Paul Winkler: But anyway, so tax-wise, we were talking about ministers, pastors. This is something that pastor friend of mine brought up as he has out to talk a little bit about this. There’s a company out there that does a lot of work with, with the pastors of churches. And one of the things that they do is they talk about the ability to take your housing allowance and they will actually, they have a program for that when you’re in retirement, taking your housing allowance from your, when you’re checking your IRA distributions. And it it’s almost couched in a way that it’s, it’s a unique program that only they have. Oh yeah. And so I thought, Evan, you might talk a little bit about that. That it’s not necessarily what it sounds like. It’s not that unique a program.
Evan Barnard: Yeah. There’s very few product unique things in the tax code first off. Right. Right. Exactly. And so, you know, what, what they’re referring to is ministerial taxation in general is really a hodgepodge of numerous tax laws over the years and labor laws and all that. I mean, it’s really kind of a patchwork, but one of the benefits of, of a minister, assuming you meet those qualifications. Today you get a parsonage allowance or you can exclude a parsonage allowance back in the day. You know, the church had a house that the pastor lived in next door to the church.
Well, that’s not the common model anymore, but you could just buy your house, rent your house and you still get to claim this allowance. Right. And basically what it says is you get to take off your pay, whatever your mortgage interest is, or your payment, you know, utilities, upkeep, all those kinds of things is basically tax deductible, right? Well, when you’re a working minister, that’s all fine and dandy, but once you retire, it is interesting that the tax law still provides for, if you take distributions from a qualified plan, used to be. It was kind of a narrow interpretation to be quite honest; there’s been several private letter rulings and so forth.
Basically if you take money out of a qualified retirement plan, you can exclude part of that off of your income tax. As a retired minister, you just have to note it properly on your tax return. You know, bulls and bears make money, pigs get slaughtered. You don’t want to, you know, borrow money against your house, buy a camper and try to write that off. And you just want to follow the rules, but you’re certainly not limited to any particular provider or any particular type of plan. You could be in a traditional IRA. You could be taking it from an, you know, an older 403(b). One thing to be aware of, if you have taken it out of your original employer’s plan, the church or the hospital, whatever church in this case, you did not want to co-mingle those assets with other IRAs that you may have a lot of times, you know, we try to simplify people’s lives and combine it.
So you have one account. If you fall into this category, if you were to transfer out of, say, your church plan, you would want to keep its own IRA. You don’t want to mix that up with other assets, or you might run a foul of having to prove that all of this money was from earnings from the ministerial deal. An interesting deal is you can both get the tax-free distribution out of your qualified plan and you can still deduct the interest.
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Housing Allowances and Retirement Accounts
Paul Winkler: And there, there are companies out there that basically say, unless you can, unless you work with us, you can’t do this. So 403(b)s and their level of diversification is not really all that great. What you can do as far as investment management goes. So we don’t have a dog in the fight, we’ll sell investments, but right. That’s the point that I like to make.
Evan Barnard: Originally, just as a general rule, anything that we find in the tax code is pretty much never limited to one company. Right? You know what I mean? If it’s tax law, if it’s, you know, a 401(k), okay, We follow the rules of a 401(k) and the tax code, doesn’t matter where you got your plan. And so the pastor’s housing allowance falls into the same category. It’s just an exclusion under the tax code that if you’re taking money from a qualified account. And so the tax laws don’t even stipulate that it has to be a 403(b), they always talk about qualified retirement accounts.
Then it’s subject to all of those same rules of, I can exclude that portion of income up to the normal other rules. You know, the market value of rent. If you were going to do it that way, or you can use it to pay your mortgage and so forth. So yeah, they could use any provider of a qualified plan and the big gotcha. In that whole thing is you just can’t co-mingle the money. So, you know, say, you say you pastored at a church for 15 years or whatever you left the church, you rolled your money into an IRA out of your church’s plan. You were in a 403(b), you left and your advisor said, Hey, let’s roll this to an IRA.
Fine. As long as you’ve never contributed any more to that IRA, or merged it with some other account at a different church that you worked at or something you’re eligible to take those same exclusions on the distributions from that plan, whether you’re retired or not, you know, based on your age. And that’s kind of a win-win as well. You still get, if you happen to be paying mortgage interest on your house, you get the exclusion for housing allowance, and you still get to deduct the mortgage interest on your schedule. A, I mean, it’s kind of one of the few double dip sitting there
Paul Winkler: How typically do you find a pastor? So I know when I was on a board for a church. One of the things that we would do is we would have a pastor come in and say, here’s what my housing allowance is for the years. This is what my expenses are. And we would basically approve that amount of money. If this pastor is now retired. How does that take place? Is it, they just say what it is and there’s no board that necessarily approves it, or how does that work?
Evan Barnard: Yeah. Well, they just have to document it in the event that they were audited, but yeah, no one has to approve that. Okay. Mortgage interest, upkeep, you know, roof repair, whatever. You just add it up.
I’m thinking there’s a pretty good deal. So, but yeah, no, no one has to approve it in retirement. You just have to document the expense. So almost like, say your mortgage interest, you just have to say, you know, you get a statement from the bank, your 1098, here’s how much interest you paid and you can include property tax, all those kinds of things. And that’s totally legit.
Paul Winkler: Well, good deal. Yeah. Yeah. I just, I figured you’d have something on that just cause, cause you deal with that quite a bit and we’ve dealt with this some here and we have several clients that are actually pastors and you know, something I wanted them to know because that’s something you hear. It’s almost like the other thing that I hear a lot, which is kind of odd where people will call up and say, well, they told me I’ve got to leave my money with my 401(k), because if I don’t leave my money with my 401(k), it’s, it’s not protected against creditors. Right. And I go, Oh boy, you know, go ahead.
Evan Barnard: Just circling back. There is one potential fact that it’s not material to your kind of question. It makes it a lot easier if your 403(b) provider codes your 1099 and includes that as housing allowance. Right. But you can still take it if it’s not on your 1099, you just have to ride it on your tech, you know, section 107, whatever. Right. This is my housing allowance, but she, you know, so they may be the only provider that codes the 1099 that way. But that’s not exactly what, it’s not a requirement under the law.
Paul Winkler: Right? Exactly. I think that’s exactly what it is.
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