(b) totaling $10,000. Since the contributions are pre-tax, your W-2 only shows $50,000 of income. If you hadn’t contributed to a retirement plan, you would have a taxable income of $60,000. 

What is the impact of that difference in taxable income? SECA taxes are 15.3%, though because of the way they are calculated they actually net out to 14.13%. You save $14.13 in taxes for every $100 pre-tax contribution you make. In our example, that’s a savings of $1,413! Pretty nice, right?

Claiming A Housing Allowance In Retirement

The icing on the cake is that you may even be able to avoid paying income taxes on the money when you take it out in retirement. Yes, you read that right. There is a way to get this money completely tax-free. How? Claim it as a housing allowance. Pastors are allowed to use money from a church retirement account as a housing allowance in retirement. This article elaborates on how that works. 

How To Start A Church Retirement Plan

Does this article make you sad that your church doesn’t sponsor a retirement plan for you to contribute to? Don’t be sad, just start one! It’s not as expensive and onerous as you think. I was genuinely surprised by how affordable it can be when I sat down to discuss it with Paul McWilliams, an advisor who helps churches set up retirement plans. Here is a post he wrote for Pastor’s Wallet on setting up a church retirement plan. 

If you’re thinking of starting a retirement plan, contact Paul or do a quick Google search to find some of the other companies that offer that service. I and my financial planning firm, Guide Financial Planning, do not set up retirement plans. At the moment, we only provide services for individuals. 

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The 4 Most Important Retirement Planning Decisions Ministers Need to Make

by Monday, September 27, 2021
Picture of an old man watching a sailboat with blog post title: The 4 Most Important Retirement Planning Decisions Ministers Need to Make

This is a guest post by Chris Cagle, author of RetirementStewardship.com and The Minister’s Retirement book. I recently published a book review on his book and it got such a good reception that I asked him to write something specifically for you.

In my book, The Minister’s Retirement, I address many of the fundamental questions that pastors have about planning for, and living in, retirement. Wise planning involves making decisions consistent with biblical stewardship principles and implemented using wisdom and practical knowledge gained through experience. I call this “retirement stewardship.”

Some decisions are more critical than others, so in this article, I discuss the ones I consider of greatest importance based on the extent to which they can help a pastor to “retire with dignity.”

1.  The Social Security Decision

Although Christians have mixed opinions about it, Social Security is an expression of God’s common grace. It can be a blessing to Christians and non-Christians alike, especially those with limited savings and no other sources of retirement income.

For most U.S. workers, participation in Social Security is mandatory (which is objectionable to some). You can think of it as a type of public insurance that the federal government administers. It provides specific benefits to regular retirees and those who are survivors, disabled, or indigent. At its inception in the 1930s, Congress intended it to be a safety net for the neediest seniors and other vulnerable groups, not a “be all” retirement plan for the retired masses.

Social Security now provides about a third of the income for older retirees, and over half need it for more than 50% of their retirement income. That means that a large segment of the retired population would be in big financial trouble in retirement without it. Therefore, deciding whether to participate in the program and, eventually, when to start receiving benefits if they do, is one of the most critical ministers will make.

As defined by the IRS, a minister can decide not to participate in the Social Security program. If they opt-out and don’t contribute, they won’t be eligible for specific Social Security health and retirement benefits when they retire. That means they will have to find alternatives for retirement income, disability insurance, and paying for Medicare insurance.

Opting-out can’t be a purely financial decision (in order to avoid Self-Employment Contribution Act (SECA) taxes). According to the IRS, it has to be on religious grounds. In such cases, the church might consider giving the pastor an additional “allowance” for a portion of the 15.3 percent SECA tax. The pastor could use that to boost his retirement savings or to purchase a deferred income annuity or cash-value life insurance product to help fund his retirement, as he can’t directly apply it to the SECA tax.

Social Security is a good source of retirement income—it functions much like a lifetime inflation-adjusted income annuity. If they participate, some pastors’ benefits upon retirement will be their only source of income, making the opt-out decision of utmost importance.

2.  The Retirement Saving Decision

You’ve heard this drumbeat over and over: “Save as much as you can now for retirement because Americans are living longer than ever and your chances of running out of money are greater than ever.” Well, this isn’t just a catchy phrase; it’s a plea to everyone to save enough so that they can “retire with dignity.” The younger you are, the greater your opportunity to get this right. You only have one shot at it!

That’s why a pastor should start saving for retirement as early as possible, preferably in a 403(b)-retirement plan if one is available. Ideally, he would save at least enough to get the church’s matching contribution, which might be 3 to 6 percent of his salary. Saving early starts up the compounding engine of long-term growth, enabling savings to grow exponentially.

A distinct advantage of the 403(b) is that the church automatically makes the pastor’s deposit from his salary. Along with its matching contribution of some percentage (typically in addition to his salary), it directly deposits them into the pastor’s retirement account. Contribution amounts deposited are exempt from the self-employment tax and federal income tax, and the distributions are eligible for the housing allowance at retirement.

The Roth IRA is also a very popular retirement savings vehicle. Nonetheless, pastors should only use it only in certain situations as no part can be claimed as a housing allowance in retirement. A pastor without access to a church- or denomination-sponsored retirement plan or who is maximizing their 403(b) contributions and wants to use one to set aside more savings in a separate account is a good candidate for the Roth IRA.

3. The Investing Decision

Saving consistently over a long time carries more weight in future outcomes than whether you invest in fund X or Y or hold 60 percent in stocks or 70 percent. But that doesn’t mean that a pastor’s investment choices don’t matter. It’s possible to take too much risk or too little. He may have sufficiently diversified his investments between stocks, bonds, and alternatives relative to his stage of life and risk tolerance.

Some people’s strategy for investing is to “play the markets.” They buy and sell and try to time market ups and downs to make a profit.  Although there is the occasional success story, this has been proven to be a losing strategy in the vast majority of cases.

Here’s the reality: the stock market is us—all of us—we are the market. So, it’s actually a little foolish for the average person to believe that they, or even a competent paid adviser, can “beat the market.” Mr. Market is the sum of all the feelings, sentiments, beliefs, and behaviors of everyone who invests in the market—many who are much more knowledgeable and experienced than you or I. So, apart from the nominal economic growth that we all benefit from, you’ve got to beat somebody else at the same game and by more than what it costs you to come out ahead. And that someone could be a very knowledgeable and experienced Wall Street hedge fund manager running a multi-million-dollar portfolio.

My point is that it really doesn’t make sense to go toe-to-toe with the professionals on Wall Street, especially when we’re talking about the money that you will need to live on in retirement. You’ll be much better off owning a cheaply-managed basket containing many different stocks—a “mutual fund.” I like index funds as they virtually ensure that, at a minimum, you’ll capture your portion of the economic growth of whatever sectors you’re investing in at a relatively low cost. If you want to pay more for “well-run” mutual funds, be my guest, but keep in mind that less than 20 percent of them will actually do better than the indexes.

A pastor can invest in a 403(b) using the same vehicles as any qualified or non-qualified retirement accounts (stocks, bonds, and alternatives). I strongly suggest no-load mutual funds and ETFs with low management fees. Passively managed index funds have become very popular with investors, as have retirement target-date funds. A pastor can read up on and study this topic and make their own choices, but they may have better things to do with their time (praying, studying, preaching, evangelizing, counseling, etc.).

Here is where an experienced financial planner/advisor can help. However, pastors should be wary of commission-based stock and insurance brokers and choose a fee-only planner or advisor they trust. They should also be very cautious about investing with a financial professional in their congregation; it can quickly become sensitive. If the pastor’s not happy or wants to make a change, relational difficulties can easily arise. That said, seeking wise counsel from someone in the church—perhaps the church business manager or stewardship deacon or pastor—is always a good idea. They may offer some high-level suggestions and point you to a reputable professional.

4.  The Home Purchase Decision

For many retirees, including pastors, home equity will be an “ace in the hole.”

For those reasons and others, most pastors should try to purchase a home and take full advantage of the tax benefits of homeownership. Churches have mostly gotten out of the parsonage business, so it’s beneficial to pastors and their families for several reasons. They can build their net worth by paying down principal and with market appreciation. Plus, the federal income tax law provides generous benefits to the pastor who is buying a home. Income taxes can be reduced and perhaps eliminated because of the housing allowance and additional deductions for mortgage interest and real estate taxes.

The goal is to have a paid-for house at retirement, thereby reducing housing expenses and making home equity available in retirement if needed. Home equity often becomes a large part of a retiree’s total net worth. They can tap it for income in various ways—equity line of credit, second mortgage, or reverse mortgage. That said, most financial professionals suggest using it only as a last resort.

God is on his throne

A pastor who makes wise decisions in these four areas and, most importantly, follows biblical principles of financial stewardship day in and day out will be doing what he can to put himself and his family on solid financial footing before and during retirement. God is on his throne, so the rest is up to Him.

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Book Review: The Minister’s Retirement, by C.J. Cagle

by Monday, August 30, 2021
Picture of The Minister's Retirement book with blog post title: Book Review: The Minister’s Retirement, by C.J. Cagle

Today’s post is going to be a review of a book written especially for YOU; The Minister’s Retirement, by C.J. Cagle. The author contacted me through this blog late last year offering to send me a copy and I finally found the time to read it on a flight this spring. 

Some Context

Going in, I knew nothing of the book or the author, only that over six months ago I had said I would read the book and I like to be a woman of my word. While The Minister’s Retirement doesn’t sound like my first choice for vacation reading (especially after spending the last two years studying finance in-depth), six hours on an airplane is just too valuable to waste. 

I should probably also give you some context for who I am as a reviewer. First of all, I’ve been studying pastoral finances for the past five years. I just completed a Master’s in Family Financial Planning and Counseling, and in March, I passed the CFP exam on my first try. On top of that, I am one of those gifted (or cursed, depending on how you view it) people who see typos in everything. Really, everything. I even notice when there is an extra space between the words in a song during worship. Suffice it to say, you probably won’t find a tougher critic for a pastoral finance book. 

About The Author

As soon as we took off, I cracked open the cover and I was pleasantly surprised. It’s a really good book, both in content and delivery. Now, it’s not John Grisham or Malcolm Gladwell, but the author writes as well as I do, so I can’t complain.

The author himself is not a financial professional. He was an IT architect/strategist for several decades and is now retired. I think the fact that he is retired makes the book better because his thoughts and opinions are more personal and tangible rather than just theoretical. He currently serves as a deacon in his local church leading the stewardship ministry and blogs at retirementstewardship.com. 

First Impressions

The truth is, I had a favorable impression of the book before even opening it. It has a well-designed cover and is made with good quality paper and cardstock. They say not to judge a book by its cover, but this one is just as good on the inside as it is on the outside. 

Cagle lays things out simply in a way that is both easy to read and easy to understand. He writes so that almost no previous financial knowledge is required of the reader and yet it is not so basic that a knowledgeable person cannot enjoy it. It is not dumbed-down. He tells you everything you need to know about complex topics without getting mired in the details or calculations—he only gives the necessary and saves you from the unnecessary. 

It is a very thorough book. Every time I found myself thinking, “He should mention…” he mentioned it in the very next paragraph or on the next page. My thoughts transitioned from, “Will he?” to “How will he?” as he failed to disappoint me with every chapter.

Contents Of The Book

The book consists of ten chapters, an introduction and conclusion, and a list of resources and endnotes. I’ll admit that endnotes bother me because I don’t like having to flip back and forth in the book. If you don’t want to flip, rest assured, because you can ignore all of the endnotes and not have any trouble understanding the book. They just always pique my curiosity so I end up flipping and reading them all. 

These are the chapters covered in the book:

  1. Why Should a Minister Plan for Retirement?
  2. What are the Minister’s Unique Challenges in Preparing for Retirement?
  3. Should a Minister Opt out of Social Security?
  4. What Types of Retirement Savings Accounts are Available to a Minister?
  5. Where do Pensions and Annuities Fit in a Minister’s Retirement?
  6. How Should a Minister Save and Invest for Retirement?
  7. Does a Minister Need to Hire a Financial Advisor?
  8. What Can a Minister Do Who is Behind in Saving for Retirement?
  9. How can a Minister Estimate and then Generate the Income They’ll Need in Retirement?
  10. What Kinds of Insurance Does a Minister Need Before and During Retirement?

I won’t repeat the information in the book, but I will make a few observations. In the chapter on opting out of Social Security, he gave a fair and balanced presentation. His explanation of the differences between Roth and traditional retirement accounts was very good. The book even covers Roth conversions, which is a very useful financial planning strategy that is not well known to the general public. 

Cagle’s explanation of how annuities work is clear, simple, and understandable, unlike annuities themselves. His guidance on investing is excellent—not just for pastors but for everyone. I love that he included pages 110 and 111 (no spoiler here!). The book has a lot of good advice and it ends with a healthy balance between faith and wise stewardship.

Should You Read This Book?

These are the questions I consider when evaluating a finance book:

  • Is it accurate information?
  • Is it helpful or important information?
  • Is it presented in a way that non-financial people can understand?

Cagle’s book is a resounding yes for all three and wins my full approval. I would recommend this book to any pastor who is thinking about retirement. Honestly, I can’t imagine a less onerous finance book. I read all 153 pages without falling asleep after waking up at 4 am. That says a lot from someone who can’t get through three pages in a finance textbook without stealing a few Zs. (It took about 4 ½ hours total to read, in case you were wondering.)

After reading his book, I would say that C.J. Cagle is a voice you can trust. I think he has the same heart as I do with what I’m doing here at Pastor’s Wallet.  

Things To Note If You Read It

There are just a few things that I want to make note of if you choose to read this book. First of all, it assumes that all ministers are men. If you are progressive, please don’t get offended. Historically, most ministers were men. Also historically, in the English language, the masculine pronouns have been used when referring to a hypothetical person of unknown gender. Please don’t let it cause you to miss out on the excellent information found in this book. 

On page 44, it refers to churches giving the pastor some extra salary to help offset the cost of his Social Security and Medicare taxes. I just want you to know that if you do that, the extra salary is considered taxable income to the pastor and it will be subject to both income and self-employment taxes. Page 46 also mentions churches withholding SECA taxes, which they aren’t allowed to do. 

In the graph on page 63, some of the information is different now because of the passage of the SECURE Act. Under the new law, anyone with earned income (or their spouse) can contribute to an IRA regardless of age. Also, the dollar amounts listed adjust from time to time, so make sure to double-check the limits for the tax year you are in. The SECURE Act also changed the age for required minimum distributions, which are discussed on page 137, to age 72. 

A final correction, on page 155 it says that an HSA is not tax-free unless it is part of a group plan. Anyone eligible to contribute to an HSA receives the same tax benefits, whether they set it up individually or their employer does. When you do it on your own, you just have to wait until you file your tax return for the benefits. Another thing about HSAs that isn’t mentioned in the book is that they can also be a great retirement savings vehicle. 

Where To Purchase A Copy

If you’re interested, you can purchase the book on Amazon here. And no, I don’t receive any commissions or payments if you buy a copy with that link. All I get is the satisfaction of knowing my readers are well taken care of and have good information at their fingertips. 

If you read it and like the book, don’t forget to leave him a glowing review!

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Making Sense of the Advanced Child Tax Credit Payments

by Monday, July 19, 2021
Picture of an IRS letter with blog post title: Making Sense of the Advanced Child Tax Credit Payments

If you have kids, there’s a good chance that you received some money from the IRS in the last couple of days. It is a part of the American Rescue Plan legislation that was passed in March, an advanced payment of your 2021 child tax credit. Along with money in people’s pockets, it has caused an incredible amount of confusion. 

I honestly don’t think I’ve ever seen so much confusion surrounding something that so broadly affects Americans and has had good press coverage. As pastors, you’re used to confusing rules (seriously, dual-status taxation?!?), but this is widespread among the general population, not a unique group like ministers. So, I decided to spell it all out for you today. I’ve seen all kinds of questions regarding how it will affect taxes in the spring, what to do with the money, and if people should opt out of the payments. Let’s start from the beginning. 

What is the Child Tax Credit?

If you make under a certain amount of money ($400,000 for a married couple) and have qualifying children, you get a break on your taxes. You basically get a discount. After calculating your tax liability based on your income, etc. you get to knock a couple thousand dollars off your bill. Pretty cool, huh? Even better, some of that tax credit is refundable, meaning they’ll give you the money even if you don’t owe any taxes. 

Child Tax Credit Changes for 2021

They made some changes to the Child Tax Credit (CTC) in the American Rescue Plan. The changes only apply to the 2021 tax year, though some people want to make them permanent. The biggest changes were increasing the amount and a provision to pre-pay some of it. This is a good article if you want to read more about the changes. 

The prepayment part is what this blog post is about. They decided that instead of making people wait until they file their tax return to receive the benefit of the higher amount, they would give them some ahead of time, starting on July 15. 

How the Prepayment is Calculated

How much did you get on July 15? The IRS calculated the payments as if they were paying out the entire CTC over the course of the year. But they’re only paying over half the year, so only half of the credit is being pre-paid. 

For example, let’s say you have a 10-year-old and a 12-year-old, so for 2021 tax purposes they are worth $6,000 total. If you divide that by 12 months, you would get $500 a month. You will only receive payments from July to December, for a total of $3,000. The other $3,000 you will subtract on your tax return, the way you usually do it. 

Why Wouldn’t You Want the Prepayment?

While the government is sending out this money to try to help people, not all of us want it. Personally, as a self-employed person, I have to pay quarterly estimated taxes just like a lot of you do (even though you’re not self-employed, it’s that dual-status taxation again!). I don’t want the government sending me money because I just have to turn around and send it back to them.

Also, a lot of people with steady income have it figured out so that they pay just the right amount and don’t owe or have a refund when they file their tax return. These prepayments can mess things up in that situation. 

Let’s look again at our above example, the people who got $3,000 of prepayments and took $3,000 off on their tax return. Normally, they would not have gotten any prepayments and instead taken $4,000 off when they filed their taxes (the usual value of 2 kids). When they go to file next April, they will only be able to take $3,000 off (since they already got the other money) and will therefore end up owing the IRS $1,000. I hope they’re setting some of those payments aside to give back in April!

How to Opt Out of the Prepayments

Of course, the IRS recognizes that not everyone wants the CTC paid in advance. They have provided a way to opt out. You can go to this website to check your eligibility and also unenroll from payments. I went in and unenrolled. It was easy for me because I already have an account with the IRS that I use to pay my quarterly estimated taxes. 

I wasn’t able to completely unenroll, though. I am married, so I was only able to unenroll from half of the payment. To unenroll for the full amount, my husband needed to unenroll also. And he tried. Boy, did he try. 

He submitted so many documents and so much information to prove his identity, I almost thought it was a scam. Finally, they told him that they were unable to confirm his identity and he would have to speak to an identity specialist with a webcam on and sent him to a queue with a 3 hour wait (which had increased to 3 ½ hours 45 minutes later). He never made it far enough to opt out. It simply wasn’t worth the effort. I would have thought he was a unique case or it was a user error, except I have heard from clients and others that also had a terrible time trying to unenroll. (And after all that we got a letter saying we would receive the full amount!)

So, technically you have the ability to unenroll from the payments, but whether or not you can actually do it is still to be determined. It has to be done three days before the first Thursday of the next month that you’re scheduled to get a payment by 11:59 pm Eastern time. In case that’s as clear as mud, this page has a chart with exact dates. Good luck!

How the Prepayment Affects Your 2021 Taxes

Now you can see why there’s so much confusion, can’t you? Not even the deadline to opt out is clear and simple! The major point of confusion for most people, though, is the effect it will have when they file their tax return next April.
What impact will it have?

The prepayments will not affect your tax liability. That is how much money you actually have to give to the government. The amount of your income that you keep in the end is not affected by the prepayments.

However, it likely will affect your tax return or the amount you have to pay. Those are both different from your tax liability. They are just what’s left of your tax liability after subtracting out the money that has been withheld from paychecks or paid as quarterly estimated payments throughout the past year. A big refund doesn’t mean you paid less in taxes, it just means you prepaid too much. The total amount you pay the IRS is the same whether you pay too much ahead of time and get a refund or don’t pay enough and have to pay more with your tax return. 

Well, I hope that helps to clear up some of your questions. I’m sure I’ve missed some, so go ahead and leave them in the comments and I’ll get back to you!

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How Can A Church Sponsor A Retirement Plan?

by Monday, June 21, 2021
Picture of an empty boat at sunset with blog post title: How Can A Church Sponsor A Retirement Plan?

This is a guest post by Paul McWilliams, an independent financial advisor with Inspire Advisors who specializes in helping organizations set up and administer retirement plans. In addition to his technical knowledge, Paul is also a pastor’s kid! Paul can be reached for questions at paul.mcwilliams@inspireadvisors.com.

Retirement is a popular topic these days because most Americans are financially unprepared for it. Pastors and church employees are no different. While many workers have employer-sponsored 401(k)s to save into, a lot of pastors are left on their own. Over half of the churches in the country have less than 100 people in attendance each week, so many churches feel they are too small to sponsor a retirement plan for their pastor and staff. 

I’m here to tell you that it’s not true. No matter how small your church is, there are ways for you to sponsor a retirement plan and it doesn’t even have to be a financial burden. 

What Kinds of Retirement Plans are Available for Churches?

As both a church and an employer, churches can sponsor all kinds of retirement plans. They include 403(b)s, 401(k)s, SEP IRAs, SIMPLE IRAs, and even defined benefit pension plans. Each kind of plan has unique features and rules that apply to it.

One benefit that churches have is that they can choose whether they want to sponsor a plan that is subject to ERISA or not. ERISA stands for the Employee Retirement Income Security Act and is the legislation that governs most employee-sponsored retirement plans. ERISA has a lot of rules and requirements, which is why it can be a benefit for churches to be able to choose whether or not to be subject to it. 

In my experience, a non-ERISA 403(b) is often the best choice for churches. A 403(b) is a lot like a 401(k) as far as tax benefits and contribution limits, but they don’t have to be subject to ERISA. Not being subject to ERISA makes things a lot simpler. You don’t have to file Form 5500 or complete nondiscrimination testing, which is a huge opportunity for cost savings in comparison with a “typical” employer-sponsored retirement plan, like a 401(k). 

Before you start shopping for a retirement plan, you may want to check to see if your denomination or association of churches already has one that your pastor and staff can participate in. However, you should also know that just because they do, that doesn’t mean it’s the best option. You may still want to sponsor your own. My dad’s denomination offers a plan, but his church still decided to sponsor their own. 

What Features Should a Church Look for in a Retirement Plan?

One of the best features of a non-ERISA plan is the fact that you can favor certain employees, or discriminate. For example, let’s look at a church that has one pastor and a couple of regular full-time employees that are not pastors. The church could make the same employer contributions to each person’s account or they could offer the pastor one amount and the other employees a different amount (or even nothing). For churches who want to help their pastor but can’t afford to do as much for their staff as well, this is a great opportunity. 

I have seen churches address this in a variety of different ways. Some churches match up to 6% while others do not. Some don’t do matching contributions but rather contribute a fixed amount. Some contribute only for their pastor while others make contributions for all employees. It really is that flexible. 

Other beneficial retirement plan features that are often overlooked are the available contribution types. You can offer both pre-tax and post-tax (Roth) employee contributions. Employers can offer matching contributions and discretionary contributions. When I design plans for my clients, I like to make them as flexible as possible with a wide range of options. 

With contribution limits much higher than individual IRA limits, having a church-sponsored plan can be a real blessing for pastors and also gives churches more flexibility in how they compensate their staff. 

Considerations When Choosing a Retirement Plan

There are a number of different things you should take into consideration when choosing a retirement plan. One is how financially “healthy” a church is. You don’t want to promise matching contributions if you may not have the cash flow to make them. Still, you can design the plan so that employer contributions are “discretionary” so that you are not locked into a requirement to match or contribute as an employer. 

In my experience, when you have an open conversation with the church board and key members about the need for staff benefits like a retirement plan for pastors, they are “normally” 100% supportive. They want to make it happen for the benefit of their pastor that leads them. Pastors who want their church to sponsor a retirement plan often have me come in and present to the decision-makers so that I can explain how it all works and answer any questions they may have. 

Cost is an important consideration, but the decision should not be based on cost alone. While SEP IRAs or SIMPLE IRAs may cost less, they are often not optimal. Increased contribution limits and flexibility are often worth the increased cost. One thing that affects the cost is whether the plan has a plan document or a third-party administrator. Some plans require a plan document (such as a 403(b)(9) church plan) while others do not (like a 403(b)(7) plan). That being said, plan documents are helpful even if they are not required by law. Among the church plans I have helped set up, some have a plan document and third-party administrator and others have neither. 

Another thing to consider is who on your staff is going to manage everything? A lot of retirement plan responsibilities can be outsourced but there is always a cost to that. Alternatively, a board member or church member who is not on staff could also help with the administration. Where there is the most opportunity for error is in depositing money and making sure that the employees’ salary deferrals get into the plan properly and in a timely manner. 

How Pastors Can Claim a Housing Allowance in Retirement

One of the greatest benefits for pastors, besides being able to save more money in a tax-advantaged manner, is being able to claim a housing allowance in retirement. The minister’s housing allowance can only be given as compensation for ministerial services. However, if you wait until retirement to receive that compensation, it is still from ministerial services and therefore eligible for the housing allowance.

The key to claiming a housing allowance in retirement is that it must come from a church (or other housing allowance eligible organization)-sponsored retirement plan. Even if your IRA account was built with money you earned as a pastor, you won’t be able to claim a housing allowance from an IRA. It has to be from a church plan. For that reason, it’s extra helpful for a pastor when the church is willing to sponsor a plan. It also means that pastors should be careful not to roll all of their money into an IRA in retirement. 

This article is for informational purposes only and is not legal, investment, or tax advice. Consult your CPA or legal counsel when establishing a retirement plan and make sure to follow all IRS guidelines.

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