Helping Clergy Plan Their Retirements

Uncle Sam provides three tax breaks for clergy, which makes their planning more complicated than for laypeople. This case study points out the four major ways clergy are advantaged by special income-tax, Social Security-tax treatment, retirement account, and housing provisions. The study also indicates how to include each factor in ESPlanner.

So if you are a member of the clergy, this case study can help you use our software. And if you haven’t used it already, you can for free! As a public service, our company provides clergy of all denominations with free copies of ESPlannerPLUS, including the ability to run updates for three years for free. Just send an email to and we’ll set you up. Our hope is that you’ll benefit from the software and also let your congregants know of its value and that they should visit

Consider Sally and Frank Wolf, age 50. Sally is a travel agent and Frank is a minister. Sally makes $30,000. Frank makes $50,000. The two live in a parsonage whose imputed rent (rental value) is $15,000. They will retire at age 65 and buy a house. Their earnings will stay fixed in today’s dollars.

Tax Advantage: The parsonage value (or church-designated housing allowance under IRS sec 107) is not subject to income taxation, but is subject to Social Security’s self-employment tax.

To enter this in ESPlanner, treat Frank’s direct and in-kind compensation of $65,000 as self-employment earnings. This ensures that all $65,000 is subject to proper Social Security taxation. But, to eliminate federal and state income taxation of the $15,000 parsonage, enter a special expense of $15,000 for each year through retirement, but specify that it’s excludable from Adjusted Gross Income (AGI).

This tells the program to lower the couples AGI by $15,000 when it makes its federal and state income tax calculations. So this gets the income taxes right. It also gets the cash flow right. Franks’ cash flow is really only $50,000, since the $15,000 is coming in the form of in-kind housing services. But in entering the $15,000 as an AGI-excludable special expense, Frank’s cash flow ends up being $50,000 (the $65,000 entered as self-employment earnings less the $15,000 entered as a special expenditure).

Frank contributes 3 percent of his salary ($1,500) to his 403(b)(9) retirement plan. His employer makes a 6 percent matching contribution.

Tax Advantage: Individual contributions by clergy to their religious order’s retirement plans are exempt from self-employment taxes.

To incorporate this in ESPlanner, figure out the self-employment tax that would be due on Frank’s $1,500 contribution, which, in this case is $230 (15.3 percent of $1,500) and enter this amount, in today’s dollars, as a non-taxable special receipt starting this year and continuing for the next 15, when Frank will retire.

Frank already has $100,000 in his retirement account. This and his contributions, plus those of his congregation on his behalf, will permit him to withdraw $10,922 each year, measured in today’s dollars, starting at age 65 from his account.

Sally and Frank intend to buy a $350,000 house at age 65 and finance it with a 20 percent down, long-term mortgage at what they assume will be a 5 percent mortgage rate. The mortgage and other housing costs ($5,000 a year for property taxes, $2,000 a year for homeowners insurance, and $2,000 a year in maintenance expenses) will exceed the $10,922 Frank receives from his retirement plan.

Frank and Sally have also made some contingency plans. They’ve decided that if Frank dies, taking his housing and other tax breaks with him, Sally will rent an apartment for $1,000 a month.

Tax Advantage: Clergy pensions and withdrawals from their retirement plans, up to the amount of their housing expenses (or up to the fair rental value, whichever is lower), are exempt from federal and state income taxes provided their religious orders received a private letter ruling from the IRS allowing them to do so. The IRS stopped issuing such letters in the 1980s. So new religious orders and old ones who didn't get their letter in time can’t benefit from this IRC 107 allowance exclusion.

In entering Frank’s initial balance of $1,000 and his own and his employer’s contributions, ESPlanner calculates the withdrawals to be a constant $10,922 (in today’s dollars) starting at age 65 and continuing through age 100 (Frank and Sally’s assumed maximum ages of death).

This gets the withdrawals right, but doesn’t tell the program that the $10,922 is exempt from federal and state income taxes. To fix this, enter a special expense of $10,922 starting at age 65 and continuing through age 100 and specify that it’s excludable from AGI. Also enter $10,922 for the same years as a non-taxable special receipt. These special expenses and receipt entries will adjust taxable income down by $10,922, but otherwise cancel in terms of their cash flows.

Tax Advantage: Clergy can deduct mortgage interest payments even though the mortgage interest is being use to help shelter pensions and retirement account withdrawals from income taxation.

ESPlanner accommodates this in specifying that Sally and Frank are going to buy a house starting at age 65. Prior to age 65, when they are living in the parsonage and the congregation is paying all expenses, their housing is covered. So enter nothing under their current home and simply enter the home they will buy at 65 in the screen marked First Change in Primary Home.

What If Frank Dies before retirement?
If Frank dies before he retires, Sally enjoys no tax breaks associated with her being the widow of a clergyman. To incorporate this, click on Contingent Planning in ESPlanner. Next delete all special expenditures and receipts in the Special folder in the case that Frank is deceased. Also, in the contingent housing folder, tell the program that if Frank dies, Sally will rent for $1,000 per month.

How Large Are The Tax Breaks?

In today’s dollars, Frank and Sally get to spend $37,646 each year for the next 50 and die with their $350,000 house fully paid off and there as a security blanket if they need to sell it to cover end-of-life medical expenses.

How much did Uncle Sam’s help help?

The answer is easily found by copying their input profile and eliminating all the special receipts and expenses in the saved copy, but adding $1,250 in monthly rent prior to their retiring. Then run the new profile. In Frank and Sally’s case, with no tax breaks they can spend $35,590. This is a 5.5 percent lower living standard, so Uncle Sam’s help, while modest, is nothing to sneeze about.