Retirement Tax Benefits Every Pastor Should Know

Planning for retirement is an important part of financial stewardship, and pastors have access to unique opportunities that can reduce taxes while growing retirement resources. By combining a church-sponsored 403(b) plan with the housing allowance provision, ministers can take advantage of benefits that few other professionals enjoy.

Here are three key ways this strategy works:

• Tax-deductible contributions: Contributions to a 403(b) made with pre-tax dollars reduce a pastor’s taxable income in the year they are contributed. For instance, if a pastor contributes $10,000, their taxable income for that year is lowered by the same amount, meaning more money remains invested for growth rather than being paid in taxes upfront. Pastors should carefully consider whether to contribute pre-tax or to a Roth 403(b), since only pre-tax contributions provide this immediate tax benefit.
• Tax-deferred growth: Once invested, contributions grow tax-deferred, meaning interest, dividends, and capital gains are not taxed annually. This accelerates compounding, the process where investment earnings generate their own earnings. For instance, Pastor James contributes $400 per month starting at age 30. With a modest 7% annual return, by age 65, his account could grow to over $680,000. Tax deferral ensures more of each dollar remains invested, allowing compounding to work effectively over decades.
• Tax-free housing allowance withdrawals: In retirement, funds used for housing allowance purposes can be withdrawn tax-free, within IRS limits. This means that a portion of the retirement account can be accessed without additional income taxes. Using the same example, Pastor James could use his accumulated 403(b) funds to cover housing costs, potentially withdrawing a large portion tax-free. Combined with deductible contributions and tax-deferred growth, this strategy maximizes resources while minimizing taxes.

By starting early, contributing consistently, and taking advantage of the housing allowance, pastors can significantly increase their retirement resources. Pastors and ministry leaders should review their church’s 403(b) plan to confirm they are fully leveraging these benefits. Applying these provisions thoughtfully allows ministers to secure their financial future, provide for their families, and continue serving in ministry without unnecessary tax burdens.