Many ministers and church lay workers are not associated with a denomination that sponsors a pension plan. What retirement options are available to these individuals? Consider the following:
- Individual retirement accounts (IRAs). An annual IRA contribution is an excellent idea for most ministers and church staff. Employees who do not participate in an employer’s retirement plan may deduct annual IRA contributions of up to $2,000 (or 100% of compensation, whichever is less). The amount of this deduction is reduced for single employees earning over $25,000 and married employees earning over $40,000, if either the employee or the employee’s spouse participates in an employer-sponsored retirement plan. The interest earnings on all IRAs continues to be tax-deferred whether or not the annual IRA contribution deduction is reduced or eliminated. Most IRAs are set up with a bank, or with a mutual fund company. IRAs are perhaps the ideal retirement plan for ministers and church staff who (1) are not associated with a church or denomination that sponsors a retirement plan, and (2) cannot afford to contribute more than $2,000 per year into a retirement plan.
- Tax-sheltered annuities (TSAs or “403(b)” plans). Churches that are not associated with a denomination that sponsors a pension plan should consider creating a tax-sheltered annuity plan for their ministers and lay workers. Unfortunately, the rules associated with TSAs are complex, and often require professional assistance. However, the benefits provided under these plans are significant, and merit serious consideration. Most employees are able to make annual contributions far above the IRA limits (discussed in the previous paragraph). Many mutual fund companies will help you establish your own TSA.
- Rabbi trusts. A rabbi trust is an arrangement that can provide tax sheltered retirement income for clergy and church workers. Generally, rabbi trusts are used only for those ministers and church workers who would like to contribute more to a retirement plan that is permissible under either an IRA or TSA. Churches can adopt a model rabbi trust published by the IRS in 1992. The model IRS rabbi trust is reproduced in chapter 9 of Richard Hammar’s annual Church and Clergy Tax Guide, along with a discussion of the advantages of this type of retirement plan.
This article originally appeared in Church Treasurer Alert, May 1994.