retirement Archives - The Pastor's Wallet

Claiming A Minister’s Housing Allowance In Retirement

by Amy Monday, March 28, 2022

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

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

The IRS says it’s still possible to claim a housing allowance even after you retire and stop receiving a paycheck. Unfortunately, there is no clear law or hard and fast rules about this. There is little guidance and not a lot of certainty, so what we do know is cobbled together from various Revenue Rulings issued by the IRS.

Even in retirement, the rules that the housing allowance must be provided as payment for ministerial services and designated in advance by a qualifying organization still apply. Based on the information available to us, this is how those two requirements work themselves out in retirement:

The allowance must be provided in payment for services that are ordinarily the duties of a minister of the gospel. According to the IRS, the housing allowance of a retired minister counts because it is paid as compensation for past services.

Contributions you make to a church retirement plan, usually a 403(b)(9), as a pastor are a part of your pastoral income. So, when you take them out in retirement they are still considered eligible pastoral income. Any pension your church or denomination pays you is something that you earned through your ministerial work and part of your compensation as well. Also, if you use part of your church pension to purchase a commercial annuity, those annuity payments generally qualify for the housing allowance as well, since they were bought with your ministerial income.

You cannot take a housing allowance from an IRA in retirement, even if you used your pastoral compensation to fund it. Neither can you claim a housing allowance from your Social Security benefits, even if you paid into the system as a pastor. I know this is confusing, but that’s just the way the IRS is. Trying to make sense of most tax law is like trying to make sense of a 3-year-old girl. You can learn to live with them but you’ll never actually understand them.

The housing allowance must be officially designated in advance by the employing church or other qualified organization. The IRS has ruled that the board of a national denominational pension fund is qualified to make a housing allowance designation for a pastor. They determined that the pension fund met the requirements of being an “employing church” and the fund trustees were acting on behalf of local churches. Revenue Ruling 63-156 also allows for an independent or nondenominational church to designate a housing allowance for their retired clergy.

The same ruling addressed pastors with non-church employers as well. Basically, if their income while working was eligible for the housing allowance, then their pension or retirement savings from that same employment should also be eligible during retirement. If that employer was able to designate an allowance for them during their working years, then they can do the same during retirement. However, the IRS has ruled inconsistently on this matter, so there is a risk that they would disallow a housing allowance taken from a non-church employer.

As during your working years, the housing allowance still must be officially designated in advance. If you anticipate level housing expenses in retirement, it is a good idea to make your request “until further notice” so that you don’t have to worry about resubmitting your housing allowance every year. For some denominations, the annual conference is responsible for passing the designation resolution for retired or disabled clergy, which is then published in the conference journal. It is not uncommon for them to designate 100% of income as housing allowance.

Another thing that doesn’t change in retirement is the fact that only current year expenses qualify for the housing allowance. This is important for retirees because many senior living facilities either require or offer the option for residents to buy-in or pre-pay with a large one-time payment.

Even if you pay 15-years’ worth of rent at once, you can only claim one years’ worth of rent for your housing allowance. And, if you pre-pay like that, you cannot amortize the payment over 15 years and try to claim a portion of it in subsequent years. We know this because one pastor tried to and the IRS wouldn’t let him. They limited his housing allowance to only the utilities, maintenance and insurance that he paid during that tax year. So, by prepaying housing expenses in retirement (or any time), you essentially forfeit your ability to claim a housing allowance for those expenses that cover more than one year.

IRA Rollovers

One threat to your ability to take a housing allowance in retirement is rolling the money out of the church plan. The common advice among financial advisors when you leave a job, whether to retire or otherwise, is to roll the funds in your employer-sponsored retirement plan into an IRA. This is because IRAs are self-managed and offer more investment options and sometimes lower fees (and some advisors get paid a percentage of them, too).

If you’re a pastor, DON’T DO IT!

That’s right, DON’T DO IT!!!

No matter what your advisor says, keep the money in your church’s retirement plan. At least enough to cover your housing expenses for the rest of your life. If you roll your money out of your church plan and into an IRA in retirement, it will no longer be eligible for the housing allowance. Also, if you roll the money from your church plan into a secular 401(k) or 403(b) it will become ineligible for the housing allowance.

The only chance you might have to reverse such a mistake would be to start working as a pastor again for a church that offers a qualified retirement plan. Then you might have the option to roll your IRA or other retirement account back into the church’s plan. Once the money is back in a church plan, it may again be eligible for a housing allowance. However, there’s no guarantee that the IRS would allow that.

So, I’m going to stick with my initial advice: DON’T DO IT!

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Video: Q&A: Do Life Care Facilities Qualify for the Housing Allowance?

by Amy Monday, January 10, 2022

Can money in a 403(b) be claimed as a housing allowance in retirement for someone living in a life care facility where the cost includes meals and medical care? How should that situation be handled?

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When Can Pastors Claim Social Security Retirement Benefits?

by Amy Monday, November 8, 2021

You’ve been paying in year after year. After year. After year. And paying double on top of that. Over fifteen percent of your income has been going towards Social Security since you entered the ministry. When does it all pay off? When do you start receiving the benefits?

You can file for and begin receiving your Social Security retirement benefits any time between ages 62 and 70. However, what you receive at age 62 is vastly different than what you would receive at age 70.

Primary Insurance Amount

When determining your Social Security retirement benefits, the Social Security Administration (SSA) starts by looking at your earnings history. Your highest 35 years of earnings, to be exact. The index your earnings to account for inflation and come up with your “averaged indexed monthly earnings.” How much money did you make while you were working?

It adjusts every year for inflation, but for someone turning 62 in 2021, the first $996 of averaged indexed monthly earnings provides a 90% benefit and the next $5,006 of averaged indexed monthly earnings provides a 3% benefit. As such, very low-income earners can earn as much as 90% of their average earnings for their retirement benefit.

The earnings from which retirement benefits are calculated are capped. In 2021, the cap is $142,800. Anything above that does not increase your retirement benefit. The highest possible benefit that someone can have earned is $3,895 per month for 2021.

What they calculate based on your earnings history is called your Primary Insurance Amount (PIA).

Full Retirement Age

I mentioned that you can collect retirement benefits any time between the ages of 62 and 70, but there is one specific age that the SSA considers your full retirement age (FRA). It is based on your date of birth as laid out in the chart below:

Your FRA is when you are eligible for the PIA I explained above. I know, it’s starting to look like a middle schooler’s text feed with so many acronyms. Would you prefer I write them out?

When you reach your full retirement age you are eligible for your primary insurance amount. But what happens if your full retirement age is 67 and you want to start collecting at age 62? They decrease your benefit amount. The primary insurance amount is decreased by 5/9 of 1% for each month you claim early, up to 36 months. If you claim even earlier, then it is reduced 5/12 of 1% per month. For example, if your full retirement age is 67 and you claim benefits at age 62, your PIA is reduced by 30%.

It works in reverse as well. Your primary insurance amount is increased by 8% for every year you wait to collect benefits after your full retirement age. Only until age 70, though. There is no benefit in waiting any longer.

How To Decide When To Claim Benefits

Things are set up so that whenever you begin collecting benefits, whether age 62, 70, or some time in between, if you live the average life expectancy you will collect the same total amount over your lifetime. The break-even point where it all evens out is around age 82 or 83.

So, is there an optimal time to start collecting retirement benefits?

That will depend on your own unique situation. Often when we do an analysis, it turns out best to wait as long as possible to increase the monthly benefit amount. One of the reasons for that is that when one spouse passes away, the surviving spouse gets to collect the greater of either his or her own benefit or the deceased spouse’s benefit. For that reason, in situations where one spouse’s earned benefit is much higher than the other’s (as is usually the case for a pastor who has opted out of Social Security but has an eligible spouse), it is often best for the higher-earning spouse to wait to maximize their benefit.

Another thing to take into consideration is your health and family history. If you have health problems or a family history of shorter lifespans, you may be better off collecting benefits sooner.

What is best for you? I wouldn’t know for sure unless I looked at your exact numbers and even then, I have no way of knowing when God will call you home. None of us do, so you just have to make the best decision possible with the information that you do have.

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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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How The SECURE Act Affects Pastors

by Amy Monday, January 6, 2020

Back in 2017, the president timed things just right so that I spent the first day of my family’s Christmas vacation researching the tax reform bill and how it affects pastors. Now, almost two years to the day, he signed into law another sweeping financial reform just in time for me to fly down to visit my family for Christmas. Thanks, Congress, I really appreciate your timing.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019, as part of a year-end appropriations bill to keep the government running. It makes significant changes to retirement plan rules that affect most Americans. Also included in the 1,770-page bill was the Taxpayer Certainty and Disaster Relief Act of 2019, which could affect how you file your tax return in the coming months. While there are no changes to the laws as they relate to pastors specifically, there are a number of other changes that might affect you.

Changes That Affect Your 2019 Taxes

Tuition And Fees Deduction

The above-the-line deduction for tuition and fees that had expired has been reinstated for 2019 and 2020. Up to $4,000 of qualified tuition and fees can be deducted. For 2019, you will need to choose between taking the deduction and the American Opportunity Credit or Lifetime Learning Credit.

Mortgage Insurance Premium Deduction

Mortgage insurance premiums may once again be included as an itemized deduction for 2019 and 2020. If your mortgage bank requires insurance on your loan and the loan qualifies, you can include it on Schedule A.

Medical Expense Deduction Threshold

The percentage of your income that medical expenses have to exceed to be deductible was supposed to increase to 10%, but that has changed. The threshold will remain at 7.5% for 2019 and 2020. Any expenses above 7.5% of adjusted gross income can be deducted.

Mortgage Forgiveness

Usually, when a debt is forgiven, the amount forgiven is counted as income and you have to pay taxes on it. The new law makes it so that qualified primary residence indebtedness that is forgiven can be excluded from income so that no taxes will be due on it.

Federally Declared Disaster Areas

Taxpayers living in federally declared disaster areas have been allowed to take penalty-free money out of their retirement accounts for 2018 and 2019. In addition, the new law gives taxpayers living in those areas an automatic 60-day filing extension. This applies to all current and future disaster areas.

Changes That Affect Retirement Accounts

Traditional IRA Contribution Age Limit

Starting in the 2020 tax year, there is no longer an age limit for traditional IRA contributions. Previously, you had to stop making contributions at age 70 ½. Now, you can continue making contributions as long as you have earned income, regardless of your age. You still cannot make contributions for 2019 if you are over 70 ½.

Graduate & Post-Doctoral Student IRA Contributions

Previously, graduate and post-doctoral students could receive taxable stipends and non-tuition fellowships that were included in gross income but didn’t count to allow them to contribute to an IRA. (You or your spouse must have income to be able to contribute to an IRA.) Thanks to the SECURE Act, that taxable income now makes them eligible to contribute to an IRA.

Required Minimum Distributions

Up until December 31, 2019, once a person turned 70 ½ they were required to start taking withdrawals from their retirement accounts (except for Roth IRAs). These are called required minimum distributions (RMDs) and a 50% penalty is imposed on any amounts not withdrawn in time.

The new law changes the age at which RMDs must be taken to 72. It only applies to those turning 70 ½ after December 31, 2019, though. If you turned 70 ½ before then, you must start taking withdrawals already.

Birth And Adoption Withdrawals

You can now take up to $5,000 out of your IRA to cover qualified birth and adoption expenses penalty-free. The distribution must be made after the actual birth of the child or the adoption is finalized. However, you can use it to pay yourself back for your initial adoption expenses or money you spent preparing for your new child.

The $5,000 is a per-person, per-child limit. That means that both parents are eligible to take $5,000 withdrawals and they can take them for each of their children. There is also a provision in the law where you can repay your retirement account the amount that you removed in relation to a birth or adoption, but regulations have not yet been issued to clarify how or when that must be done.

Inherited Retirement Account Distributions

Previously, when someone inherited an IRA or another retirement account, they were required to start taking distributions calculated so that they would last over the heir’s lifetime. Many people with money to spare would leave their retirement accounts to grandchildren because of this so that the money could continue to grow over the 60-80 year life of the youth.

Under the new law, those inherited retirement accounts must be emptied within 10 years (though there is no requirement for how much must be taken each year). The only exceptions are spouses, disabled individuals, and individuals not more than 10 years younger than the account owner, who can still stretch out the distributions for their lifetime. Minor children of the original account owner have a special exception, but only until they reach the age of majority, at which point they have to empty the account within 10 years.

Changes That Affect Educational Savings

529 Plan Usage

The new law allows up to $10,000 from a 529 plan to be used to pay down student debt without taxes or penalties. This is a per-person limit and in addition to the 529 plan beneficiary, the siblings (of any age) of the beneficiary are also eligible for up to $10,000 to pay down their loans. Also, apprenticeship programs have been added to the list of institutions where 529 plan funds can be used, as long as they are registered with the Department of Labor. This part of the law is effective January 1, 2019, so you can use it retroactively for expenses incurred last year.

In earlier versions of the SECURE Act, there was a provision to allow 529 plan funds to pay for homeschooling expenses. However, that did not make it into the final version of the bill which has become law.

There are a number of other provisions in this law that became effective January 1, 2020, but most of them do not relate to you as an individual. The above changes are the most important parts of the law as they affect individual taxpayers.

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Are Gifts To Retired Ministers Taxable?

by Amy Monday, September 2, 2019

You’ve done it! You’ve fought the good fight, run the race with perseverance, and now the time has come to retire from your post. You did a good job and your church loves you. They want to bless you in this new season of life, so they write you a big check. While you’re thrilled and grateful, there’s one important question you need to answer before you start spending it: Do you have to pay taxes on your retirement gift?

Most Gifts To Pastors Are Taxable

Usually, gifts to pastors are considered taxable income. The IRS is pretty strict about that and tax court cases have been decided that lay out their criteria and reasoning. While your congregation might not realize it, pretty much anything they do for you that’s related to the fact that you’re their pastor constitutes taxable income for you.

A $50 thank-you after a baptism? Taxable income.

A cash birthday gift? Taxable income. (I guess the IRS doesn’t think they’d like you enough to give it to you if you weren’t their pastor.)

Gift certificate for a night at a hotel from the congregation for your anniversary? Taxable income.

A big check from a love offering at your retirement party? You might actually get to avoid taxes on that one!

When Gifts To Retired Pastors Are Tax-Free

Yes, it’s true. Certain gifts to retired ministers are not considered compensation and are therefore tax-free gifts. There are some strict criteria that must be met in order for a gift to avoid taxes, given by the IRS in Revenue Ruling 55-422.

For your retirement gift to be non-taxable, the following must be true:

You aren’t expected to perform any services in exchange for the gift.
The gift is not based on any enforceable agreement or past practice. The church is under no obligation to do it for you.
You will no longer be working for the church or rendering services in any formal capacity.
You had a deeper relationship than simply employee/employer with the church. The gift cannot be for just any employee but rather someone like a senior or executive pastor.
You must have received adequate compensation for your past services. The gift cannot be to make up for what the church wishes they could have paid you previously. How things are worded when the gift is presented can violate this requirement if not thought through carefully.

If even one of the above criteria does not apply, then the gift is considered compensation for services rendered and is thus taxable.

When planning for such a gift, it is important that the church asks, Could this in any way appear to be compensation for past, present, or future services? If the church cannot answer that question with a clear negative, then the IRS may not either.

When you’re unsure if a gift that your church has given you qualifies to be tax-free, discuss it with your church and find out the reasoning and logic behind the gift. If they cannot give you any definitive answers, then consult a tax professional that is experienced in clergy matters. (Beware, though, because most standard tax preparers do not know or understand all of the special tax considerations that you, as a pastor, face.)

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Tag Archives retirement

Claiming A Minister’s Housing Allowance In Retirement

IRA Rollovers

Video: Q&A: Do Life Care Facilities Qualify for the Housing Allowance?

How The SECURE Act Affects Pastors