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Can I use funds withdrawn from my Nazarene 403(b) Retirement Savings Plan account as a tax-free housing allowance?
You can only do this if you are a district licensed or ordained Nazarene minister over the age of 59½. You may request that Fidelity Investments designate your withdrawal as housing allowance for retirement housing purposes. To do this, contact Fidelity toll-free at 1-866-NAZARENE (629-2736). Fidelity will send you a pre-completed form to review and sign. If you are married, you and your spouse will both need to sign the form. Please return the completed form to Pensions and Benefits USA, 17001 Prairie Star Pkwy., Lenexa, KS 66220. The Pensions and Benefits USA office will be responsible for approving the request for housing allowance.
Fidelity will issue an IRS Form 1099-R in January of the year following the distribution. They will report any housing allowance designated withdrawal as “taxable amount not determined” in Box 2 of the 1099-R.
The availability of a housing allowance exclusion for denominationally-sponsored pensions plans has been a very attractive benefit for many retired ministers. In many instances, retired ministers have been able to exclude all of their 403(b) distribution income by having the Plan designate their distribution request as a housing allowance. Keep in mind that the housing allowance designation is limited to denominationally-sponsored plans, like the Nazarene 403(b) Plan.
The responsibility for determining the portion of the housing designation rests solely with the minister. In retirement, IRS guidelines allow a minister to designate the lesser of (1) the fair rental value of the home furnished plus utilities, or (2) the amount actually used to provide a home. Legitimate housing expenses include rent, mortgage payments, interest, home insurance, taxes, repairs, utilities, furnishings, and general maintenance costs for one's primary residence. You will want to document all of your expenses.
Until the Clergy Housing Allowance Clarification Act of 2002, it was unclear ministers needed to include a fair rental value when computing their housing allowance. This Act updated the Code to make sure ministers include a rental value of their property in determining how much they can exclude from income tax. However, the IRS remains silent on how a minister can go about determining the fair rental value. According to clergy tax specialist and CPA Dan Busby, “the fair rental value should be based on comparable rental values of other similar residences in the immediate neighborhood or community, comparable furnished. One of the best methods to use in establishing fair rental value of your housing is to request a local realtor to estimate the value in writing. Place the estimate in your tax file and annually adjust the value for inflation and other local real estate valuation factors.”
Carefully review P&B Tax Memo #13 – The Minister’s Housing Allowance. You may also wish to obtain IRS Publication 517 which provides helpful information in this regard. You may also want to review Dan Busby's booklet, “Preparing Tax Returns for Clergy” which is sent to all active Nazarene ministers in January of each year.
NOTE: Distributions made from a 403(b) account (whether designated housing allowance or not) do not need to be included in determining your Social Security self-employment tax liability. This is due to the fact that distributions from a 403(b) account are not considered as "earned income," but as "deferred income."
Are ministers eligible for a housing allowance under the tax law? Currently, the IRS indicates this is a question “under extensive study” and has not provided definitive answers for this issue. However, there are several precedents from previous rulings and regulations which provide some direction.
Section 107 of the Internal Revenue Code provides that, in the case of a minister of the gospel, gross income does not include the rental value of a home furnished to the minister as part of the minister's compensation, or rental allowance paid to the minister as part of the minister's compensation to the extent used by the minister to rent or provide a home.
In Rev. Rul. 75 22, 1975 1 C.B. 49, the Internal Revenue Service concluded that the portion of a retired minister's pension designated as a rental allowance by the national governing body of a religious denomination having complete control over the retirement fund was excludable under Section 107.
The 1982 General Board of the Church of the Nazarene voted that 100 percent of the pension paid to a retired minister be designated as housing allowance to the extent allowed under Section 107 of the Internal Revenue Code. This designation was intended to be permanent.
A good rule of thumb is the longer you expect to live, the more likely that delaying the start of social security benefits will pay off. After you reach what the government calls “full retirement age” (FRA), which ranges from 65 to 67 years old (depending on the year you were born), the amount of the checks you receive will rise by eight percent for each additional year that you wait—until you reach age 70. The rate is less than eight percent for those born before 1943.
After you die, your spouse can claim survivor’s benefits equal to your full retirement benefits, but only if you wait until full retirement age to start collecting. If you start collecting early, the reduced benefits carry over to your spouse after you die. However, if you postpone the start of benefits past full retirement age, your spouse’s benefits do not increase further.
There is an alternate strategy that is often overlooked. If you are healthy and expect to live well into your 80s, consider filing for benefits at your full retirement age but then immediately suspend those benefits. Your spouse can’t file for spousal benefits until you file for your own benefits.
Under this scenario, your spouse can start collecting benefits as a dependent as soon as you file, based on your salary history. A person age 62 or older is entitled to receive benefits of up to 50 percent of his/her spouse’s benefits as a “dependent” of the spouse, as long as the person is not collecting benefits based on his/her own salary history.
At the same time, by immediately suspending your benefits, you allow the size of your future checks to further increase for each year you wait to resume collecting benefits until you reach age 70.
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.
Once your account has been activated, you can access your account online through Fidelity NetBenefits® at www.fidelity.com/atwork or call the Fidelity Retirement Specialists at 1-866-NAZARENE (629-2736) to speak with a representative or use the automated voice response system, virtually 24 hours, 7 days a week. Fund performance information is also available on our site. Check out the Guide to NetBenefits® Brochure.
See the 403(b) section of our website for more details about the plan.
You are permitted to roll over eligible pretax contributions from another 401(k) plan, 401(a) plan, 403(b) plan or a governmental 457(b) retirement plan account or eligible pretax contributions from conduit individual retirement accounts (IRAs). A conduit IRA is one that contains only money rolled over from an employer sponsored retirement plan that has not been mixed with regular IRA contributions. Call the Fidelity Retirement Specialists at 1-866-NAZARENE (629-2736) or log on to Fidelity NetBenefits® at www.fidelity.com/atwork for details.
See the 403(b) section of our website for more details about the plan.
Although your plan account is intended for the future, you may borrow from your account for any reason. Generally, the Nazarene 403(b) Retirement Savings Plan allows you to borrow up to 50% of your employee salary reduction source balance. The minimum loan amount is $1000, and a loan must not exceed $50,000. You then pay the money back into your account, plus interest, through automatic funds transfer from your bank account. Any outstanding loan balances over the previous 12 months may reduce the amount you have available to borrow. Be sure you understand the Plan guidelines before you initiate a loan from your plan account.
To learn more about or request a loan, log on to www.fidelity.com/atwork or call the Fidelity Retirement Specialists at 1-866-NAZARENE (629-2736).
See the 403(b) section of our website for more details about the plan.
Withdrawals made from voluntary salary reductions are allowed after age 59½, Disability, Death (to be paid to your beneficiary), Hardship, Retirement and Termination of employment.
Withdrawals from accounts resulting from employer matching, Pension and Benefits Fund, World Mission, or Agency contributions are permitted afer age 62, disability or death.
Withdrawals made by retired Nazarene ministers may be designated as "housing allowance" and thereby may qualify as tax-free withdrawals.
See the 403(b) section of our website for more details about the plan.
You are always 100% vested in all contributions to the Nazarene 403(b) Retirement Savings Plan no matter what their source.
See the 403(b) section of our website for more details about the plan.