December 28, 2011

403(b) Plan Rollovers to IRAs

Question:

From my 403(b) retirement plan can I rollover an amount to a Traditional IRA, then roll that over to a Roth IRA to avoid paying self employment taxes?

Answer:

First, timely rollovers from an Internal Revenue Code section 403(b) plan to a Traditional IRA are non-taxable both for income and self-employment (SE) tax purposes. In fact, distributions from qualified retirement plans are not subject to SE tax. Income tax can be postponed by rolling over 403(b) distributions to a Traditional IRA. But subsequent distributions from a Traditional IRA rolled over to a Roth are not tax-free.

However, there may be reason to avoid rolling over a lump-sum distribution from a 403(b) plan into a Traditinal IRA. Please reference the following posting and others within this blog related to housing allowance designations.

http://ministrycpa.blogspot.com/2008/02/ministers-retirement-distributions.html

December 02, 2011

Housing Allowance for Extra Mortgage Principal Payments

Question:

Can a pastor pay extra on his mortgage principal and use it to count toward his housing allowance?

Answer:

Yes, but.

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. The IRS lists only food and servants as prohibitions to allowance housing expenses. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home (IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1).

Because of the third limitation listed here, many ministers gain little or no benefit by accelerating their mortgage payments. For example, an additional $5,000 principal payment adds to the amount actually used to provide a home. But it does not increase a minister's fair rental value of his home.