How Ministers Can Prepare for Retirement

By Raul Rivera

Scripture admonishes us to continue to prepare for the future. For instance, Proverbs 6:6-8 teaches us the wisdom of the ant by telling us it gathers its food in the summer to prepare for the winter months. 

The truth is that many Americans have no plan to live out the latter years of life known as the “golden years.” This is especially so for ministers. 

This is a hard truth to face, and believe me when I say that I am telling you this in love - it is your responsibility to plan and prepare for the latter years of your life. You cannot simply believe that you will always be able to work like you work today and earn income forever. 

As you age, you must grow in wisdom and set up vehicles that produce income so that in your latter years, you will be independent and able to enjoy a high quality standard of life. 

Here is what I have noticed through all my years of experience in speaking and helping pastors and church leaders across America: they do not know which retirement strategy is best for them. 

Now I want to be clear that this blog is not intended to tell you what the best retirement strategy is for you as a minister. Rather, my intention is to provide you with some basic information on what types of retirement strategies and plans are available to you.

My hope is that the information provided in this blog will help guide you on your journey of preparing for the golden years of this life. 

However, before we delve into different types of retirement strategies for you to consider, there are some nuggets of wisdom that you should first consider.

Nuggets of wisdom to consider

I firmly think that if you can come to terms with these nuggets of wisdom then you will be ready to actively plan for your golden years. 

Below are some nuggets of wisdom that you should consider as you age:

  1. You will not always be able to pastor a church.
  2. You will not always be able to earn income by the sweat of your brow.
  3. You must understand that a day is coming when you may not be able to perform physical work.
  4. As you age, your life goals and desires change: children grow up and grandchildren come. You must plan now to have resources to invest in your posterity instead of being stuck in a low-wage job somewhere just to make ends meet.

God provides, and He is faithful. That is not the question at hand. 

The question at hand is, "Will you consider the information God is providing you with now and apply faithfulness to this important area of preparing for your future?" 

I encourage you to stop from your busy day and consider where your life is leading you. Retirement is a guaranteed event in your life. 

It does not mean that you stop being busy for the Lord, but rather that your busyness for the Lord will not be within the context of generating income. 

What will you do? 

A retirement strategy every minister should utilize

If you have been to one of our conferences, then there is no doubt that you have heard us teach about the self-employment tax exemption. In case you have not heard of this or you could use a refresher, I will give you a brief explanation.

The self-employment tax exemption is a tax benefit afforded to duly ordained, licensed, or commissioned ministers of the gospel. This is also known as the social security tax. 

As a minister, you have a “dual-tax” status which means that for tax purposes you are considered both an employee of your church and a self-employed individual. As a result, you are responsible to withhold and pay the 15.3% self-employment tax on the income you earn as a minister. 

However, as a duly ordained, licensed, or commissioned minister of the gospel, the tax code provides you with the option to “opt out.” That is a savings of 15.3% of the income you receive as a minister each year. 

Imagine taking the 15.3% that you would have otherwise paid toward the social security tax, which depending on your age may not even be around by the time you retire, and investing that into a retirement fund that would result in a bigger return for you in your golden years. 

I realize you may have additional questions about “opting out” of the self-employment tax, so I want to encourage you to either give our office a call at 877-494-4655, or click below to learn more. 

Learn More About "Opting-Out"!

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Next, we will look at a couple of different retirement strategies for you to consider. 

3 retirement plans for ministers to consider

Before we delve into the 3 retirement plans, it is important to note that by no means is this an exhaustive list of retirement plan options. Additionally, if you find interest in utilizing any of the retirement plans mentioned below, then I would suggest seeking the counsel of a financial advisor who has a record of working with ministers and churches.

1. Individual Retirement Arrangements (IRAs)

Both traditional and Roth IRAs allow you to save money for retirement. The main difference between each type of IRA is the kind of tax benefits each offers.

  • With a Roth IRA, you do not get a deduction for contributions, but if you follow the rules associated with Roth IRAs, your investment earnings will be distributed tax free and penalty free when you retire. 
  • Traditional IRAs can provide a deduction for your contributions, and taxes on investment earnings are deferred until you withdraw the funds which should be when you retire.

Below is a chart from the IRS’s website for your convenience:

IRS Expense

2. A 401(k) retirement savings plan

A 401(k) is a retirement savings plan that is sponsored by an employer; in your instance, your employer is your church. This type of retirement plan allows you to save and invest a piece of your paycheck before taxes are taken out. You will not pay taxes on your contributions until the money is withdrawn from the account. 

If your church is interested and able to provide you and other church employees with a 401(k) plan, there are several types to consider, such as:

  • Traditional 401(k) plans, 
  • Safe harbor 401(k) plans, and 
  • SIMPLE 401(k) plans.

It is important to note that different rules apply to each type of 401(k) plan. For tax-favored status, a plan must be operated in accordance with the applicable rules.

Therefore, it is important your church (the employer) be familiar with the special rules that apply to the selected 401(k) plan to ensure the plan is being administered according to those rules. 

3. A 403(b) tax-sheltered annuity

One of the more popular retirement plans for church employees is the 403(b) plan. These retirement plans may also be referred to as tax-sheltered annuities (TSAs). 

These types of retirement plans allow church employees, and employees of other public charities, to make nontaxable contributions to their 403(b) account up to the allowable limits prescribed by law. 

A 403(b) retirement plan has several tax advantages such as you do not pay tax on the contributions to your 403(b) plan in the year they are made. Rather, you pay tax on them once you begin making withdrawals from your 403(b) retirement plan.

It is important to note that IRS Publication 571 states the following about contributing to a 403(b) plan:

“Generally, employees must pay social security and Medicare tax on their contributions to a 403(b), including those made under a salary reduction agreement.” 

This is another reason why you, as a minister, should seriously consider “opting out” of the self-employment tax.

(Recommended reading: "4 Reasons Why Ministers Should Opt-Out of Social Security")

One last question to consider

We have talked a lot about the future in this blog. There was much information given to you that may be new information for you to consider. I encourage you to not put off planning for your future, but begin working on your future today.

Before I let you go to plan for your future retirement, I need to ask you, “What about now?” In other words, “Are you confident in the compensation arrangement that you have set up with your church?”

Prudence tells us to ask one question, “What do I not know?”

When it comes to the compensation you receive from your church, did you know that there must be a written contract between the minister and the ministry in order for the minister’s pay to be in compliance with the law?

At this moment, if you are second guessing your compensation agreement with your church or if you do not have an established compensation agreement with your church, then I encourage you to give us a call at 877-494-4655.

We can help you to establish a compliant compensation agreement between you and your church. What are you waiting for?

Create Your Minister’s Compensation Agreement Today!

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