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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 minster 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 or other interest-bearing accounts.  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 deferred housing allowance 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 to 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 this housing allowance retirement rule is the best retirement plan in America today, because the money goes into the investment tax free and it can be withdrawn tax free.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?

In order 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 in 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 only deposit 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.  Proverb 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 that 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 principal that has God's zeal on it.  With that in mind, listed below are the three legs of retirement that I believe every minister should have.

1.     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.

2.     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 and allow that money to grow tax free and then withdraw it tax free at retirement age of at least 59 and 1/2.

3.     A Housing Allowance Retirement Plan:  As mentioned earlier, there is not a better retirement program that anyone can put into place than the church-sponsored Housing Allowance Retirement Plan.  In this plan the church can deposit pretax dollars into it and allow them to grow tax-free and then the minister can start withdrawing tax-free after he/she retires from the church.  For those who have attended one of our Church Compliance and Ministry Empowerment Conferences, beginning on page 136 of the manual, you will find this topic covered.

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 make statements to me that 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 do this year for your future.  When I am man in my 60's or 70's 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."


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