Can retired ministers claim a housing allowance from their church-sponsored retirement account?

Yes. This is one of the most valuable and least-known retirement benefits for clergy. IRS Publication 517 confirms that a retired minister may exclude from gross income the part of a church-sponsored retirement distribution designated as a rental (housing) allowance, as compensation for past ministerial services.

How it works: the church or denominational board that administers a church-sponsored retirement account (such as a church 403(b) plan) can designate some or all of your retirement distributions as housing allowance, based on IRS Revenue Ruling 75-22. Many plans allow up to 100% of distributions to be designated, and the designation typically carries forward to future years.

Important limits and caveats:

• All the normal rules still apply in retirement: the exclusion is capped by the lesser of the designated amount, actual housing expenses, and fair rental value (furnished, plus utilities). Keep receipts.
• The designation must come from a qualifying church plan or its denominational board. Distributions from an IRA or an ordinary secular 401(k) cannot be designated as housing allowance, which is a big reason many pastors keep retirement money in their church-sponsored retirement account.
• Housing allowance from these retirement distributions is generally not subject to self-employment tax in retirement.
• A minister's surviving spouse cannot exclude a housing allowance based on the deceased minister's past services.