Q. Can a portion of retirement benefits paid from a church’s 403(b) or 401(k) plan be treated as tax-free housing allowance for a retired minister?
A. Yes, a portion of distributions from a retirement plan (including the mentioned 403(b) or 401(k) plan) used by the retired clergy for housing allowances will be tax-free under these circumstances:
- as long as the church has so designated; and
- only to the extent it is supported on the minister's tax return as representing post-retirement housing costs.
IRS Publication 517 provides details on calculating the housing costs and proper completion of the clergy’s tax returns.