What are my retirement plan 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:
- IRC 403(b) plans (also called Tax Sheltered Annuities (TSAs))
- Traditional Individual Retirement Accounts (IRAs)
- 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 2014, a minister may elect to have his employer withhold (“elective deferral”) up to $17,500 of his compensation and contribute it, instead, to his 403(b) qualified investment account. Many ministers who are 50 and older are eligible to increase this amount by another $5,500 to catch-up for earlier years’ smaller deferrals (source: IRS Publication 571). In addition, unlike other retirement plan choices, an employee minister is not subject to the 15.3 percent federal self-employment tax on amounts deferred into 403(b) accounts (source: IRS Revenue Rulings 68-395 and 78-6). This is also true of any amount that his employer contributes over-and-above the minister’s own elective deferral.
The situations for which Traditional IRAs are the best choice for a minister’s retirement plan are less frequent, especially since the establishment of Roth IRAs beginning with the 1998 tax year. For the year 2014, a minister and his wife may each contribute up to $5,500 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). However, he may not be able to deduct his full Traditional IRA contribution. For this reason and others, many ministers choose Roth IRA’s 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 (age 59½ or later) distributions of their current contributions be untaxed, the earnings distributed from the Roth IRA will not be taxed. Further, pre-retirement distributions may be made without penalty for:
- Medical expenses (and health insurance premiums for the unemployed).*
- Qualified higher education expenses.*
- New home purchase costs for taxpayers who have not owned a personal residence for at least two years (“first time homebuyers”).
*Also available for some Traditional IRA distributions.
Tax-saving opportunity: Many ministers who participate in retirement plans have also reduced their federal income tax by taking advantage of the retirement savings contributions credit. For 2014, the credit is equal to 50% of Traditional and Roth IRA and 403(b) plan contributions for married filing joint taxpayers with Adjusted Gross Income less than $35,500. Reduced credits are available for those with AGI greater than $35,500 but less than $59,000 (IRS Form 8880). With housing allowances reducing their AGI to these levels, many ministers are eligible.