Have You Heard of the Housing Allowance Retirement Rule?
By Raul Rivera
The vast majority of churches across America are not aware that a church can create a retirement (pension-like) plan that allows a minister to receive tax-free income after he/she resigns or retires from the church. This is a rule that is defined in IRS Revenue Ruling 63-156. In essence, a church takes a portion of a minister's pay each week, month, or year and invests it into stocks, mutual funds, other interest-bearing accounts, and even Bitcoin. These funds grow over the years, and when the minister retires, the church can pay these funds to the minister on a weekly, monthly, or annual basis. The minister can claim a housing allowance exclusion just like in the days when he/she was working in the ministry because these are funds that he/she earned for services performed as a minister.
Let us look at an example
Pastor Tom's total church-sponsored deferred compensation grew to $450,000.00. He retired from his church in 2010. In the past, Pastor Tom's housing allowance was $20,500.00. He was also exempt from self-employment tax. To maximize the tax savings, the church paid Pastor Tom annual distributions of $30,000.00. Though he retired from the church, it continues to pay him $30,000.00 a year from the accrued funds. He is able to exclude $20,500.00 each year from taxable income, leaving only $9,500.00 as reportable taxable income that will be erased by the annual standard deduction. The bottom line is that the Church-Sponsored Deferred Compensation Plan is the best retirement plan in America today because the money goes into the investment tax-free, and it can be withdrawn tax-free.
How is the plan created?
For the plan to be created correctly, the church and the pastor reach a contractual agreement that the church will deposit a monthly set amount of money into an interest-bearing account (this can also be stocks or mutual funds) that grows tax-free. The funds have to be invested on his behalf for the services he performs as a minister. The key to making the money tax-free is that the agreement has to state that the church must maintain full control over it, and the money can only be distributed to the pastor according to the written agreement. Some churches deposit weekly, others monthly, while others may choose to deposit only when members and other individuals designate pastoral love gifts, offerings, or other gifts. Under this rule, the donations given by church members specifically to this plan are deductible.
The three legs of retirement
Let's face it: we are all getting older, and one day, we will reach an age where we will not be able to earn income as in the past. Wisdom cries out to us and invites us to plan for the future. Proverbs 6:6-8 commands us to study the ant and its ways. It tells us that the ant stores its provisions in the summer and gathers its food at the harvest. The ant stores provisions in the summer so it has enough to carry it through the winter. In the same way, we ought to consider its ways and create a way to store up some of our provisions and save them for the golden years of life. By doing so, we put into motion a biblical principle that has God's zeal on it. With that in mind, listed below are the three legs of retirement I believe every minister should have.
- Social Security: Though many people doubt the solvency of Social Security, I still believe that every minister (whether they have opted out or not) should ensure that they earn enough credits to receive social security payments at retirement. You can earn between $580.00 and $2,000.00 per month.
- Roth IRA: Every minister should establish a Roth IRA account. Under the law, a person under 50 can deposit up to $5,000.00 after-tax dollars ($6,000 if over 50 years of age) per year into stocks, mutual funds, or the like, allow that money to grow tax-free and then withdraw it tax-free at the retirement age of at least 59 and 1/2.
- A Church-Sponsored Deferred Compensation Plan: Or, as I like to call it, the Housing Allowance Retirement Plan. This is, without a doubt, the most powerful retirement option available for ministers. With this plan, the church can deposit pre-tax dollars into an interest-bearing account, invest in stocks, or even purchase Bitcoin—all while allowing the funds to grow tax-free. Then, when the minister retires, they can begin making withdrawals tax-free. It’s a smart, flexible, and highly effective way to secure financial stability for life after ministry.
Very few ever take advantage of the housing allowance retirement rule
One of the most difficult things to do is to get someone to seriously consider and plan for retirement. I often hear people say they are getting older and have nothing set for their future. Yet I see them a year later and they say the same thing. He who has ears, let him hear. Today is the day to start planning for retirement. If you are a minister, knowing how to implement the Housing Allowance Retirement Rule can be the best thing you can do this year for your future. When I am a man in my 60s or 70s, I would love to hear you tell me, "I read your article and made the change, and today, I am a man/woman of affluence because of it."