September 27, 2016

A Roth 403(b) Contribution Cannot Lower Self-Employment Taxes

Question: 

A previous MinistryCPA blog post mentioned that, "In addition, unlike other retirement plan choices (Traditional and Roth IRAs, and for-profit company 401(k) plans), a minister is not subject to the 15.3 percent federal self-employment tax on amounts deferred into 403(b) accounts (IRS Revenue Rulings 68-395 and 78-6)."

Does this exclusion apply to ministers with elective deferrals to Roth 403(b) plans similar to the treatment available when contributing to pre-tax 403(b) plans?

I can see how this works easily for pre-tax 403(b) plans since Form W-2, Box 1 (total compensation) does not include the contributions as income. Accordingly, Schedule SE self-employment tax based on Box 1 is not assessed.

Answer:

We know of no IRS Revenue Rulings or authoritative IRS publications that would permit the reduction of SE tax through Roth 403(b) contributions.

Compare a traditional 403(b) contribution with a Roth 403(b) contribution displayed on Form W-2. Assumptions: $50,000 total compensation with $10,000 designated as housing allowance and $2,000 as elective deferrals (either traditional or Roth 403(b) plans).

Form W-2 with a traditional 403(b) contribution:



Form W-2 with a Roth 403(b) contribution:


Ministers often prefer Roth contributions for their non-taxable distribution benefit. Once retired, they can enjoy significant tax reductions. One alternative strategy may yet allow a minister tax-free distributions from his pre-tax 403(b) plan. When he retires, he may ask his congregation to designate his 403(b) withdrawals as housing allowance.

Please see the following posts for further explanation:








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