In 2019, you can elect to contribute up to $19,000 to your 403(b) account out of your salary. If you are age 50 or older at the end of the year, you can also make a catch-up contribution of $6,000. In total, you could contribute up to $25,000 to your 403(b) account.
Why is this significant?
Let’s say that you defer $25,000 of your salary to your 403(b). Let’s assume that your effective income tax rate in this situation is 22%. We also know the self-employment tax rate is 15.3%.
- $25,000 x 22% = $5,500 of income tax
- $25,000 x 15.3% = $3,825 of self-employment tax
In this scenario, by contributing $25,000, you would potentially lower your tax bill by $9,325.
There are many additional savings that come later on in retirement as well:
- The 403(b) account avoids the self-employment tax entirely.
- You could also potentially avoid paying income tax on the distribution if you claimed a housing allowance out of your denominational pension.
- Even if you did end up paying some income tax, hopefully you would be at a lower tax bracket after you retire, and thus would be taxed less on the same amount of money.
As you can see, the 403(b) account is one of the best vehicles for tax savings available to clergy.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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