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Tax Exempt Pension/Retirement Plans

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Payments to a qualified pension plan or tax-sheltered annuities (403(b) plans) are exempt from income and Social Security taxes for ministers and rabbis employed as such. This saves over 30% over taxable investment accounts and over 15% over IRA's. The advantages of these accounts are unique to ordained clergy as detailed below.

Churches may use denominational pension plans and independent 403(b) plans for their ordained and lay employees. Independent plans offer the tax advantages of denominational plans while also offering greater choice, flexibility and estate options with the possibility of greater growth. Denominational plans offer greater assurance of a lifetime income stream to both employee and their spouse. We recommend funding denominational plans first.

Generally, the limit for employee elective deferrals to a 403(b) pension plan is $17,000 for 2012 and $17,500 for 2013. If you are age 50 or older, you may make catch-up contributions up to $5,500 per year. The limit on annual additions (the combination of all employer contributions and employee elective deferrals to all 403(b) accounts) generally is the lesser of:

  • $50,000 for 2012 or $51,000 for 2013, or
  • 100% of your includible compensation for the most recent year of service, plus any age 50 catch-up contributions
There are complicated rules for those who wish to deposit more.

Features of 403(b) retirement plans include the following items:

  1. All funds are vested from the first dollar. The account belongs to the employee after they leave employment.
  2. We encourage a church to adopt a fixed percent of salary or a dollar amount it will contribute for all clergy and other qualified employees under a "salary reduction agreement."
  3. Funds are invested in consultation with each employee according to their needs and preferences.
  4. Contributions reduce taxable income. For clergy, contributions are free from Social Security and federal and state income taxes.
  5. For clergy plans, withdrawals in retirement are deemed as housing allowance to the extent used as such by a minister. Withdrawals are not subject to Social Security tax. This means funds are exempt from income and Social Security tax going in and coming out as long as a minister uses the funds for housing allowance--a substantial tax benefit!
  6. Withdrawals before age 59 are subject to a 10% penalty as well as ordinary income taxes, like an IRA.
  7. Payments must begin by age 70 unless still employed. Minimum payments are based on life expectancy.
  8. We recommend allowing all employees to participate in the plan. It is also wise to consider an "employer match" provision.
  9. Each employee should name primary and secondary beneficiaries.
  10. The total net payout after taxes can be from 15-60% higher than the same investment through an IRA!


Clifford & Associates, LLC
Clifford & Yoho Advisors, LLC

4150 Belden Village St. NW
Ste. 601
Canton, OH 44718

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Steven Clifford, CFP©, EA
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2013 R. Shul | Updated 05/28/13 | Terms | Ph. 800.456.1803 | Fax 330.493.1807

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