Clergy Retirement Investing: 403(b) vs. Roth IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
millerstevew
Posts: 8
Joined: Sun Jun 29, 2014 7:07 pm

Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by millerstevew »

I am 27, just began serving as a minister, and am looking for some advice with respect to choosing a retirement investing account.

Here are my limited presuppositions about choosing an account:

The order in which a person should chose retirement investment accounts is as follows: (1) 401(k) or 403(b) to employer match, (2) Roth (or traditional) IRA to max, (3) 401(k) or 403(b) beyond employer match to max.

Here's my situation:

My employer does not offer a match. However, I am a member of the clergy. This has several tax implications that may amend my above presuppositions about choosing a retirement investing account.

1. As a minister, I am regarded as an employee for income tax purposes. However, the IRS specifically excludes ministers from the usual withholding or social security tax rules applicable to employees. As a result, with respect to Social Security, I am self-employed and pay self-employment tax on 100% of the money I earn. That said, on my income taxes, I am allowed to deduct my housing expenses.

2. In researching my investment options as a minister—403(b), Traditional IRA, and Roth IRA—I discovered the following:
You pay self-employment tax on contributions you make to a traditional IRA. You pay federal income tax on distributions.You pay self-employment tax and federal income tax on contributions you make to a Roth IRA.You never pay taxes on 403-b contributions. You pay no taxes on 403-b distributions that are used for housing expenses. You only pay federal income taxes on 403-b distributions which are NOT used for housing expenses.
http://ssfoundation.net/pastors/?qa_faq ... sus-an-ira
So, I do not pay SE tax on 403(b) contributions, and I have read that I will not need to pay SE tax on 403(b) distributions:
Must ministers pay Social Security Tax on 403(b) distributions if continuing in ministry?
Do ministers have to pay Social Security tax on 403(b) retirement distributions or contributions? Some have mistakenly believed that clergy who receive retirement benefits but continue their service in the ministry will have to pay self-employment taxes on their retirement benefits designated as housing. Ministers Simply DO NOT. If you are a minister and have been told that you must include this on your schedule SE, it is incorrect advice.
http://www.clergysupport.com/important- ... urity-tax/
Not paying self-employment tax on my retirement savings seems to significantly advantage contributing to a 403(b) over the other options available?

I have two questions:

1. Have I missed anything in my analysis?

2. What factors might mitigate the advantage of not paying SE tax when contributing to a 403(b) and motivate me to use either a Roth or Traditional IRA?

Thanks for your continued help
Last edited by millerstevew on Mon Jul 28, 2014 6:27 pm, edited 1 time in total.
User avatar
BL
Posts: 9874
Joined: Sun Mar 01, 2009 1:28 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by BL »

If your average salary is on the low end, the social security payments you receive will be a considerable portion of your contribution and would definitely be worth paying now.

From http://www.ssa.gov/oact/cola/piaformula.html
PIA formula
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2014, or who dies in 2014 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $816 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $816 and through $4,917, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,917.
I am not sure if you want your real name tied to this thread which will show up on Google "forever". Moderators would help change if you so choose.
123
Posts: 10415
Joined: Fri Oct 12, 2012 3:55 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by 123 »

My guess is that you will have lower expenses and more options with a Traditional IRA or a Roth IRA since they are available at low/no cost from many places (Vanguard, Schwab, Fidelity, etc) whereas with a 403(b) there is a layer of structured overhead administration that someone has to pay for. It is often paid for with higher expense ratios in (limited) investments available.

I'm not saying you should forgo a 403(b) option, just that it the "return" may be higher in an IRA so perhaps that should be the primary plan with excess going to a 403(b), depending on their fees. A lot depends on the structure of any matching.
The closest helping hand is at the end of your own arm.
Topic Author
millerstevew
Posts: 8
Joined: Sun Jun 29, 2014 7:07 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by millerstevew »

It sounds like the tax savings are one consideration to take into account in making this decision; however, fund choices and expense ratios may enter the equation too. There are several Vanguard index funds available in my 403(b). I have listed all the available funds in my 403(b) with their expense ratios.

How might this information influence your decision making given the tax advantages of the 403(b) for clergy?

Code: Select all

Investment Name                            Asset Class          Expense Ratio
Aberdeen Emerging Markets Instl            International Funds  1.10%   ABEMX
AllianceBernstein Discovery Value Z        Mid Cap Funds        0.80%   ABSZX
American Funds EuroPacific Gr R6           International Funds  0.49%   RERGX
Invesco International Small Company R6     International Funds  1.08%   IEGFX
JHancock Disciplined Value R6              Large Cap Funds      0.82%   JDVWX
MetLife Guaranteed Asset Account           Fixed                4.00%
Oakmark Equity & Income I                  Balanced             0.77%   OAKBX   
PIMCO Real Return Instl                    Bond                 0.48%   PRRIX
PIMCO Total Return Instl                   Bond                 0.46%   PTTRX
T. Rowe Price Instl Large Cap Growth       Large Cap Funds      0.56%   TRLGX
Transamerica High Yield Bond I             Bond                 0.79%   TDHIX
Vanguard Extended Market Idx Instl         Mid Cap Funds        0.08%   VIEIX
Vanguard Institutional Index Fund          Large Cap Funds      0.04%   VINIX
Vanguard Total Bond Market Index Inst      Bond                 0.07%   VBTIX
Vanguard Total Intl Stock Index Instl      International Funds  0.12%   VTSNX
Wells Fargo Advantage Small Co Growth I    Small Cap Funds      1.10%   WSCGX
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by placeholder »

MetLife Guaranteed Asset Account Fixed 4.00%
That doesn't sound right so could it be the yield on that (if so it's really good these days)?
Topic Author
millerstevew
Posts: 8
Joined: Sun Jun 29, 2014 7:07 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by millerstevew »

placeholder wrote:
MetLife Guaranteed Asset Account Fixed 4.00%
That doesn't sound right so could it be the yield on that (if so it's really good these days)?
Just checked the investment overview. It states:
Seeks to avoid investment risk by obtaining a fixed interest rate guaranteed by MLIC.
So, yes, it looks like that's the yield of that investment.
trueblueky
Posts: 2365
Joined: Tue May 27, 2014 3:50 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by trueblueky »

I get to deduct my housing expenses.
You will receive three types of money from your congregation:

1) Reimbursement for mileage, conferences, professional books and the like. This is not taxable if the congregation has an appropriate accountable reimbursement policy (e.g., pay mileage at the IRS rate to you for documented miles each month.) A non-accountable plan might be they give you $400 each month as a car allowance, in which case it's taxable income. You can deduct taxable expenses if you itemize, but they go against 2% employee expenses rule.

2) Housing and utility allowance. This is taxable for Social Secuity, but not income tax. The money needs to be designated by the congregation for that purpose. You can avoid income tax on the lesser of a)what is designated, b) what you spend, and c) market value (the latter is important for a personage owned by the congregation).

3) Salary. You pay Social Security as if self-employed and income tax.

You want your package to fill the types top-to-bottom.

You may also have Schedule C income from when someone pays you for conducting a wedding or funeral.

When you have a few free hours, read IRS Pub 517, which contains a detailed example of a clergy return. You may want to recommend it to your finance and personnel chairs as well.
Last edited by trueblueky on Wed Jul 30, 2014 8:37 am, edited 1 time in total.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

millerstevew wrote:
My employer does not offer a match.
What do they offer for retirement? Is there a denomination pension fund, or does your retirement need to be 100% self-funded?
Rosco
Posts: 82
Joined: Fri Oct 19, 2012 8:31 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by Rosco »

are you sure that 403b with met life doesn't also include vanguard total bond; total stock market; total international? It looks suspiciously familiar. bh
dotnet
Posts: 52
Joined: Tue Sep 18, 2012 1:39 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by dotnet »

vanguard offers a 403b plan that you can adopt for your church. It basicaly has no cost. You have to pay a little extra per fund until your balance is high enough, but it is hard to beat. After that you have all the same benefits you would with an IRA (as far as cheapness/fund options).

I would verify this next paragraph but I think it is true:

If you contribute to a 403b, you still get the same housing benefits in retirement. So if you withdraw 10k in year 1 from your 403b, and you use 2k for housing expenses, then you only have to pay tax on the 8k. This is a major benefit over the IRA. (i'm pretty sure this is right, or something very similar, but check this).

Hope this helps.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

dotnet wrote:
If you contribute to a 403b, you still get the same housing benefits in retirement. So if you withdraw 10k in year 1 from your 403b, and you use 2k for housing expenses, then you only have to pay tax on the 8k. This is a major benefit over the IRA. (i'm pretty sure this is right, or something very similar, but check this).
True for now, though a federal judge ruled in 2013 that the clergy housing allowance exemption is unconstitutional (the ruling is stayed while on appeal), so that might not be around for long.
Topic Author
millerstevew
Posts: 8
Joined: Sun Jun 29, 2014 7:07 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by millerstevew »

flyingbison wrote: What do they offer for retirement? Is there a denomination pension fund, or does your retirement need to be 100% self-funded?
They offer a 403(b) and a pension fund.
Rosco wrote:are you sure that 403b with met life doesn't also include vanguard total bond; total stock market; total international? It looks suspiciously familiar. bh
They do not offer those. Only the ones I listed :-(
dotnet wrote:If you contribute to a 403b, you still get the same housing benefits in retirement. So if you withdraw 10k in year 1 from your 403b, and you use 2k for housing expenses, then you only have to pay tax on the 8k. This is a major benefit over the IRA. (i'm pretty sure this is right, or something very similar, but check this).
To my knowledge this is true. However, as a flyingbison mentioned there is a federal court ruling that would/could jeopardize this in my retirement in forty some odd years.

---

It sounds like given the current tax structure as it relates to clergy housing allowance, my 403(b) is the best place to invest for retirement if the laws pertaining to clergy and their taxes do not change. Does this sounds accurate?

If so, given the funds available to me, is this the place to ask for opinions about asset allocation or at very least general approach to it. I have read the Bogleheads Guide to Investing, so I'm intuiting that I'll likely invest in some combination of the Vanguard Funds because of their super low expense ratios.

Here are the funds again:

Code: Select all

Investment Name                            Asset Class          Expense Ratio
Aberdeen Emerging Markets Instl            International Funds  1.10%   ABEMX
AllianceBernstein Discovery Value Z        Mid Cap Funds        0.80%   ABSZX
American Funds EuroPacific Gr R6           International Funds  0.49%   RERGX
Invesco International Small Company R6     International Funds  1.08%   IEGFX
JHancock Disciplined Value R6              Large Cap Funds      0.82%   JDVWX
MetLife Guaranteed Asset Account           Fixed return of 4.00%
Oakmark Equity & Income I                  Balanced             0.77%   OAKBX   
PIMCO Real Return Instl                    Bond                 0.48%   PRRIX
PIMCO Total Return Instl                   Bond                 0.46%   PTTRX
T. Rowe Price Instl Large Cap Growth       Large Cap Funds      0.56%   TRLGX
Transamerica High Yield Bond I             Bond                 0.79%   TDHIX
Vanguard Extended Market Idx Instl         Mid Cap Funds        0.08%   VIEIX
Vanguard Institutional Index Fund          Large Cap Funds      0.04%   VINIX
Vanguard Total Bond Market Index Inst      Bond                 0.07%   VBTIX
Vanguard Total Intl Stock Index Instl      International Funds  0.12%   VTSNX
Wells Fargo Advantage Small Co Growth I    Small Cap Funds      1.10%   WSCGX
HurdyGurdy
Posts: 1177
Joined: Wed May 09, 2012 10:21 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by HurdyGurdy »

And that Metlife guaranteed account at 4%!
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

millerstevew wrote: They offer a 403(b) and a pension fund.

...

If so, given the funds available to me, is this the place to ask for opinions about asset allocation or at very least general approach to it. I have read the Bogleheads Guide to Investing, so I'm intuiting that I'll likely invest in some combination of the Vanguard Funds because of their super low expense ratios.
I think your choices for 403b investments should take into consideration the conditions of your pension plan, since it is part of your overall retirement plan. Is it a traditional defined benefit plan, or some other type of hybrid plan? How much does the church/denomination contribute on your behalf? What is the benefit formula? What happens to your pension if/when you leave the church or denomination?
Topic Author
millerstevew
Posts: 8
Joined: Sun Jun 29, 2014 7:07 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by millerstevew »

flyingbison wrote:I think your choices for 403b investments should take into consideration the conditions of your pension plan, since it is part of your overall retirement plan. Is it a traditional defined benefit plan, or some other type of hybrid plan? How much does the church/denomination contribute on your behalf? What is the benefit formula? What happens to your pension if/when you leave the church or denomination?
My pension plan is a traditional define benefit plan.

The benefit formula is based based on the highest five years of compensation (salary + housing allowance + benefits) during my last 20 years of service at any church in my denomination, the amount of creditable service in my denominations pension plan, and an "integration number," which is defined as follows:
Integration Level—number used in determining benefits to reflect the fact that Social Security provides a higher benefit as a percentage of pay for employees at lower pay levels. This number is based on federal requirements for combining benefits from Social Security and a pension plan. Because the maximum salary is subject to Social Security tax changes each year, the Integration Level also changes each year. Contact the Concordia Plan Services for the Integration Level currently in effect.
The formula is as follows:
7.1 Accrued benefit. A Member’s accrued monthly Primary Benefit at any time is a monthly benefit in an amount equal to the sum of
a) one and one-tenth percent (1.1%) of the Member’s Final Average Monthly Compensation up to the Covered Compensation amount (integration level), multiplied by Creditable Service, plus
b) one and six-tenths percent (1.6%) of the Member’s Final Average Monthly Compensation in excess of Covered Compensation (integration level), multiplied by Creditable Service, where Final Average Monthly Compensation, Creditable Service, and Covered
Using a spreadsheet, I calculated the following monthly pension payment based on my highest five years of compensation at $80,000. I would receive $2,864.05 per month in pension benefits.

If I were to leave my denomination or no longer serve as a called pastor, I would no longer be eligible to receive benefits from the pension. For this reason, some pastors in my denomination will serve as a pastor pro bono to remain in the pension plan while they work in another capacity, e.g. at a non-profit. If I were to terminate my membership in the pension plan (by no longer serving as a pastor or leaving my denomination) and later return to my denomination, I would be reinstated in the pension plan and my previous service in my denomination would count towards my creditable service.

Give all of this, two question:

1. How much should I rely on this pension when making preparations for retirement? Again I am 27, so I will accrue a great deal of creditable service, and I do not intend to leave my denomination.

2. My question from before about my 403(b):
Given the funds available to me, is this the place to ask for opinions about asset allocation or at very least general approach to it. I have read the Bogleheads Guide to Investing, so I'm intuiting that I'll likely invest in some combination of the Vanguard Funds because of their super low expense ratios.
Again, here are the funds available to me:

Code: Select all

Investment Name                            Asset Class          Expense Ratio
Aberdeen Emerging Markets Instl            International Funds  1.10%   ABEMX
AllianceBernstein Discovery Value Z        Mid Cap Funds        0.80%   ABSZX
American Funds EuroPacific Gr R6           International Funds  0.49%   RERGX
Invesco International Small Company R6     International Funds  1.08%   IEGFX
JHancock Disciplined Value R6              Large Cap Funds      0.82%   JDVWX
Oakmark Equity & Income I                  Balanced             0.77%   OAKBX   
PIMCO Real Return Instl                    Bond                 0.48%   PRRIX
PIMCO Total Return Instl                   Bond                 0.46%   PTTRX
T. Rowe Price Instl Large Cap Growth       Large Cap Funds      0.56%   TRLGX
Transamerica High Yield Bond I             Bond                 0.79%   TDHIX
Vanguard Extended Market Idx Instl         Mid Cap Funds        0.08%   VIEIX
Vanguard Institutional Index Fund          Large Cap Funds      0.04%   VINIX
Vanguard Total Bond Market Index Inst      Bond                 0.07%   VBTIX
Vanguard Total Intl Stock Index Instl      International Funds  0.12%   VTSNX
Wells Fargo Advantage Small Co Growth I    Small Cap Funds      1.10%   WSCGX
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by Duckie »

millerstevew wrote:If so, given the funds available to me, is this the place to ask for opinions about asset allocation or at very least general approach to it. I have read the Bogleheads Guide to Investing, so I'm intuiting that I'll likely invest in some combination of the Vanguard Funds because of their super low expense ratios.
The best options in the 403b are:
  • (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.04%)
    (VIEIX) Vanguard Extended Market Index Fund Institutional Shares (0.08%)
    (VTSNX) Vanguard Total International Stock Index Fund Institutional Shares (0.12%)
    (VBTIX) Vanguard Total Bond Market Index Fund Institutional Shares (0.07%)
    (N/A p.12) MetLife Guaranteed Asset Account paying 4%
At age 27 a reasonable AA would be 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds. If the 403b were your only retirement holding you could have:
  • 45% Institutional Index
    11% Extended Market <-- Roughly 80% large caps (Institutional Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.
    24% Total International
    20% Total Bond/MetLife
If you have other retirement accounts you would need to spread the AA across all of them.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

millerstevew wrote:
If I were to leave my denomination or no longer serve as a called pastor, I would no longer be eligible to receive benefits from the pension. For this reason, some pastors in my denomination will serve as a pastor pro bono to remain in the pension plan while they work in another capacity, e.g. at a non-profit. If I were to terminate my membership in the pension plan (by no longer serving as a pastor or leaving my denomination) and later return to my denomination, I would be reinstated in the pension plan and my previous service in my denomination would count towards my creditable service.

Give all of this, two question:

1. How much should I rely on this pension when making preparations for retirement? Again I am 27, so I will accrue a great deal of creditable service, and I do not intend to leave my denomination.
Although you don't intend to leave your denomination (I didn't at 27, either), things can change. The fact that you could forfeit any benefit from this plan suggests to me that you shouldn't count on it too much in your retirement planning at this point in time. When you are getting closer to 20 years of service you can re-evaluate. But for now, I would save/invest as much as you can for your retirement and pretend like the pension doesn't exist. I'd also suggest that you don't count your pension in considering your asset allocation at this point.
User avatar
camillus
Posts: 958
Joined: Thu Feb 28, 2013 8:55 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by camillus »

I am resurrecting an old thread, I know. I just too discovered that as clergy, my 403b contributions are free from SECA (15.3%). I was about to plow my retirement savings into a Roth, but now I am going to max out the 403b instead. It seems like a slam dunk case, even with the difference in funds and expense ratios in the two accounts, Roth being weighted 14 bp and 403b being about 67 - about a 50 bp difference.

So while the cheaper expense ratio of the Roth funds would save me approximately $50 per year on $10,000. A $10,000 contribution to the 403b would save me a ridiculous $1,500 in taxes, which I could then contribute to the 403b. The tax advantage of the 403b seems at least an order of magnitude greater than the fund selection of the Roth.

Let me know if anyone has a good counterpoint.
51% US / 34% ex-US / 15% “bond”
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

camillus wrote:I am resurrecting an old thread, I know. I just too discovered that as clergy, my 403b contributions are free from SECA (15.3%). I was about to plow my retirement savings into a Roth, but now I am going to max out the 403b instead. It seems like a slam dunk case, even with the difference in funds and expense ratios in the two accounts, Roth being weighted 14 bp and 403b being about 67 - about a 50 bp difference.

So while the cheaper expense ratio of the Roth funds would save me approximately $50 per year on $10,000. A $10,000 contribution to the 403b would save me a ridiculous $1,500 in taxes, which I could then contribute to the 403b. The tax advantage of the 403b seems at least an order of magnitude greater than the fund selection of the Roth.

Let me know if anyone has a good counterpoint.
Have you accounted for taxes on the 403b distributions down the road? The amount you spend on housing from the 403b may be tax exempt, but the rest will be taxed as income. The Roth distributions will be tax free.
User avatar
camillus
Posts: 958
Joined: Thu Feb 28, 2013 8:55 pm

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by camillus »

flyingbison wrote:403b distributions
Hi flyingbison,

I am in the 15% tax bracket currently, and pay state income tax of maybe 4%. I think that the Roth vs deferred is a wash in the 15% bracket. I'm not as gung-ho Roth as some people around here. I still have to generate enough retirement income to get into the 15% bracket first, filling up the 0% and 10% brackets. Once I'm in the large 15% bracket, it is a wash. If I make it into the 25% bracket, I'll have done some poor math and missed out on an early retirement or otherwise have too much money to know what to do with.

In the current year, if I max out my wife's clergy 403(b) with an $18,000 contribution, by avoiding SECA and deferring federal and state income tax, I'll have almost $6000 more to contribute!
51% US / 34% ex-US / 15% “bond”
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Clergy Retirement Investing: 403(b) vs. Roth IRA

Post by flyingbison »

camillus wrote:
In the current year, if I max out my wife's clergy 403(b) with an $18,000 contribution, by avoiding SECA and deferring federal and state income tax, I'll have almost $6000 more to contribute!
The discounted SE tax is definitely an advantage for the 403b in your situation, as is the higher contribution limit.
Post Reply