Written by Amy Artiga
From her column Sensible Stewardship
Editor’s Note: With this issue, we welcome Amy Artiga as our specialist on ministerial finance. Amy is a financial planner and creator of the blog, The Pastor’s Wallet, which she started in 2016. Amy has a master’s degree in Family Financial Planning and Counseling, and is a Certified Financial Planner (CFP). She also has a love for God, the Church, and those who devote their lives to the Church—pastors. We believe ministers and treasurers will greatly benefit from her knowledge and ability to simplify complicated ministerial financial issues.
The clergy housing allowance is a great tax benefit for those in ministry. Most pastors, though, don’t realize that it isn’t only for their ministry years. The housing allowance is also available in retirement under certain conditions.
The key to claiming a housing allowance in retirement is receiving a church pension or having money saved in a church 403(b) plan, like the traditional Nazarene 403(b) Retirement Savings Plan offered by Pensions and Benefits USA. The logic is that if the money was eligible for a housing allowance when it was originally earned, then it should be eligible when it’s finally spent.
It’s pretty easy to prove that a pension came from ministerial earnings, but retirement savings are a little bit more complicated. To prove that the money was eligible going in, it must be made by a church employer. While it’s true that you could fund an IRA with ministerial earnings, you can also fund one with secular earnings or based on a spouse’s earnings. You cannot claim a housing allowance from an IRA.
The moral of the story for your non-pension savings is that if you want to claim a housing allowance in retirement, you should put money into a church 403(b) plan while you are working and keep it there after you stop working. Keeping it there is important to remember because when you retire, some financial advisors may recommend that you move your money from your 403(b) to an IRA. They have a lot of good reasons for making that recommendation, but it may not be the best advice for pastors, because when you move it you might lose housing allowance eligibility.
How does the housing allowance work in retirement? Basically, it works the same as during your working years, except that you’re getting the money from a pension payment or 403(b) withdrawal instead of a paycheck.
- The fair market rental value of your home,
- Your actual expenses, or
- The amount designated by your church or pension board in advance.
You may notice that the last point includes a pension board, which you probably don’t see when you’re reading about using the housing allowance while you’re working. Usually, a church has to designate the housing allowance. However, the IRS has ruled that in retirement a pension board has the same rights as a church to designate a housing allowance.
(Editor’s Note: The Nazarene 403(b) Plan already pre-qualifies benefit payments and/or distributions as housing allowance; however, ministers are required to maintain credentials with a Nazarene district to qualify.)
What that looks like in practice can vary depending on your situation. Some retired pastors ask to have all of their pension payments and 403(b) withdrawals designated as housing allowance. Others ask to have a percentage or dollar amount of their payments and withdrawals designated as such. It’s okay if you have more designated as housing allowance than you end up using. There is no penalty, and it’s a simple fix to add the excess amount back into your taxable income at the end of the year.
While the idea of claiming a housing allowance in retirement may be a new idea to you, thousands of retired pastors all over the US are taking advantage of it every day and have been for decades. It’s a great opportunity to minimize taxes so you can maximize your stewardship.
There’s one little thing I need to warn you about regarding the clergy housing allowance in retirement, though. When it comes to tax law, it’s kind of a big gray area. The IRS has provided little specific guidance and, in fact, currently refuses to provide guidance. You may be surprised, as I was, to learn that the IRS has a list of things for which they will not provide rulings or determination letters, meaning they won’t answer your questions or provide guidance. You may have already guessed, but the clergy housing allowance in retirement is on that list. It’s there because it’s “under study,” but it’s been there for several decades, so I wouldn’t hold my breath waiting for the study to end.
That shouldn’t be a big concern for you, though. The IRS has clearly stated that pension boards can designate a housing allowance in retirement, so you can rest assured that you can claim a housing allowance from your Pensions and Benefits USA pension or 403(b) plan. So if you’re retired, start calculating your housing expenses and take advantage of this opportunity. If you’re still working, start saving into your 403(b)!
Editor’s Note: In addition to the traditional 403(b), P&B USA now offers a Roth 403(b). It allows ministers to save within the Nazarene plan with after-tax dollars, but distributions at retirement are received tax-free, regardless of whether they are spent for housing. For more information on the Roth or traditional Nazarene 403(b) plan, contact us at 888-888-4656 or firstname.lastname@example.org
Amy Artiga is a Certified Financial Planner (CFP) who serves at Guide Financial Planning and is author of the clergy personal finance blog PastorsWallet.com, and the book The Pastor's Wallet Complete Guide to the Clergy Housing Allowance . If you have church or clergy financial questions for Amy, send them to email@example.com.