Wednesday, January 14, 2009

IRAs and Pastors

As I've been beginning to work on the income taxes, I've noticed how much we're going to have to pay in income taxes because of withdrawing an IRA for the downpayment on the house last spring. Conventional wisdom says that IRAs are good because you defer payment on taxes until you're retired and thus in a lower income-tax bracket.

Nobody told us that pastors need to watch out for this!!!

Eventually we figured it out on our own, but not until after we'd put a little money away in an IRA for Gary. Granted, some pastors actually are paid what's recommended, or at least 75-90% of what's recommended by the district. But some are paid far less. I know so many pastors' families who have one very low income from Dad, no income from Mom who's staying home with several children (all of whom become exemptions on the tax form), and thus are already in a zero-percent tax-bracket.

If you're not paying taxes anyway because you're too poor, by all means, DO NOT PUT MONEY IN A TRADITIONAL IRA. A Roth IRA is a different story: you pay taxes on that now ... all zero percent.

When you're bombarded with advice to put away money now so as to "put off paying taxes on it," it never seems to cross the mind of a financial advisor (or the editors of the AAL magazine) that a nice middle-class family in America might be poor enough to pay no taxes, and thus wants to include as much income as possible NOW when it's not being taxed.


  1. Amen!
    I'll leave it at that.

  2. Actually, a regular IRA is a good thing for pastors, because the income is not taxable. In your situation, this would not help, but if a pastor is going to buy a house with IRA money, he converts it over to an IRA THEN and counts it under housing allowance, so it is non-taxable income, coming and going.

  3. But normally a pastor would be taking the income, say, in his 30s and not paying taxes on it, and then paying the taxes when he withdraws the money at age 70. At age 70 he's likely to be in the "lowest" income-tax bracket (that is, 10% as it stands now). But if the pastor is paying zero taxes, then by all means pay the taxes now. The Roth IRA still allows you to set the money aside without having to pay taxes on the interest, but for those of us who are too poor to pay income taxes, there are no concerns down the road for when the money comes out of the account.

    Thing is, so few people understand that pastors really can be that poor ... and really can be that frugal that they'd have money to set aside a little in an IRA even on poverty-level income. So sometimes we listen to the drumbeat of information that says "postpone the income to your retirement years" without realizing that the man's prime bread-winning years may actually be the poorest financial years of his life.

  4. of course most of these laws are made by people with sufficient incomes too ;)

    I've experienced a change in jobs and income too and am afraid of what it will mean in taxes...