How Pastors Can Maintain a Housing Allowance in Retirement

As a pastor, you've dedicated your life to shepherding others, often accepting modest compensation in exchange for the privilege of following your calling. The ministerial housing allowance has likely been a crucial financial blessing throughout your years of service, but what happens when you retire? Will this significant tax benefit continue, or will you face unexpected tax burdens just when your income becomes fixed?

After 20+ years of ministry experience and serving countless pastors with their unique financial needs, I've seen this question create unnecessary anxiety for far too many faithful servants. The reality is that with proper planning, you can maintain your housing allowance benefits in retirement, but the window for making the right decisions may be narrower than you think.

Understanding the Housing Allowance: A Pastor's Most Valuable Tax Benefit

Before diving into retirement strategies, let's quickly review what makes the housing allowance so valuable. Under Section 107 of the Internal Revenue Code, ministers can exclude from gross income the portion of their compensation designated as a housing allowance—whether that's used for rent, mortgage payments, utilities, repairs, furnishings, or other qualified housing expenses.

This benefit represents one of the most significant tax advantages available to clergy, often resulting in thousands of dollars of tax savings annually. For many pastors I work with, it's not uncommon to see 30-50% of their total compensation structured as a housing allowance.

But here's where many ministers encounter a problem: When retirement comes, they discover that their housing allowance benefit doesn't automatically continue. In fact, without specific planning, this valuable tax benefit often disappears entirely.

The Retirement Housing Allowance Challenge

Here's a truth that catches many pastors by surprise: You can only receive a housing allowance in retirement if your retirement income comes from a church, denomination, or a qualified church-controlled organization.

This creates a significant challenge for ministers who have saved for retirement through:

• Traditional IRAs

• Roth IRAs

• Regular 401(k) plans

• Personal investment accounts

None of these common retirement vehicles qualifies for housing allowance distributions in retirement—regardless of how much you've saved. This means many pastors inadvertently structure their retirement plans in ways that completely eliminate this valuable benefit.

The financial impact can be substantial. Consider Pastor James, who receives a $24,000 annual housing allowance while actively ministering. If he retires without planning for housing allowance continuation, he could face an additional $3,000-$6,000 in taxes each year of retirement—a significant hit to a fixed retirement income.

The Key to Maintaining Your Housing Allowance in Retirement

So how can you ensure your housing allowance benefit continues into your retirement years? The answer lies in how and where you save your retirement funds.

403(b)(9) Church Retirement Plans: Your Most Powerful Tool

The 403(b)(9) retirement plan, specifically designed for churches and ministry organizations, is the primary vehicle that allows for the continuation of housing allowance benefits in retirement.

Here's why it's so valuable:

1. Tax-deferred growth: Like other retirement accounts, your contributions grow tax-deferred until withdrawal

2. Housing allowance eligibility: Distributions in retirement can be designated as housing allowance

3. Church-specific design: These plans are specifically created for ministry organizations

4. ERISA exemption: Churches enjoy simplified administration and reduced regulatory burden

When a pastor receives distributions from a 403(b)(9) plan in retirement, the church plan administrator can designate appropriate portions as housing allowance, allowing the pastor to maintain this valuable tax benefit.

Denominational Pension Plans: Another Viable Option

If you serve within a denomination, your denominational pension plan may also qualify to provide housing allowance benefits in retirement. These plans are established by church conventions or associations of churches and operate similarly to 403(b)(9) plans in their ability to designate retirement distributions as housing allowance.

Strategic Planning Steps for Housing Allowance in Retirement

To ensure you don't lose this valuable benefit, here are the critical steps to take:

1. Evaluate Your Current Retirement Savings Strategy

Review where your retirement funds are currently being saved. If you're contributing to accounts that won't qualify for housing allowance in retirement (IRAs, secular 401(k)s, etc.), consider redirecting future contributions.

2. Establish a 403(b)(9) Church Retirement Plan

If your church doesn't already offer a 403(b)(9) plan, discuss establishing one with your leadership team. At Shepherd’s Wallet Financial Services, we help churches set up these plans with minimal cost and administrative burden. In fact, we can often implement church retirement plans at zero ongoing cost to the church while still maintaining professional administration.

3. Consider Consolidation of Existing Retirement Assets

Under certain circumstances, you may be able to transfer existing retirement assets into a church plan. The PATH Act provides specific provisions allowing churches to roll plan assets directly from an ERISA plan to a non-ERISA church plan without requiring liquidation—a significant advantage worth exploring.

4. Document Housing Expenses Properly

Even in retirement, you'll need to document your housing expenses to justify your housing allowance exclusion. Develop a system for tracking and documenting all qualifying housing expenses, including:

• Mortgage payments or rent

• Property taxes and insurance

• Utilities (electricity, gas, water, trash, internet)

• Home repairs and maintenance

• Furnishings and appliances

• Property improvements

5. Work With Your Church for Proper Designation

The housing allowance must be properly designated by your church, denomination, or church pension board. This designation should be done in advance through an official action (like a resolution) from the appropriate governing body.

Case Study: The Financial Impact of Housing Allowance in Retirement

To illustrate the significant difference a housing allowance can make in retirement, let's compare two scenarios for Pastor Michael, who is planning to retire at age 65:

Scenario A: No Housing Allowance in Retirement

• Annual retirement income: $60,000

• Taxable income: $60,000 (minus standard deductions)

• Estimated federal income tax: Approximately $6,700

• Net retirement income: $53,300

Scenario B: With Housing Allowance in Retirement

• Annual retirement income: $60,000

• Housing expenses: $24,000 (designated as housing allowance)

• Taxable income: $36,000 (minus standard deductions)

• Estimated federal income tax: Approximately $2,900

• Net retirement income: $57,100

The difference? Nearly $3,800 more in Pastor Michael's pocket each year—or over $75,000 across a 20-year retirement. That's funding for ministry opportunities, family needs, or simply peace of mind during your retirement years.

Steps to Take Now, Regardless of Your Career Stage

No matter where you are in your ministry journey, there are actions you can take today to protect your future housing allowance benefits:

For Early-Career Pastors:

• Ensure your church offers a 403(b)(9) retirement plan

• Maximize contributions to this plan rather than to IRAs or other accounts

• Make housing allowance planning part of your long-term financial strategy

• If you're within your first two years of ministry, get educated about your Social Security options

For Mid-Career Pastors:

• Review your current retirement savings allocations

• Consider consolidating retirement assets into a qualifying church plan

• Discuss retirement plan options with your church leadership

• Calculate the potential impact of losing housing allowance in retirement

For Pastors Approaching Retirement:

• Confirm that your retirement plan distributions will qualify for housing allowance

• Establish proper documentation systems for housing expenses

• Work with your church to ensure proper designation procedures

• Develop a retirement budget that accounts for housing allowance benefits

The Shepherd’s Wallet Approach: Financial Covering for Those Who Provide Spiritual Covering

At Shepherd’s Wallet Financial Services, we believe that those who have dedicated their lives to ministry deserve specialized financial guidance. Our mission is rooted in 1 Timothy 5:17-18, providing "financial covering for those who provide spiritual covering."

We've witnessed too many pastors reach retirement age without adequate resources or proper planning, forced to continue working well past when they should be able to rest from their labors. This fuels our passion to help ensure ministers can retire with dignity, security, and all the benefits they've earned through their years of service.

When it comes to preserving your housing allowance benefits in retirement, specialized expertise matters. Generic financial advice often overlooks the unique opportunities available to clergy or fails to recognize the specific requirements for maintaining these benefits.

As someone with over 20 years in ministry as a worship leader and church board member, I understand firsthand both the financial challenges pastors face and the importance of maintaining ministry-specific benefits like the housing allowance.

Your Next Steps

If you're concerned about maintaining your housing allowance in retirement, I encourage you to:

1. Review your current retirement savings strategy to determine if it will support housing allowance in retirement

2. Discuss 403(b)(9) options with your church leadership if you don't currently have access to this type of plan

3. Document your current housing expenses to understand what portion of your retirement income will need housing allowance designation

4. Consider consulting with a financial advisor who specializes in clergy finances to develop a comprehensive strategy

Remember, the key to maintaining your housing allowance in retirement is planning ahead. With the right structures in place, you can continue to enjoy this valuable benefit throughout your retirement years, allowing you to focus on whatever ministry God calls you to in that season of life.

Are you a pastor concerned about maintaining your housing allowance in retirement? At Shepherd’s Wallet Financial Services, we specialize in helping ministers optimize their unique benefits. Schedule a consultation today to ensure you don't leave this valuable tax advantage behind when you retire.

About the Author

Seth Scott, AAMS®, is the Founder and Lead Financial Planner at Shepherd’s Wallet Financial Services. With over 20 years of ministry experience as a worship leader and church board member, Seth combines financial knowledge with a deep understanding of ministry contexts. He holds a Series 65 license, is a CTEC-certified tax preparer, and is currently pursuing his Certified Kingdom Advisor designation. Seth is passionate about serving as a "financial armorbearer" for those who provide spiritual covering through their ministry work.