As a pastor, you have several key tax issues that makes you uniquely different from other taxpayers. These differences include the housing allowance, self-employed treatment for W-2 wage earners and the big one…the ability to opt out of Social Security.
Once licensed, commissioned, or ordained you have two years to decide if you want to opt out of social security. According to the government your decision must be based upon religious reasons. If you qualify as a preacher, you can opt not to pay Social Security tax on future ministry earnings. Any non-ministry related income will still be subject to social security tax. If you choose to “opt out” and already have your 40 quarters or if your spouse has or will have 40 quarters, you are still eligible to receive social security benefits. You will still be eligible to receive whatever benefits you have previously accrued.
The ability to irrevocably opt out of Social Security is probably the most complex financial planning issue for new ministers as it carries a high degree of long-term consequence if the wrong decision is made. Seeking competent financial advice is something I highly recommend.
Here are some things to consider in evaluating what is best for you. If you don’t put your money in Social Security, you must do the following three things:
1. Save for retirement.
2. Get life insurance.
3. Get long-term disability insurance.
If you don’t do these things I would recommend not to opt out. Consider what do you receive in exchange for paying your social security taxes? In exchange for a total 15.3% tax rate, you are eligible for benefits for:
1. Retirement income
2. Death – Survivors Benefits for your family.
3. Disability income in the event you are unable to work
4. Medicare insurance
Will there be social security for you at retirement? No one knows for sure but most likely there will be. How much you will receive is uncertain. But don’t count on it for your sole retirement income because your retirement benefits will not be enough to sustain you. Even if you decide to stay in the Social Security program, you must start while you are young to develop a savings and investment plan that will subsidize your income at retirement.
If you opt out you must get good insurance to cover the possibility of your death or disability. However, the biggest concern about opting out is Medicare insurance. If you opt out you will need to buy health insurance in your senior years, which already is extremely costly. The benefits of medicare alone is a strong consideration to remain in the social security program. When you reach sixty-five you must sign up for Medicare and failure to do so means every year you delay to sign up you will face stiff penalties. That means if you opt out, it is final and you will not be able to rejoin.
If you are very frugal and good at saving money you may make out better financially in the end, but it does come with a high risk. Most importantly, seek professional counsel and weigh all the pros and cons before you make any decision. It may not be as simple as you first think.