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My church contributes to my Nazarene 403(b) account on my behalf, and I appreciate this. Recently, a member of the church raised the possibility of the church purchasing an annuity for the pastoral staff instead of contributing to our 403(b) accounts. The idea is gaining some strength because of the turmoil on Wall Street. What should we do?

Yes, the challenges in the financial markets have been mind-numbing to say the least. Especially if you are nearing retirement, the market fluctuations cause concern about the funds that you will soon be depending on.

There are several reasons why 403(b) contributions continue to be a sound approach:

  • Tax-preferenced. Contributions made by your church to your 403(b) plan are income tax deferred and social security tax-free. If your church purchases an annuity for you, the payments to fund the annuity are fully taxable for income and social security tax purposes. So, only a fraction is being invested in the annuity (perhaps as little as 65 percent) of what would be invested with a 403(b) contribution.
  • Housing allowance aspect. Funds that your church contributes to your 403(b) account are designated as a housing allowance when you receive the funds in retirement. So, not only are the contributions income tax-deferred, the withdrawals from the plan may be income tax-free. These two benefits cannot remotely be matched with the purchase of an annuity.
  • Investment options. With your 403(b) account, you have the power to invest very conservatively, very aggressively, or somewhere in between. You are in charge. So, while an annuity may remove market fluctuations, you have a choice with your 403(b) account to determine the degree market fluctuations will impact your account.
Dan Busby is a certified public accountant, acting president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.