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IRC 403(b) Plan Distributions

Question:

Are Internal Revenue Code section 403(b) plan distributions taken in retirement after age 55 subject to Federal Income, State Income, Social Security, or Medicare taxation?
Answer:

Distributions from a 403(b) account are taxable as ordinary income to the employee; however, if the distribution occurs when the employee is under age 59½ , the amount may be subject to an additional 10% early-distribution penalty, unless the employee qualifies for an exception.

The distributions are not subject to social security or Medicare tax. Readers of this blog will want to read other postings regarding potential housing allowance benefits to ministers who receive retirement distributions from church plans.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. James Jorgensen of Owatonna, Minnesota gets credit for this one.

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Answer:

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Answer:

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Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.