Helping clergy keep costs lower in retirement
After you retire, your parsonage tax exclusion can continue—if you keep the funds in your RPB account and meet other requirements.
Eligible clergy can continue to claim a parsonage exclusion after retirement on distributions from their RPB 403(b) and Rabbi Trust accounts as well as from their MetLife annuity and on disability payments from our Long Term Disability Plan. This means the portion of your distributions used for allowable housing expenses are not subject to federal income tax.
Make sure you understand the important features and limitations of this tax benefit explained below. And we suggest that you consult your financial or tax advisors for assistance in tax planning and compliance with IRS parsonage regulations.
To exclude housing expenses for your primary residence from your federal income tax during retirement you must:
- Have distributions from a qualified church plan that has authority from the employer to designate parsonage (like RPB).
- Have been an ordained clergy member during the time the contributions were made.
- Have made contributions to your 403(b) account out of your ministerial earnings.
- Be of retirement age to begin distributions, as defined by the IRS.
If you've rolled money into your RPB account from another 403(b) account at an RPB-eligible employer, distributions from these funds are also eligible for the the parsonage tax exclusion.
Please note that the housing allowance tax exclusion is only available to clergy—a surviving spouse cannot claim the housing allowance exclusion on distributions from RPB accounts.
Understanding your parsonage exclusion
Before each year-end, RPB will designate 100% of your following year's distributions as your potential parsonage allowance exclusion. However, you and your tax preparer are responsible for excluding the correct amount from your gross income on your tax return.
The maximum amount you can exclude is the lesser of:
- The amount officially designated by RPB as a housing allowance (in advance of the expense), or
- The amount of actual housing expenses, or
- The fair market rental value of your home, including utilities.
Additionally, your annual housing expenses cannot exceed the amount of your annual RPB withdrawals, and the exclusion can only be claimed on your primary residence.
Consider the example of Rabbi Cohen
Rabbi Cohen is retired and owns her own home.
- RPB designated $40,000 for her annual housing allowance (the amount of her annual distributions).
- Her actual housing expenses for that year were $35,000.
- The fair rental value of her home (furnished, including utilities) was $36,000.
Because her actual housing expenses were lower than both the amount RPB designated and the fair rental value of her home, Rabbi Cohen is able to exclude $35,000 from her retirement income.
Remember, RPB must designate the housing allowance before Rabbi Cohen receives the income that the housing allowance will be excluded from.
Need help estimating your parsonage?
RPB’s housing allowance worksheet can help you calculate your exclusion amount.
Distributions that fall into the following categories are not eligible for the parsonage exclusion:
- Distributions from funds rolled over to RPB from other tax-deferred accounts such as 403(b)s and IRAs that came from non-RPB eligible employers or where the contributions were not earned in a ministerial capacity.
- Distributions from your RPB account that you directly roll over to another qualified plan retirement account.
- Distributions from contributions that were not eligible to be designated as housing allowance because of the nature of the clergy’s employment at the time. For example, an ARJE educator who later becomes a rabbi.
- A deemed distribution resulting from defaulted loans.
Your year-end 1099-R tax form from RPB will show the total amount of distributions paid to you and any federal taxes withheld for the year, with the “Taxable amount not determined” box checked.
You and your accountant are responsible for the calculation and verification of the parsonage amount that is excluded from income on your tax return. You must retain accurate records to support the exclusion should the IRS contact you.
You can claim a parsonage exclusion on your tax return based on the lesser amount of:
Have you chosen your beneficiaries?
It’s important to review and update your beneficiary designations regularly to make sure your legacy is protected.