- Accumulation during working years, distribution at and during retirement
- Roth 403(b) a win for many ministry personnel
- Housing allowance prior to retirement is a positive benefit
- Tax on traditional 403(b) distributions is reduced by housing allowance after retirement
- Envoy provides full and clear 1099-R reporting for your 403(b) distributions
- Roth 403(b) is a positive option for many with ministerial status
- Roth 403(b) contributions made by participant reduce SECA tax, too
Addendums: Sample Housing Allowance notification form and calculation worksheets
Resources: IRS publication: Publication 517, Social Security and other information for the Members of the Clergy and Religious Workers. Section 107 of the Internal Revenue Code
Service leaders and those who serve them are faced with a unique set of tax and administrative issues when dealing with 403(b) retirement savings plans, “Future-Funded Service” plans. The following issues impact all those who are licensed or commissioned:
- Housing Allowance during active years
- Impact of Housing Allowance on Retirement Distributions
- Payment of SECA taxes on voluntary contributions
- Roth 403(b) contributions
- Payment of SECA taxes on voluntary Roth 403(b) contributions
Our objective is to detail how these issues can be addressed within the 403(b) Retirement Plan context.
Housing Allowance during active years is a positive benefit for service leaders:
“A housing allowance, sometimes called a rental allowance, is excludable from gross income for income tax purposes, but not for self-employment tax purposes.”
Whether he/she owns or rents a home, it is essential that his or her employing organization designate a housing allowance. Housing allowances should be:
- Adopted by the organization board or leadership,
- Recorded in written form (such as minutes); and
- Designated in advance of the calendar year.
However, organizations that fail to designate an allowance in advance of a calendar year should do so as soon as possible in the new year. The allowance will operate prospectively.
The housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. It is not a deduction. In other words, a housing allowance is money that is not reported as income. A housing allowance is never deducted because it is never reported as income in the first place. However, you are required to include any excess housing allowance as income on your Form 1040.
What is the impact of a housing allowance on retirement plan distributions?
Under certain denominational plans and those established specifically to protect the value of the housing allowance, 403(b)(9) retirement plan distributions may be taken as part of the ongoing housing allowance.
This means that the taxable amount of any 403(b) retirement distribution is reduced dollar-for-dollar by the amount of your designated housing allowance. For example, if the annual distribution is $7,000 and the housing allowance is $3,000, the amount of the taxable income will be $4,000.
Full and clear 1099-R reporting makes tax reporting easy.
Using the prior example, Envoy has arranged for this information to be reported on the 1099-R that is issued for the distribution showing $4,000 as taxable distribution, while $3,000 is allocated from the housing allowance. The procedure for implementing this process is as follows:
- Each year during retirement, the retiree provides a copy of the Housing Allowance notification letter from the declaring entity, (a 501(c)(3) organization) to Envoy.
- This document validates the housing allowance.
- The housing allowance amount is then used to calculate the amount of net taxable income.
- The retiree is responsible for advising Envoy if the total amount of the allowance is not used.
- The net amount of taxable income is then reported on the 1099-R.
- When the proper documentation from the organization board/council is received, Envoy will provide 1099-R tax reporting taking into account the amount indicated by the organization board/council as “housing allowance” for the retiree. This information is used to complete the taxable amount of the distribution in Box 2a of the 1099-R.
Protecting the value of the retiree’s housing allowance is a top priority for Envoy Financial. Envoy is one of the few organizations that make it possible for the retiree to ensure the tax-reduced distribution from their 403(b) plan is protected. Please note, that if monies are transferred to any other retirement plan vehicle, this tax benefit will be lost.
Roth 403(b) is a good choice for many with Service Leadership status
In 2006, the Roth 403(b) option became another way for people to save for retirement by contributing dollars after-tax, and experiencing tax-free growth and distribution at retirement. (All normal Roth requirements apply.)
A Roth 403(b) contribution option, when added to a traditional 403(b) Plan, has benefits for many with this status. The combination of regular personal tax exemptions coupled with either itemized deductions or standard deduction and a housing allowance often results in a very low tax situation, perhaps even zero. Providing a tax advantaged investment alternative where the earnings grow tax-free and the distribution is the same, has great appeal for many with this status. As noted above, the Roth 403(b) contributions also reduce the SECA tax payment required.
Payment of SECA taxes on Voluntary or Employee 403(b) contributions:
The SECA tax owed by those with this status is reduced by the amount contributed to either a traditional or Roth 403(b) plan. Again, this is only true for those with this status. Envoy is committed to protecting and ensuring that your tax and retirement plan benefits are truly there for you during your active service years and beyond.
Addendums: Sample Housing Allowance Forms: Three sample Housing Allowance forms:
For more information, visit Housing Allowance Frequently Asked Questions