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What's the Best Retirement Plan?


As a pastor, what are my retirement options and what are the advantages/disadvantages of each?


The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include:

(a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs))
(b) Traditional Individual Retirement Accounts (IRAs), and
(c) Roth IRAs 

Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it; instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals (IRS Publication 571).

In addition, unlike other retirement plan choices, an employee minister is not subject to the 15.3% federal self-employment tax on amounts deferred into 403(b) accounts (IRS Revenue Rulings 68-395 and 78-6). This is also true of any amount that his employer contributes over-and-above the minster’s own elective deferral. These "matching contributions" or "non-elective contributions" are subject to strict rules that may limit their applicability to some ministers. IRC Section 403(b) includes subsections 1, 7, and 9 which are eligible as "church plans." The specific nuances of these subsections should be explored and understood in connection with a church's competent retirement plan adviser. 

The situations for which Traditional IRAs are the best choice for a minister’s retirement plan are less frequent, especially since the establishment for Roth IRAs beginning with the 1998 tax year. For the year 2020, a minster and his wife may each contribute up to $6,000 to qualified IRA accounts; an additional $1,000 each may be contributed if they are 50 years of age. 

A minister who has opted out of the Social Security system but is still looking for additional income tax deductions may find the Traditional IRA his best choice. These contributions can often be made even if the minister participates in a 403(b) plan. However, he may not be able to deduct his full Traditional IRA contribution. This is true for the rare minister whose modified AGI is greater than $104,000 (2020). For this reason and others, many ministers choose Roth IRAs instead of Traditional IRAs. 

Roth IRAs enable ministers to make the same amount of contributions as do Traditional IRAs but without receiving an income tax deduction. For many ministers, especially those with young families and ample housing allowances, additional tax write-offs are not needed. Unlike Traditional IRAs, not only will future retirement distributions of their current contributions be nontaxable, the earnings distributed from the Roth IRA will not be taxed. Further, pre-retirement distributions may be made without penalty for:

(a)  Medical expense (and health insurance premiums for the unemployed)*
(b)  Qualified higher education expenses*
(c)  New home purchase costs for taxpayers who have not owned a personal residence for at least two years (“first time home buyers”)

*Also available for some Traditional IRA distributions.

Additional tax-saving opportunities:
1. Many ministers who participate in retirement plans have also reduced their federal income tax by taking advantage of the retirement savings contributions credit. For 2020, the credit is equal to 50% of Traditional IRA, Roth IRA, and 403(b) plan "elective deferral" contributions for married filling joint taxpayers with Adjusted Gross Income less than $39,000. Reduced credits are available for those with AGI greater than $39,000 but less than $65,000 (IRS Form 8880). With housing allowances reducing their AGI to these levels, many ministers are eligible.

2. Retired ministers who receive 403(b) distributions from their "church plans" may enjoy housing allowance exclusions if their churches designate them as such (Minister's Audit Techniques Guide). Caution: ministers are well advised to receive assistance from a tax professional who understand the proper filing of these ministers' returns.


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