I meet with pastors all the time, and they often ask me questions about their financial options as professional ministers. Specifically, they’re curious about their options for opting out of Social Security. It’s a great question! Now, I’m not an accountant, but I’ve been a pastor for many years myself, and I know a thing or two about how to best manage the money God has entrusted to you, including how to do it legally.
When it comes to honoring God with your finances, I have some pretty strong opinions! And I want to share my opinion on opting out of Social Security with you. Just be sure to keep up with the facts yourself since tax laws are always changing, and go over the specifics of anything you do with a tax professional.
What Is Social Security?
You probably have lots of questions about how Social Security works. Let’s break it down:
Social Security is an automatic deduction taken from your paycheck if you live in the United States. The amount deducted is based on your income, and there is a tax cap for high-income earners.
The Social Security Administration collects the money from current workers and uses it to cover current beneficiaries. That means that if you’re paying Social Security today, it’s not sitting in a savings account waiting for you to collect it when you retire. It’s paying benefits for retirees, surviving spouses, and surviving dependents right now. Part of the Social Security you pay also covers disability benefits for qualified Americans.
Social Security was never designed to be a complete retirement plan. It was only meant to be a supplement to other money you hopefully saved on your own.
How Do You Opt Out of Social Security?
First things first, you’re going to want to pick up a copy of Publication 517 from the IRS. This document specifically deals with Social Security and other tax information for members of the clergy and religious workers. I know, I know. It’s definitely not the kind of thing you want to read on your beach vacation. In fact, it might even take you back to your seminary days trying to decipher Greek and Hebrew. But it’s worth weeding through to get the answers you need when it comes to managing your money for God as a clergy member.
Here’s the short of it: You can legally opt out of Social Security on religious grounds—but you need valid reasons. You can’t just say, “I want out because I want to do it myself.” You have to fill out a form (4361 Form) and state your specific biblical grounds for opting out. Just remember that this only applies to the income you receive as part of your vocational ministry. That includes your full-time ministry salary and any extra self-employment income you receive through your ministerial duties, such as honorariums for a wedding or a funeral.
But keep in mind that if you’re bi-vocational, you’ll still have to pay into Social Security on your secular income.
Advantages and Risks of Opting Out
If I were in your shoes and still serving as a church pastor, I’d opt out in a nanosecond. That’s because sending money to the Social Security office is a bad way to manage your money for God. When you opt out, it frees up more of your income so you can invest in your own retirement plan. Plus, it gives you the freedom to make your own biblically informed decision about how to manage that portion of your income, rather than leaving it to Uncle Sam to decide for you.
Just be aware that if you don’t put any money into Social Security as you work, then you won’t be able to draw any money when you retire. If you opt out, then you will receive zero Social Security or Medicare benefits from any ministerial income.
The bottom line is that this is a great opportunity for anyone in ministry. Yes, you need to have a valid biblical reason for opting out of Social Security, but a little basic math will tell you why this is a great plan.
Things You Must Have If You Opt Out
If you are going to opt out, there are some commonsense things you must do for the rest of your life to make sure you and your family are taken care of. Now, you should definitely be doing them anyway, but even more so if you’re opting out. Otherwise, you’re signing up for major risks that are just not worth taking. So, have these four things in place:
- Term life insurance—You must have a level term policy that covers at least 10 times your income. (That’s the average amount, but check with an insurance professional who can take your age, income and specific situation into consideration.) That way, if something happens to you, your family will be taken care of. If you die with children under 18 and you’ve opted out, they won’t receive a Social Security check like they otherwise would. That’s why you must have a life insurance policy in place if you’re going to opt out, and you must keep it—period—because your family won’t have Social Security to count on.
- Long-term disability insurance—If you become disabled and have opted out, you will not receive any Supplemental Security Income at all, since that also comes out of the Social Security pool. Do not opt out without having a good long-term disability policy in place. Once you have it, keep it!
- Long-term care insurance—The day you turn 60, I suggest working with an insurance agent to buy yourself a little birthday present: a long-term care insurance policy. Yes, these policies are pricey, but not nearly as pricey as a few years in a long-term care facility. If it turns out you must live in such a facility later in life, it’s better to have an insurance policy to pay for it than to drain your life savings.
- Retirement savings—You will not be receiving a Social Security check at retirement if you opt out. So what! If you take the thousands and thousands of dollars you’d be paying into Social Security and put that cash into a Roth IRA in a good growth stock mutual fund, you could retire with dignity times 20! That’s because mutual funds can beat inflation, but Social Security doesn’t account for inflation at all. The same $100 you put into Social Security now might only buy you $50 worth of stuff by the time you can actually use it! Besides, there’s no guarantee Social Security will even be around at all when you need it.
Create a Retirement Plan Without Social Security
If you’re willing to take responsibility for yourself by having the proper insurance and planning for retirement, you can experience the benefits of opting out of Social Security and eliminate the risks. Work with a financial advisor to make sure you have a plan for your retirement years that doesn’t include depending on Social Security income.
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