A prospective client informed me that the rabbinical council advised him that is was acceptable to take a non-taxable distribution of $15,000 per year from his 403b account for "living expenses." What section of the code or PLR supports this position?

The individual is no doubt referring to the "parsonage allowance" under IRC § 107. There have been some rulings to the effect that if a portion of the distribution (not exceeding actual housing expenses) is specified to be a parsonage allowance, the exclusion may be available under certain circumstances. (I spent some time advising rabbis myself, and was always amused at having to cite a provision for "parsonage allowances" for "ministers of the gospel," but that's life!)

No more rulings on whether amounts paid from a tax-qualified retirement plan will qualify for the exclusion for parsonage allowance under Section 107. Rev. Proc. 91-3, Section 5.06.

I have a copy of an IRS document MSSP - "Ministers" - it's a training document for IRS employees. In it is the statement "A retired minister may recieve part of his or her pension benefits as a designated parsonage allowance" it then refers to IRS ruling 75-22. While this MSSP document is not a legal opinion, it may provide a starting point. Hope this helps.

There was an earlier, and quite detailed, discussion of this issue on the Church Plans message board. You can get to it by clicking on this link:

http://benefitslink.com/boards/index.php?showtopic=2055

From the replies (and thanks to all who replied), I see that the IRS is "accepting" of the practice without actually having ruled on the subject. This brings me to more questions, namely:

- does the rabbi/minister have to be active. or can he/she be retired and still claim the allowance?
- is it safe to assume costs including rent/mortgage, utilities, maintenance etc., are attributable to "housing expenses"?
- what "certain circumstances" is Carol V. Calhoun referring to? (I love that phrase)
- can the exclusion be applied to distributions from an IRA rollover account (from the taxpayer's 403b plan), or must the distribution be from the original plan?

I answer to three your questions

1) It is my understanding that is definately for a retired rabbi, here is some wording from a IRS document for field workers dealing with ministers

"A retired minister may receive part of his or her
pension benefits as a designated parsonage allowance
based on past services. If so, the "least of" rules
apply.8

Trustees of a minister’s retirement plan may designate
a portion of each pension distribution as a parsonage
allowance excludable under IRC section 107. The
minister may claim that the amount is both excludable
from income as a parsonage allowance under IRC section
107 and excludable from self-employment income for
Self-Employment Contribution Act (SECA) purposes."


2) Allowable expenses are outlined in IRS publication 517

Hope this helps

Does anyone know if there are any restrictions on the housing allowance if a 1035 annuity exchange is done within a 403b? I am being told that it will not be allowed.

Let me restate that. The housing allowence will not be allowed.

This is probably the correct interpretation, at least if the new annuity is not one available under the original plan. The existing authorities that have allowed a housing allowance in the context of a 403(B) plan have relied on some action taken by the plan sponsor. If the retiree is dealing directly with a provider without plan sponsor involvement, it would be harder to make the claim that a nontaxable housing allowance was available.