403b Housing Allowance Rules for Retired Ministers
Retired ministers can structure 403(b) distributions to receive tax-free income for housing costs, continuing a key financial benefit after their service.
A 403(b) plan is a retirement savings vehicle available to employees of public schools and certain tax-exempt organizations, including churches. Separately, the minister’s housing allowance is a tax benefit under Section 107 of the Internal Revenue Code, allowing a “minister of the gospel” to exclude certain housing-related income from federal income taxes. For retired ministers, these two provisions can be combined. Distributions from a 403(b) plan, which are normally taxable, can be received tax-free when properly designated as a housing allowance.
This article explains the eligibility requirements, the process for designating distributions, the method for calculating the excludable amount, and the steps for reporting it on your tax return.
Eligibility Requirements for the Housing Allowance
To qualify for the housing allowance in retirement, an individual must first meet the IRS definition of a “minister.” This means the person is ordained, licensed, or commissioned by a church or denomination. The individual must perform ministerial services, which include conducting religious worship, administering sacraments, and holding management responsibilities within a church.
The benefit is available to retired ministers who receive payments from a church-sponsored retirement plan, such as a 403(b) annuity, as compensation for past ministerial services. While the IRS does not provide a rigid definition of “retired,” factors like a significant change in work duties or a meaningful break in service are considered.
The distributions must come from a 403(b) plan sponsored by a church. If a minister rolls over funds from a church-sponsored 403(b) into a personal Individual Retirement Account (IRA), those funds lose their eligibility for the housing allowance designation. The allowance is for the minister only. A surviving spouse of a retired minister who receives payments from the minister’s pension or 403(b) cannot exclude any portion of that income as a housing allowance.
Designating 403(b) Distributions for Housing
A retired minister cannot independently decide to treat their 403(b) withdrawals as a housing allowance after receiving them. The designation must be formally established before the distributions are made. The authority to designate retirement distributions as a housing allowance rests with the church body that oversees the 403(b) plan, such as a national denominational pension board.
This official designation is typically made through a formal resolution or a written statement from the pension board. The document should clearly state that a portion, or even all, of the minister’s potential distributions for the upcoming year are designated as a housing allowance. Some denominational plans have policies that automatically designate 100% of all distributions as a potential housing allowance, simplifying the process for the retiree.
The formal declaration must be in place before the beginning of the calendar year in which the distributions will be taken. For example, for a minister to claim a housing allowance on distributions received during 2025, the pension board’s designation must have been made before January 1, 2025. Payments made before a designation is officially in place are not eligible for the exclusion and are considered fully taxable income.
Calculating the Maximum Excludable Amount
Once the housing allowance is designated, the retired minister is responsible for calculating the actual amount they can exclude from their income. The excludable amount is limited to the lowest of three figures: the amount officially designated by the pension board, the actual amount spent on housing, or the fair rental value of the home. This three-part test ensures the exclusion does not exceed the minister’s actual housing costs or the property’s value.
The first limit is the total amount designated as a housing allowance by the 403(b) plan administrator for the year. The second limit is the actual amount of money spent on qualifying housing expenses. These expenses include:
- Rent or mortgage payments (both principal and interest)
- Property taxes and homeowners insurance
- Utilities like electricity and water
- Furnishings and repairs
- Yard maintenance
The third limit is the fair rental value of the property. This is an estimate of what it would cost to rent the home, fully furnished, plus the cost of all utilities. For example, if a retired minister withdraws $30,000 from their 403(b) (all designated as housing), has actual housing expenses totaling $24,000, and the fair rental value of their home is $26,000, the maximum excludable amount is $24,000. Expenses that do not qualify include costs for food, domestic help, or expenses related to a second home or vacation property.
Reporting the Housing Allowance on Your Tax Return
After determining the correct excludable amount, the final step is to report it properly on the federal income tax return. The process begins with Form 1099-R, which the retired minister receives from their 403(b) plan administrator. This form reports the total gross distribution for the year in Box 1. Often, Box 2b, “taxable amount not determined,” will be checked, indicating that the recipient is responsible for calculating the taxable portion.
When filing Form 1040, the total distribution from Form 1099-R is reported on the line for pensions and annuities. On the same line, the minister subtracts the calculated excludable housing allowance from the gross distribution to arrive at the taxable amount. The minister should then write “Excludable Housing Allowance” or “EHA” in the space next to the line to identify the adjustment.
For instance, if the gross distribution was $30,000 and the calculated excludable allowance was $24,000, the taxable amount reported on the Form 1040 would be $6,000. The housing allowance is an exclusion from income, not a deduction.
In the event of an IRS inquiry, the retired minister must be able to provide documentation to support every dollar claimed as an excludable housing allowance. Keeping meticulous records, including receipts, bills, and canceled checks, is necessary and these records should be kept for at least three years from the tax filing date.