Skip to main content

401(k) distribution rollover to 403(b) plan

By
For a quick review, readers should be reminded that ministers may be eligible to make contributions to an Internal Revenue Code section 403(b) plan established by their not-for-profit employers. The traditional 401(k) plan is available to for-profit employers. Also, ministers' distributions at retirement taken from 403(b) plans may be designated as non-taxable housing allowance.

See other postings on this blog for a refresher of these rules:
403(b) Retirement Distributed as Housing Allowance

Question 1:

An ordained minister, formerly working for a for-profit company, is now working for a nonprofit ministry. His former retirement plan was a 401(k). The current employer offers a 403(b) plan. Can a 401(k) distribution be rolled over into a 403(b) plan?

Answer 1:

According to IRS Publication 571,

“You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan.”

Question 2:

But should a minister consider doing so? Will the ability to designate as housing allowance all or a portion of 403(b) retirement plan distributions still be allowed?

Answer 2:

Caution is advised when comingling non-church [401(k)] and church [403(b)] accounts. The church monies may become ineligible for a housing allowance designation if careful records are not kept of the 401(k) roll over amount (and subsequent earnings on that amount) versus church and minister 403(b) contributions and related earnings. The minister may be called upon to defend his calculations of tax-free housing related to his 403(b) portion of the church plan account.

We do not have definitive guidance on this particular matter. Accordingly, we recommend avoiding comingling monies from a 401(k) rollover with monies that can be distributed tax free through a housing allowance designation from a 403(b) account.

An alternative to rolling over the 401(k) distribution into the 403(b) plan is to rollover the 401(k) into a traditional IRA, leaving the 403(b) solely for church monies. Therefore, no confusion should arise as to the eligibility of the 403(b) monies for a housing allowance.



Labels:

Comments

Post a Comment

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

By
Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a...
Post a Comment
Read more

How can my ministry expenses be covered by the church?

By
     How can my ministry expenses be covered?                            Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...
Post a Comment
Read more

Debits and Credits for Designated Gifts

By
Question: A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances? Answer: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements. What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these  Temporarily Restricted  gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these  Permanently Restricted  gifts). Only earnings on the subsequ...
12 comments
Read more