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Retirement Plans for Pastors Without Denominational Pension Plans

Learn about three key retirement plans for pastors without denominational pensions, including IRAs, 403(b) plans, and rabbi trusts.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 7, 2025

Many pastors and church staff are not affiliated with a denomination offering a pension plan. This guide explores three practical retirement plan options pastors can use to build financial security.
  • IRAs are ideal for pastors who can contribute up to $7,000 annually and need a simple, tax-advantaged plan.
  • Tax-sheltered annuities (403(b) plans) allow for higher contributions but may require professional setup.
  • Rabbi trusts are suitable for clergy seeking additional retirement savings beyond IRA or 403(b) limits.</li>

IRA Contribution Limits for 2025:

Contribution Limit: The maximum annual contribution limit for IRAs in 2025 remains at $7,000. Individuals aged 50 and older can make an additional catch-up contribution of $1,000, bringing their total limit to $8,000. Internal Revenue Service

Deductibility of IRA Contributions:

Not Covered by Employer’s Retirement Plan: If you are not covered by an employer’s retirement plan, your traditional IRA contributions are fully deductible regardless of your income. However, if your spouse is covered by a retirement plan at work, the deduction may be phased out based on your modified adjusted gross income (MAGI). Internal Revenue Service

Covered by Employer’s Retirement Plan: If you are covered by an employer’s retirement plan, the deductibility of your traditional IRA contributions depends on your MAGI and filing status.

For 2025, the phase-out ranges are as follows:
  • Single or Head of Household: The deduction is phased out for MAGI between $79,000 and $89,000. Above $89,000, the deduction is not allowed.

Married Filing Jointly:
  • IRA Contributor Covered by a Plan: The deduction is phased out for MAGI between $126,000 and $146,000. Above $146,000, the deduction is not allowed.
  • IRA Contributor Not Covered by a Plan, but Spouse Is: The deduction is phased out for MAGI between $236,000 and $246,000. Above $246,000, the deduction is not allowed.
  • Married Filing Separately: The deduction is phased out for MAGI between $0 and $10,000. Above $10,000, the deduction is not allowed.

These updated limits reflect the IRS’s adjustments for inflation and changes in retirement plan contribution rules. It’s essential to consult the latest IRS publications or a tax professional for personalized advice.

Pastors without access to denominational pension plans still have several retirement planning options. Below, we explore IRAs, tax-sheltered annuities, and rabbi trusts to help you find the best fit for your financial goals.

Three Retirement Plan Options for Pastors

1. Individual Retirement Accounts (IRAs)

IRAs offer a straightforward retirement solution for pastors and church staff who lack employer-sponsored plans. Key details include:
  • Annual contribution limit: $7,000 or 100% of compensation (whichever is less).
  • Tax-deductible contributions: Available for employees not participating in employer-sponsored plans, subject to income limits.
  • Tax-deferred growth: Earnings on contributions grow tax-deferred, regardless of deduction eligibility.

Most IRAs can be easily set up through banks or mutual fund companies, making them a practical choice for pastors with limited retirement contributions.

2. Tax-Sheltered Annuities (403(b) Plans)

Churches without denominational pension plans should consider establishing a 403(b) plan for pastors and lay workers. These plans offer significant benefits, including:
  • Higher contribution limits compared to IRAs.
  • Tax-deferred growth on investments.

While the setup and compliance requirements can be complex, mutual fund companies often provide assistance to help churches implement these plans.

3. Rabbi Trusts

Rabbi trusts are another option for pastors and church staff seeking additional retirement savings. Highlights include:
  • Designed for those contributing beyond IRA or 403(b) limits.
  • Offers tax-sheltered retirement income.
  • Churches can adopt a model rabbi trust provided by the IRS.

Learn more about retirement planning for clergy: IRS Publication 517. For detailed information on 403(b) plans, visit the Department of Labor.

FAQs About Retirement Plans for Pastors

What are the best retirement plans for pastors?

IRAs, tax-sheltered annuities (403(b) plans), and rabbi trusts are excellent options for pastors without denominational pensions.

Can a church sponsor a retirement plan for pastors?

Yes, churches can establish 403(b) plans or contribute to rabbi trusts for their pastors and staff.

What are the contribution limits for IRAs and 403(b) plans?

IRAs allow annual contributions of up to $2,000 (or 100% of compensation, whichever is less), while 403(b) plans have higher limits based on salary and other factors.

Are rabbi trusts a common retirement option?

Rabbi trusts are less common but are valuable for pastors seeking additional tax-advantaged retirement savings beyond IRA or 403(b) contributions.

With careful planning, pastors can create a solid retirement strategy, even without denominational pensions. By exploring these options, you can secure financial stability and peace of mind for the future.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Are Designated Contributions to a Scholarship Fund Tax-Deductible?

Discover the rules for designated contributions to scholarship funds and their impact on tax-deductibility for donors.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 18, 2025

IRS Letter Ruling 9405003

Designated contributions are a common way churches raise funds for specific purposes, such as scholarship funds. However, these contributions may not always be tax-deductible. Here’s what churches and donors need to know.

What is the IRS Position on Designated Contributions?

The IRS has clarified that contributions earmarked for specific individuals, like students, may not qualify as tax-deductible. The agency focuses on whether the organization has full control and discretion over how the funds are used. If donors expect their contributions to benefit specific individuals, the donations may not meet IRS guidelines for deductibility.

IRS Ruling: Key Takeaways
  • Contributions designated for a specific individual are not deductible.
  • Organizations must demonstrate full control and discretion over donated funds.
  • The intent of the donor plays a significant role. Donations made with the expectation of benefitting a specific person are generally non-deductible.

Examples of Tax Treatment for Designated Contributions
  • Non-Deductible Example: A parent contributes $2,000 to a scholarship fund and specifies that it should cover their child’s tuition. This contribution is not tax-deductible.
  • Deductible Example: A donor gives $1,000 to a general scholarship fund without naming a specific recipient. This contribution is tax-deductible because the organization retains full control.

Impact on Other Types of Designated Contributions

This ruling also affects contributions for missionaries, benevolence funds, and other purposes. Contributions can remain deductible if the organization exercises full control and does not limit funds to a specific recipient.

How Should Church Treasurers Handle These Contributions?
  • Refuse Non-Deductible Checks: If a donor specifies a recipient, treasurers should refuse the check or inform the donor it’s non-deductible.
  • Stamp Contributions as Non-Deductible: Use a stamp to mark checks as “NONDEDUCTIBLE” when appropriate.
  • Provide Clear Receipts: Ensure receipts explicitly state the contribution terms.

FAQs About Designated Contributions

What makes a designated contribution non-deductible?

Contributions are non-deductible if they are earmarked for a specific individual rather than the organization’s general purpose.

Can contributions for missionaries be tax-deductible?

Yes, if the organization retains control over the funds and uses them for general missionary support.

What about contributions to benevolence funds?

Benevolence contributions may not be deductible if they are directed to specific individuals. General benevolence funds can be deductible if the organization retains discretion over fund distribution.

How should organizations communicate with donors about these rules?

Provide clear guidelines to donors at the time of contribution, ensuring they understand the tax implications of designated gifts.

Conclusion

Understanding the IRS rules for designated contributions is essential for both churches and donors. By ensuring compliance, churches can help their members maximize tax benefits while adhering to federal guidelines.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Form 990: Does Your Church Need to File This IRS Form?

A comprehensive guide on whether churches must file Form 990, including exemption criteria and legislative updates.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 2, 2025

Are churches required to file Form 990 with the federal government? Here’s a detailed guide to help churches understand their filing obligations.

Key Takeaways:
  • Churches and certain religious organizations are exempt from filing Form 990.
  • Specific criteria define which organizations qualify for the exemption.
  • Proposed legislative changes could alter filing requirements for churches.

Churches are generally not required to file Form 990 with the IRS. This exemption is granted under Section 6033 of the Internal Revenue Code, which outlines specific criteria for exempt organizations.

Here’s what church leaders need to know.

Who Is Exempt from Filing Form 990?

Section 6033 specifies organizations exempt from filing Form 990. These include:
  • Churches, conventions, or associations of churches, and interchurch organizations of local church units.
  • Integrated auxiliaries of a church, such as men’s or women’s organizations, religious schools, mission societies, or youth groups.
  • Schools below the college level affiliated with a church or religious order.
  • Mission societies affiliated with churches, if over half of their activities target foreign countries.
  • Exclusively religious activities or religious orders.
  • Religious or apostolic organizations described in Section 501(d) of the Code.
  • Exempt organizations with annual gross receipts typically below $25,000.

What Is Form 990?

Form 990 is an annual return required for most tax-exempt organizations. It includes 89 questions covering finances, services, and administration. While this form ensures transparency and accountability, many religious organizations are exempt from filing due to their unique status.

Legislative Developments to Watch

Efforts are ongoing in Washington to require all religious organizations, including churches, to file an annual Form 990. If enacted, this could impact reporting requirements significantly. Stay informed on legislative updates that could affect your church’s obligations.

Example: A small mission society that conducts over half its activities abroad and earns less than $25,000 annually qualifies for the exemption.

Practical Steps for Compliance
  • Confirm your organization’s exemption status under Section 6033.
  • Stay updated on potential legislative changes affecting Form 990 filing requirements.
  • Consult a tax advisor or legal professional for guidance tailored to your church.

FAQs About Form 990
  • Are all churches exempt from filing Form 990? Yes, under Section 6033, most churches and related organizations are exempt.
  • What happens if filing requirements change? Churches will need to adhere to new regulations. Stay informed of legislative updates.
  • Do small organizations qualify for exemption? Yes, organizations with annual gross receipts below $25,000 are generally exempt.
  • Why is Form 990 important? It ensures transparency and accountability for tax-exempt organizations, but churches are uniquely exempt.

To learn more about Form 990 and filing requirements, visit the IRS website or consult a legal expert specializing in nonprofit tax law.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Clergy Taxes: Should Ministers Revoke Their Social Security Exemption?

A guide for ministers considering whether to revoke their social security exemption based on the Tax Reform Act of 1986.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 2, 2025

Many ministers previously opted out of social security due to financial advice, but should they reconsider? Here’s a guide to help clergy evaluate their clergy tax options.

Key Takeaways:
  • Ministers can revoke their social security exemption under specific conditions.
  • Eligibility for exemption is based on religious principles, not financial motives.
  • Ministers nearing retirement should weigh the benefits of revoking carefully.

Ministers who exempted themselves from social security for financial reasons may reconsider their decision under the provisions of the Tax Reform Act of 1986. Here’s what to know about revoking an exemption and the steps involved.

Why Consider Revoking a Social Security Exemption?

To qualify for a social security exemption, a minister must oppose receiving benefits on religious grounds, not for financial reasons. Congress created the opportunity to revoke exemptions for those who did not meet this criterion. If the initial exemption was improperly claimed, ministers have an ethical obligation to re-enter the system.

Steps to Revoke an Exemption

Ministers can revoke their social security exemption by filing a revised Form 2031 by the deadline. For the Tax Reform Act of 1986, this deadline was April 15, 1988. Though the specific deadline has passed, similar principles may apply to current circumstances, depending on updated legislation.

Important: Ministers will not face penalties for back taxes when revoking their exemption and do not need to justify their decision.

Considerations for Ministers Nearing Retirement

Ministers close to retirement should assess the practicality of revoking their exemption, as eligibility for social security benefits requires at least 10 years (40 quarters) of covered employment. Paying into the system shortly before retirement may result in limited or no benefits.

Example: A minister with fewer than 10 years of covered employment may find revocation financially unwise, as benefits are calculated using the 35 highest years of earnings.

Impact of Secular Employment on Social Security

Ministers with at least 10 years of secular employment retain their social security benefits based on those earnings. However, years of exempt wages as clergy will reduce the overall benefits calculation.

Practical Steps for Ministers Considering Revocation
  • Evaluate your eligibility and reasons for exemption.
  • Consult with a tax professional or legal advisor.
  • File Form 2031 by the applicable deadline.
  • Prepare to pay self-employment taxes for the year of revocation.

FAQs About Clergy Taxes
  • Can a minister revoke a social security exemption? Yes, by filing the appropriate form within the deadline set by legislation.
  • What is the eligibility for a social security exemption? Opposition to benefits must be based on religious principles, not financial concerns.
  • How does revocation affect retirement benefits? Ministers must work 10 or more years in covered employment to qualify for benefits.
  • Does secular employment impact social security for ministers? Yes, secular earnings count toward benefits, even if clergy income is exempt.

Ministers must weigh their options carefully, considering both their ethical obligations and financial implications. For more information, refer to the Social Security Administration or consult a legal expert specializing in clergy taxes.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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