I was recently on a webinar where a great question came up: Why should clergy go through the effort of setting up a 403(b) plan instead of simply opening an IRA?
After all, an IRA is quick and easy, and it doesn’t require any involvement from the employing church.
While it’s true that an IRA is the simpler route, taking the easy way out could cost you thousands in unnecessary self-employment taxes. And those extra taxes mean you have less money to put toward your retirement savings.
The 403(b) plan is a powerful and underutilized retirement tool specifically designed for clergy. When it’s used correctly, it can save you a significant amount in taxes and allow you to put more of your hard-earned dollars to work for your future.
What Makes the 403(b) So Advantageous?
First, unlike an IRA, a 403(b) plan is set up by your employer (the church), and your contributions are made through salary deferral. This means those contributions are excluded from your taxable income and—most importantly for clergy—are not subject to self-employment tax. That alone gives the 403(b) about a 15% financial advantage over an IRA.
Here’s what that looks like in real numbers: If you contribute $5,000 to an IRA, you’d first have to pay $750 in self-employment tax (15%). Over 30 years, assuming a 7% return, that seemingly small difference could grow into $75,000 in lost retirement savings. A 403(b) allows you to keep that money invested instead of sending it to the IRS.
Beyond the tax savings, contribution limits for a 403(b) are much higher than for an IRA. This is a major advantage for clergy who need to catch up on retirement savings after years of focusing on ministry instead of building their nest egg.
The 403(b) Advantage Continues in Retirement
Here’s where the 403(b) really shines: the housing allowance benefit in retirement.
When you take distributions from your 403(b) in retirement, you have the opportunity to designate a portion of those withdrawals as housing allowance, which is tax-free. This is a game-changer. During your working years, you paid self-employment tax on your housing allowance. But in retirement, when you pull money from a properly structured 403(b), that housing allowance is no longer considered taxable income at all.
Think about it—tax-free money from contribution to distribution. That’s a level of tax efficiency you simply won’t find in other retirement accounts.
Additional Benefits of a 403(b) Plan
Another key benefit of the 403(b) plan is its ability to offer ministerial service credits, which can boost your retirement savings. Many denominations and church-affiliated organizations provide opportunities for clergy to accrue additional benefits through years of service, making the 403(b) even more attractive compared to a traditional IRA.
Additionally, some 403(b) plans offer loan provisions. These allow participants to borrow against their account balance when times are tough financially. While withdrawing from retirement savings is not ideal, having access to these funds in an emergency can be an important safety net for clergy and their families.
Another major advantage of a 403(b) is the potential for employer contributions. Unlike an IRA, which relies solely on individual contributions, churches can contribute to a 403(b) on behalf of their clergy. If your church offers a matching contribution program, enroll in a 403(b) so that you don’t leave free money on the table.
Setting It Up Right
Of course, there are a few key details to get right. Your church needs to formally adopt a plan document, and it must be a 403(b)(9) church plan, not the more common 403(b)(7). Managing the housing allowance in retirement also requires some planning and coordination with your sponsoring church. And while clergy enjoy these benefits, other church employees do not receive the same tax advantages, so it’s important to navigate nondiscrimination rules carefully.
One of the biggest misconceptions is that setting up a 403(b) is too complex or time-consuming. While it does require effort, the long-term tax savings and financial security make it well worth it.
Fortunately, there are financial professionals, like Crosstribe Advisory, who specialize in helping clergy establish 403(b)(9) plans that meet IRS guidelines and church-specific needs.
Long-Term Financial Security for Clergy
Many clergy members find themselves underprepared for retirement due to lower-than-average earnings and a career dedicated to serving others.
A properly structured 403(b) can serve as a lifeline in retirement, providing a steady stream of income while maximizing tax-free benefits.
It’s also important to consider how a 403(b) fits into an overall retirement strategy. Some clergy members choose to pair their 403(b) with a Roth IRA for additional tax diversification. While Roth contributions are made with after-tax dollars, the benefit is that withdrawals in retirement are completely tax-free. Using both accounts strategically can provide flexibility in managing retirement income and tax liabilities.
Get Professional Guidance for 403b for Clergy
This is where professional guidance makes all the difference.
I’ve personally helped structure numerous 403(b)(9) church plans, helping hundreds of clergy maximize their retirement savings. I’ve also walked alongside ministers as they transition into retirement, ensuring they structure their distributions wisely to secure their future with tax-free dollars.
If you want to ensure you’re making the most of your limited retirement dollars, I’d love to help you figure out the best strategy. A 403(b) takes a little extra effort to set up, but the long-term benefits are undeniably worth it. Investing in the right retirement plan today could mean a more secure, tax-efficient, and worry-free future.