I grew up in a ministry family. My dad was a youth pastor, and my mom worked in adoption ministry. I spent every day of the week at church and had a heart for it from a really young age. But when I was in high school, my parents, normally diligent stewards when it came to finances, got caught up in a Ponzi scheme and lost everything. I wanted to make sure nothing like that ever happened to me or my family when I became an adult, so I went into finance. Now I work for Clergy Advantage, serving and educating pastors in financial and retirement planning, ministerial investing, and the unique tax advantages available to them. Every day I use my passion and knowledge to serve the ministry professional.
In this blog, I’d like to give you an overview of some of the unique tax advantages available only to pastors and how you should begin planning for your financial future. But before that, it’s important to understand that when you become a pastor in the eyes of the IRS, you have four distinct tax rules:
- You are considered duly employed (self-employed).
- Because of your dual-employment status (self-employed but also a traditional W2 employee at your church), you have what is called a SECA liability or social security tax. It is a full 15.3% put on you as an individual.
- The church can withhold your social security taxes if they want to, but they don’t have to. There is no mandatory withholding. If you run into issues with your taxes as a pastor, it’s on you as far as the IRS is concerned. As a side note, some pastors get the idea of opting in or out of social security. This is a massive decision that you should be well informed on before making.
- You have a housing allowance. This is a powerful advantage. My company makes it easy to maximize this opportunity by simplifying the information down to what you can claim and how to take the next step.
A side perk of being clergy is that you have the opportunity to plan for your retirement with a denominational 403(b)(9) plan. This allows for tax-free growth and tax-free distributions as a housing allowance after you retire from the ministry.
Because you, as a pastor, have such unique benefits, you may as well take advantage of them! You should put time and effort into deciding how much to save, how to ensure your money goes to the right places, and how to plan effective distributions of your wisely invested savings when retirement comes.
One question I get asked frequently about housing distributions is, when a pastor uses his housing allowance and pays off his 30-year mortgage, is he done getting housing allowances? Is the only way for him to keep utilizing this benefit to sell his house and buy a new one? The answer is that clergy tax strategies can help with your paid-off home. They can cover utilities, taxes, home insurance, monthly bills and more. But more than 70% of individuals move at some point in their retirement years. It’s likely you will too. Maybe that looks like downsizing, moving to be closer to grandkids, or buying a second home. It doesn’t really matter. You may as well have tax-free dollars in your retirement account instead of the equity in your home that’s already tax free and able to be put toward another home.
Your housing allowance can also be used tax-free for long-term care, so if you ever go into a long-term care facility, the funds can come out to you tax free as a housing allowance.
Now, you don’t have to use the funds just on housing. If you set up a 403(b) the right way and take normal distributions to pay for gas, groceries, or trips, it’s just taxable to you like any other retirement account would be. But as a pastor, you are a touch more advantaged than someone with a traditional retirement plan.
The amount you plan for retirement hinges on whether or not you’ve opted out of social security, regardless of your age. The 15.3% you’re saving on tax if you opted out is not a raise. Though it can feel like it, it’s not. It’s you saying, “I’m going to be a better steward of my money than the US government by putting it into a retirement account.”
If you’ve opted out of social security, that 15% has to be your starting place for future savings. If you don’t do that, you’ll fall behind and not have enough to retire on. This is the number one mistake we see pastors make in financial planning.
For those paying their 15% social security tax, I like to use this generic formula as a baseline for saving: 80/10/10. 10% is your first fruits (giving). Another 10% is saved. And 80% is lived on. If you increase your giving, it will need to come out of the 80%, but you may want to also consider increasing your savings to match your giving. Strategies are different at different ages. Ministers in their 20s and 30s may still be trying to figure life out and have a lot of up-front costs to get established. Those who are middle aged may be more in the mindset of planning and saving for retirement. And those ministers over 60 will probably see their interest compound most quickly because they have more money to compound!
So what’s my key takeaway here? Finance is a marathon, not a sprint. If you follow the latest TikTok trend or the latest cryptocurrency, it probably won’t go all that well for you. It may be one in a million that makes a bunch of money on cryptocurrency. Sure, invest a little, but don’t only do that. I mean, if you strike gold with your little investment, you still win.
When you see your finances as a marathon, you’ll realize the slow, little steps are where you want to be. We live in a culture obsessed with instant gratification, but that is not a best practice in terms of finances. What’s better is to start where you are, learning and taking small steps and growing from there. Keep in mind that your savings will most likely start with your stewardship and investment into God’s kingdom, your giving. So if you’re building a budget, the first line item should be giving. Do what the Spirit leads you to do. Start with generosity and take slow, small steps in saving and investing to get where you need to be.
In closing, you can learn more about financial planning for pastors at clergyadvantage.com. We have nearly 24 videos on topics discussed here that are free to you. I recommend watching the one called “Tax-Free Money for Ministers.” It goes through social security, housing allowance, and saving for retirement in the most tax-advantaged ways possible to you. You’ll find it very helpful. And Pastor, let me encourage you: you’re not as far behind as you think you are. Start taking steps today to create a financial plan that will carry you through the next 50+ years, and know that God is with you. He will help you develop and fund the right plan for your future.
This blog was created using content from the webinar Financial Planning for Pastors.
