Tag Archives 403(b)

Should A Pastor Contribute To A Roth Or Traditional 403(b)?


The internet is plastered with articles discussing the merits of Roth versus traditional accounts. The Pastor’s Wallet even has one for IRAs. They talk about the different taxation, time horizons, and how to pick the right kind of retirement plan for you. If you’re a pastor, though, you should ignore them all. 

If you’re a pastor, you should invest in a traditional 403(b) (if it’s a 403(b)(9), which is the type that churches sponsor). At least some, if not all, of your retirement money should be going into a traditional 403(b), not a Roth 403(b). It doesn’t really matter what your personal details are. If your church or denomination offers a 403(b), it is a waste for you to put all of your money into a Roth account. 

The Difference Between Roth & Traditional Accounts

Before I tell you why I’m taking such a bold and non-personalized stance, let me give you some background. The major difference between traditional and Roth accounts is the taxation. 

With a Roth account, you pay taxes on the money before you put it in. Then, everything you withdraw is tax-free. With a traditional account, you invest the money before paying taxes, but then you pay income taxes on all of your withdrawals. The difference is whether you pay the taxes on the money now or in retirement.

Why Traditional 403(b)s Are Better For Pastors

What makes pastors unique in the Roth versus traditional debate is the clergy housing allowance. Ministers have a special privilege where they can pay for all of their housing expenses tax-free. And it’s not just for while you’re in active ministry. You can claim a housing allowance in retirement, too, if you have a church-sponsored retirement plan. Like a 403(b)(9). 

This means that in retirement, the housing allowance will allow you to take distributions from your 403(b) completely tax-free for housing expenses. If the housing allowance makes it possible to take money out tax-free, then having a Roth is irrelevant. Why would you pay taxes on the money before investing it if you were going to be able to take it out tax-free either way?

Let’s say you have $1,000 to invest for retirement and you’re in a 10% tax bracket. With a Roth, you would pay your $100 tax and then put the remaining $900 into your retirement savings account. Then, in retirement, you can take withdrawals from the account without paying any taxes.

If you were using a traditional 403(b), you would put the entire $1,000 into the account without paying any taxes on it. Then, in retirement, anything you took out for qualified housing expenses would be tax-free. You would still have to pay taxes on the money if it were used for other things.

How much of a difference does paying that $100 in taxes make? Let’s say you leave the money invested for 30 years and earn 8% interest on it. Your Roth account, where you only invested $900, grows to $9,056. That’s pretty impressive. But, your traditional account, where you put in the entire $1,000, grows to $10,062. That’s even more impressive. That’s over $1,000 difference, and the more you invest, the bigger the difference is.

How To Determine The Best Way To Invest For Retirement

As you can see, it doesn’t make any sense to put money that will be used for housing expenses into a Roth account. However, not all of your expenses in retirement will be for housing. 

You could make a case for saving some in a Roth account for living expenses and saving some in a traditional account for housing expenses. There’s nothing wrong with that. Or you could use Social Security and your IRAs or other savings to pay for living expenses and your 403(b) for housing. That works too.

Take a look at your current tax return. After the housing allowance and deductions, how much of your everyday living expenses are you paying taxes on? Based on your spending, how much of your 403(b) do you think will end up being taxable in retirement after all of the deductions?

It’s important to remember, though, that you can only take a housing allowance in retirement from a church or denominational retirement plan. You cannot take one from your IRA (even if it contains funds rolled over from a church account) or a 401(k) from a secular employer. You can read more about that here.

As you strategize for your retirement, just remember this: If you have access to a church or denominational traditional 403(b), put the money that will go towards housing expenses there. Putting it anywhere else will cause you to waste money paying unnecessary taxes.


Retirement Savings Options For Ministers


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

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

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

Church-Sponsored 403(b) Or 401(k)

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

These plans are great because they allow you to set aside up to $19,000 (more if you’re over 50) before paying taxes on it. That means you have more money to invest and start earning compound interest. Some even offer Roth options, where you invest after paying taxes but don’t have to pay taxes on the gains.

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

Traditional Or Roth IRA

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

You can’t put quite as much into an IRA, only $6,000 for 2019 (or $7,000 if you’re over age 50). However, they do hold some advantages over the workplace retirement plans. They offer more flexibility in investment options and you have more control over the account. Because of this, it might be a good idea to split your retirement savings between an IRA and a workplace retirement plan if you have access to one. That way you can take advantage of the benefits of each.

Taxable Brokerage Account

If you don’t have access to a workplace retirement plan, saving $6,000 a year into an IRA may not be enough to prepare you for retirement. Once you’ve maxed out your IRA, you may need to start saving into a taxable brokerage account. 

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

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

Health Savings Account

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

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

What makes an HSA so special is that it has double tax benefits. Like a traditional retirement account, you get to put your money into it before paying any taxes, so you have more to put in. Then it also has the benefits of a Roth account, where you get to take all of the money out tax-free. You don’t pay taxes when you put the money in or when you take it out. That’s why an HSA provides more tax savings than any other retirement account out there. And, you can invest it in the stock market just like any other retirement account. 

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

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


How To Take A Ministerial Housing Allowance In Retirement


If you’re a pastor, you know that your ministerial housing allowance is perhaps the biggest financial benefit of being in the ministry. It allows you to avoid paying taxes on all of your housing expenses, including things like cable television and landscaping.

Because of this, one of the most common questions pastors ask is if they can keep taking a housing allowance in retirement. The answer? It depends on where your money is coming from. Unfortunately, one of the most common pieces of advice that professional financial advisors give could actually disqualify you from taking a housing allowance in retirement.


Should I Invest My 403(b) (Or IRA) In A Target Date Fund?


Perhaps the most difficult, or at least most intimidating, thing about saving for retirement isn’t finding money to set aside, but rather choosing how to invest that money. After all, 1 in 5 Americans who aren’t invested in the stock market says it’s because they “don’t know enough.”


What Is A Target Date Fund?

Because of this, in 1994, a new kind of mutual fund was created: the target date fund (TDF). It is a kind of investment designed so that you can just put your money in and forget about it until it’s time to take your money out. You will recognize them because they have a future date in their name, like LifePath Index 2040 Fund or Vanguard Target Retirement 2040 Fund.


Are You Eligible To Make Extra 403(b) Contributions?


People over 50 are eligible to make extra contributions to their 403(b) plans. However, some plans even let younger people make extra contributions. Here is everything you need to know regarding eligibility, limits, etc. for making extra contributions to your 403(b).