Everyone's Doing Roth Conversions—Should Pastors?
It's December, which means savvy investors everywhere are running the numbers on Roth conversions.
If you're not familiar with the term, here's the quick version: A Roth conversion is when you take money from a pre-tax retirement account (like a Traditional IRA or 401k) and move it into a Roth account. You pay income taxes on the converted amount now, but in exchange, that money grows tax-free and comes out tax-free in retirement. You're essentially prepaying your tax bill at today's rates to lock in tax-free income for life.
Why December? Because by this point in the year, you have a pretty clear picture of your annual income. That means you can calculate exactly how much "room" you have in your current tax bracket before you'd bump into the next one—and strategically convert just enough to fill that space. It's like playing Tetris with your tax brackets, and year-end is when you can see the whole board.
The advice pastors typically hear goes something like this: "Your housing allowance keeps you in lower tax brackets, which makes Roth conversions even more attractive. Pay low taxes now, pay no taxes later!"
It's good advice. And it's not wrong.
But it's incomplete.
There's actually something better than paying low taxes now and no taxes later. What if I told you there's a way to pay no taxes now AND no taxes later?
Welcome to what I call the "Super-Roth"—and it's a retirement strategy only pastors have access to.
The Math That Changes Everything
Let's compare two retirement savings strategies for a pastor in the 12% tax bracket:
Direct Roth IRA Contribution:
You earn $6,000
You pay income tax: $720 (12%)
You pay SECA tax: $848 (14.13%)
You contribute what's left: ~$4,432
It grows tax-free
You withdraw it tax-free in retirement
Not bad! You paid about 26% in taxes upfront, but you'll never pay taxes on that money again.
Pastor's 403(b) with Housing Allowance Strategy:
You contribute $6,000 directly to your church 403(b)
Income tax: $0 (pre-tax contribution)
SECA tax: $0 (403(b) contributions are exempt from self-employment tax)
In retirement, you withdraw it as housing allowance
Income tax on withdrawal: $0
That's not a typo. Zero percent going in. Zero percent coming out.
This is why I call the pastor's 403(b) a "Super-Roth." It's actually better than a Roth in terms of pure tax efficiency—because you're not just getting tax-free growth and tax-free withdrawals, you're also getting a tax deduction and a SECA exemption on the way in.
The Bottom Line on Contributions: 403(b) First, Always
Here's something most pastors don't realize: If your church offers a 403(b), you should almost always contribute pre-tax to it rather than making direct Roth contributions.
Why? Because of that 15.3% SECA exemption.
When you contribute directly to a Roth IRA, you've already paid SECA tax on that money. But when you contribute pre-tax to your church 403(b), you skip the SECA tax entirely—that's an immediate 15.3% advantage that direct Roth contributions can never recover.
"But wait," you might be thinking. "What if I want the Roth benefits—tax-free growth and tax-free withdrawals?"
Great news: you can probably have both. Here's the strategy:
Contribute pre-tax to your 403(b) (capturing the SECA exemption)
Convert those funds to Roth after they're in the plan
This can happen two ways:
In-plan Roth conversion: Some 403(b) plans allow you to convert pre-tax funds to a Roth 403(b) within the same plan. You'll pay income tax on the conversion, but you've already avoided SECA.
Rollover and convert: If your plan allows in-service distributions (or when you leave your position), you can roll the funds to a Traditional IRA, then convert to a Roth IRA.
Either way, you get the SECA exemption on the way in AND the Roth benefits going forward. It's the best of both worlds.
Before you implement this, check with your plan administrator about what your specific 403(b) allows. Not all plans are created equal.
The Catch (Because There's Always a Catch)
Before you rush to keep everything in your 403(b) and never convert, there's a significant limitation to the Super-Roth strategy: Your housing allowance in retirement is capped by your actual housing expenses.
And here's where things get interesting for those of you who've been aggressively paying down your mortgage (I'm looking at you, Dave Ramsey devotees).
Paying off your mortgage is almost always a good move. I'm not here to argue against it. But here's what many pastors don't realize: when that mortgage disappears, so does a significant chunk of your housing expenses—and with it, a significant chunk of your Super-Roth benefit.
If you're currently spending $2,500/month on housing and $1,800 of that is your mortgage payment, your housing expenses are about to drop by 72% when you pay it off.
"But wait," you might be thinking. "I'll still have housing expenses, right?"
Absolutely. Property taxes, homeowner's insurance, utilities, maintenance, home improvements, HOA fees—these don't go away when your mortgage does. For most pastors, this means somewhere between $8,000 and $15,000 per year in ongoing housing expenses, even with a paid-off home.
That's real money you can still shelter from taxes through your church plan's housing allowance. But it's not unlimited.
The Strategic Question
So here's the million-dollar question (literally, depending on your retirement savings): How much should you keep in your 403(b) versus converting to Roth?
My rule of thumb: Keep approximately 10 times your projected annual housing expenses in retirement inside your church 403(b). The "excess" above that can be converted to Roth over time.
But—and this is important—that calculation needs two adjustments:
Adjustment #1: Factor in any mortgage overlap. If you're planning to retire before your mortgage is paid off, you need to include those remaining mortgage payments in your calculation. Retiring with 5 years left on your mortgage at $1,500/month? That's $90,000 of additional housing expenses you'll need to account for before your expenses drop to the post-mortgage level.
Adjustment #2: Account for inflation. That $12,000 in annual housing expenses today won't be $12,000 in 20 years. Property taxes increase. Insurance premiums rise. Utility costs climb. If you're 20 years from retirement, you might reasonably expect those expenses to double. The "10x" target should be based on your inflation-adjusted projected expenses, not today's dollars.
Let me show you what this looks like practically:
Pastor Sarah's situation:
Current age: 45, planning to retire at 65
Mortgage will be paid off 3 years before retirement
Current annual housing expenses (post-mortgage): $12,000/year
Inflation-adjusted projection (20 years at 3%): ~$21,700/year
Target 403(b) balance for housing allowance optimization: ~$217,000
Current 403(b) trajectory at retirement: $500,000
"Excess" available for strategic Roth conversion: ~$283,000
Pastor Mike's situation:
Current age: 55, planning to retire at 65
Mortgage will be paid off 5 years AFTER retirement
Current mortgage payment: $1,400/month ($16,800/year)
Current annual housing expenses (post-mortgage): $10,000/year
Inflation-adjusted post-mortgage expenses (10 years at 3%): ~$13,400/year
Mortgage overlap: 5 years × $16,800 = $84,000 (plus inflation)
Approximate target: $84,000 + ($13,400 × 10) = ~$218,000
Current 403(b) trajectory at retirement: $300,000
"Excess" available for Roth conversion: ~$82,000
You can see how the math gets personalized quickly.
Why 10x Instead of 25x?
If you've read anything about retirement planning, you know the "25x rule"—you need 25 times your annual expenses saved for retirement. So why am I suggesting only 10x for the housing allowance portion?
A few reasons:
First, the Roth strategy is also excellent. You're not losing much by converting "excess" funds to Roth—you're just trading the Super-Roth benefit (which you can't fully use anyway) for the regular Roth benefit (which is still fantastic).
Second, if your 403(b) runs low and you have a healthy Roth account, it's not catastrophic. If you live longer than expected and your church plan balance drops below what you need for housing expenses, you can simply start paying for housing from your Roth. You lose some tax efficiency, but you're not in trouble by any means.
Third—and this is important—your 403(b) housing allowance benefit doesn't transfer to your heirs.
The Legacy Factor
Here's something that might tip the scales for you: unless your spouse is also an ordained or licensed minister, they cannot continue taking housing allowance distributions from your inherited church retirement plan. And your children? Definitely not.
Your 403(b) housing allowance is a benefit that dies with you.
Roth accounts, on the other hand, pass to your beneficiaries completely tax-free. If leaving a legacy to your children or grandchildren matters to you, this is a significant consideration in favor of more aggressive Roth conversions.
The Honest Truth
I'll be straight with you: this is complex stuff.
We're talking about coordinating multiple account types, projecting expenses decades into the future, adjusting for inflation, factoring in mortgage timelines, checking plan rules for conversion options, and timing conversions to minimize tax impact. The "right" answer depends on variables that are unique to your situation.
This is exactly the kind of thing where personalized guidance makes a real difference. A few hours with someone who understands both the numbers and the clergy-specific rules can save you tens of thousands of dollars over your retirement—and give you the confidence that you're not leaving money on the table.
Your Next Steps
If you want to start thinking through this on your own, here's a framework:
Estimate your post-mortgage housing expenses. List everything: property taxes, insurance, utilities, maintenance budget, HOA fees, and a buffer for improvements. Be realistic—I see pastors underestimate this all the time.
Adjust for inflation. A rough rule: if you're 20+ years from retirement, double the number. 10-15 years out, increase by 50%. Closer than that, increase by 25%.
Add any mortgage overlap. If you'll still have mortgage payments in retirement, add those years of payments to your target.
Multiply your adjusted annual expenses by 10. That's your rough target for how much to keep in your church 403(b).
Compare to your projected balance. If you're on track to have significantly more than you need, you may have "excess" that could be converted to Roth.
Consider your legacy priorities. If leaving tax-free assets to heirs matters to you, that tips the scales toward more aggressive conversion.
Check your plan's conversion options. Can you do in-plan Roth conversions? In-service distributions? This affects your strategy.
That's a lot of moving pieces—which is why I'd encourage you to schedule a free coaching consultation. This is exactly the kind of strategic planning where having a guide who understands clergy finances can make a significant difference. We can walk through your specific numbers, check the rules of your particular plan, and build a strategy that actually fits your life.
The Super-Roth is real. But like any powerful tool, it works best when you know how to use it—and when you have someone in your corner helping you wield it wisely.