What Pastors Need to Know About Retirement Accounts That Save on Taxes

Planning for retirement is an important part of being a good steward of your money and taking care of yourself as a pastor. Pastors typically have to deal with problems that other workers don't have to do with when it comes to preparing for retirement. These problems include irregular income, housing allowances, and particular tax restrictions. Knowing about the tax-advantaged retirement accounts you can open can help you save more money, pay less in taxes, and have a pleasant retirement. This complete guide will tell you everything you need to know about retirement accounts for pastors, including 403(b) plans, IRAs, SEP IRAs, contribution restrictions, and how to manage your taxes in a smart way.

Why Pastors Need to Plan for Retirement

1. Different ways to make money and tax issues: A pastor's compensation usually includes a salary, a housing allowance, and honorariums. Housing allowance changes taxable income, but not self-employment tax. Income that isn't steady can make it harder to save money consistently.
2. Limited Access to Traditional Employer Plans: Not all churches have good retirement programs. A lot of pastors depend on their own funds and individual accounts.
3. The Need for Tax Efficiency: Tax-advantaged accounts let money grow without paying taxes on it. Strategic contributions can lower the amount of taxes you owe right now.

Important Tax-Advantaged Retirement Accounts for Pastors

1. Plans for 403(b): This is for people who work for public schools and non-profit groups, such as churches. It lets you make donations before taxes, which lowers your taxable income. You can make contributions to a Roth 403(b) plan after taxes and take money out without paying taxes. The maximum contribution is $22,500 per year for 2025, plus $7,500 for people over 50 who need to catch up. Some programs let employers match contributions.
2. Individual Retirement Accounts (IRAs) that are traditional: Depending on income and whether or not you are in an employer plan, contributions may be tax-deductible. Until you take money out, your earnings increase tax-free. Limits on contributions: $6,500 per year for 2025, with an extra $1,000 if you're over 50. Withdrawals are taxed like regular income.
3. Roth IRAs: Contributions made with money that has already been taxed. If certain requirements are met, earnings and withdrawals are tax-free. To be able to donate, you must meet certain income criteria. The same limits on contributions as regular IRAs.
4. SEP IRAs, or Simplified Employee Pensions: Good for pastors who work for themselves or have a secondary ministry. It lets you put in more money (up to 25% of your income or $66,000 in 2025). You can deduct your contributions from your taxes. Funding that is flexible; there is no minimum amount that must be contributed each year.
5. SIMPLE IRAs (Savings Incentive Match Plan for Employees): For churches or ministries that are smaller and have fewer workers. Limits on contributions: $15,500 in 2025, plus $3,500 to catch up. Employers must make a matching or non-elective contribution.

Rules and Limits on Contributions

Learn how salary deferral restrictions work in different plans. Know about catch-up donation possibilities for pastors over 50. Be aware of the deadlines for contributions and required minimum distributions (RMDs).

Tax Benefits and Effects

Contributions made before taxes diminish taxable income, which lowers the amount of tax owed. Tax-deferred growth helps savings grow quicker. Roth accounts let you grow and take money out without paying taxes, which is great for planning for the future. Unless there are exceptions, withdrawals before age 59½ may be subject to fines.

Rules for Withdrawals and Required Minimum Distributions (RMDs)

Know the rules and exceptions for early withdrawal penalties. As of now, the law says that RMDs will commence at age 73. Plan withdrawals so that you can pay your taxes.

Pastors: Tips on Planning Your Retirement Strategically

1. Make the most of your contributions to the plans that are available: If your church offers a 403(b), make it a priority to contribute. IRAs can help you save more money.
2. Use Roth accounts to spread out your taxes: To lower your tax risk, keep a balance between your regular and Roth accounts.
3. Think about using SEP or SIMPLE IRAs for money you make as a freelancer: If you can, use larger contribution limits.
4. Get help from tax experts: Knowing a lot about how clerics handle money.
5. Look over your retirement plan often and make changes as needed: Change your contributions and investment options when your income or goals change.

Frequently Asked Questions About Pastors and Their Retirement Accounts

• Is it possible to put housing allowance money into retirement accounts?
• How do having more than one source of income influence contribution limits?
• Can pastors get employer matching in church plans?
• What will happen to your retirement accounts if you switch churches or ministries?

How Church Law and Strategy Helps Pastors

Regan runs Church Law and Strategy, which offers expert legal and financial assistance on planning for retirement for clergy through subscription tiers including THE FOUNDATION PLUS PLAN and THE PASTOR SUPPORT PLAN. This makes sure that pastors get the help they need.

Links Inside

• Find out more about the legal strategy for pastoral recompense.
• Look at church legal audit and compliance reports.
• Learn about consulting for church tax strategies.

Links to Other Sites

• Visit the IRS for an overview of retirement plans.
• Financial Planning for ECFA Ministries.
• Christianity Today has a page on retirement planning.