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.

What Financial Advisors Commonly Recommend

Upon retirement, most financial advisors will recommend that you roll any workplace retirement plans, like 403(b)s or 401(k)s, into an IRA. They tell you to do this because you have more control over your money, more investment options, and lower fees in an IRA. If you convert it to a Roth IRA, you have the added benefits of no required minimum distributions and favorable withdrawal rules for your beneficiaries. However, you will have to pay taxes upon conversion.

While this is solid financial advice for most people, it can be a really bad idea for pastors. To learn more, I discussed it with Ben Wacek, Certified Financial Planner® and Founder of Guide Financial Planning. He has attracted a lot of pastors as clients because of his biblically-based financial guidance, lack of asset minimums, and ability to work virtually with clients all over the country. Because of this, he knows the ins and outs of ministerial housing allowances.

Taking A Ministerial Housing Allowance In Retirement

“Withdrawals from a retirement savings account can only be counted as housing allowance if withdrawn from a qualified church retirement plan,” Ben explained to me. “Revenue ruling 75-22 is the main supporting ruling that ties back to IRS Code Section 107, which is then further supported by the Housing Allowance Clarification Act of 2002.” What he is saying is that you can’t take a housing allowance from an IRA or a 401(k) from a secular job. Because of this, it is best for pastors to keep their money in their church’s 403(b) or 401(k) plan.

In fact, if you have some of your pastoral income saved in an IRA, you should try to roll your IRA into your 403(b)! Most 403(b) plans allow you to roll in outside IRA accounts. That way, your IRA money would be eligible to be used as a housing allowance as well. If you receive a fixed pension through your denomination in retirement, it can also be counted as a housing allowance.

Work With An Advisor Who Understands Pastoral Finances

Having this discussion with Ben reminded me of the importance of working with financial professionals who understand pastor-specific issues. The housing allowance is just one example of how financial planning for pastors isn’t the same as financial planning for everyone else.

Just like my friend who had her taxes messed up by H&R Block because they didn’t understand how some church employees have to pay self-employment taxes, a financial advisor that doesn’t understand the rules surrounding housing allowances could really cost you a lot of money. As Ben told me, “This strategy is a big deal and one that pastors definitely want to be aware of.  For example, if a retired pastor is in the 25% marginal tax bracket and they take total withdrawals from their retirement account of $20,000 in a year, this opportunity could save them $5,000 in taxes every single year of retirement!”

Don’t miss out on the chance to take a housing allowance in retirement. Put money into your 403(b) while you’re working and keep it there when you retire. And if you get outside financial advice, make sure it is personalized and takes into account your position and unique opportunities as a pastor.